By Oliver Tonby, Jonathan Woetzel, Noshir Kaka, Wonsik Choi, Anand Swaminathan
Asia’s initial response to the COVID-19 pandemic in 2020 was partly enabled by technological foundations developed long before the crisis. Over the past decade, the region has developed and deepened its technological capabilities and infrastructure rapidly, accounting for a large share of global growth in technology company revenue start-up funding, spending on R&D, and patents filed.
There is more to come, given the potential to leapfrog in the region’s technological development based on the scale of markets and investment and the speed of adoption and intellectual property (IP) creation. However, tariff and data flow barriers, standards, export controls, and research barriers pose new risks. Moreover, Asia still needs to overcome gaps in core capabilities.
This paper is part of a series focused on the Future of Asia. This research focuses on Asian economies, describing growth in major technological indicators, exploring characteristics of growth in technological capabilities, and homing in on four major sector opportunities—with challenges in each—where Asia has significant scope for technological leapfrogging.
Asia has undergone a significant technological transformation
Asia’s strengths, particularly in digital and mobile technologies, played an important role in the region’s early response to the novel coronavirus SARS-CoV-2 in spring 2020. The region’s technology-enabled responses were rooted in capabilities developed prior to the pandemic. Over the past decade, Asia has undergone a significant technological transformation, which in turn has changed the region’s technology marketplace (Exhibit 1).
Exhibit 1
Corporate presence. Between 2006–08 and 2016–18, Asia accounted for 52 percent of global growth in the revenue of technology companies. Based on market capitalization, four of the world’s top ten technology firms were Asian in 2020; ten years earlier, the region had no companies in the top ten. In 2012, Asia was home to only two unicorns (privately held start-ups valued at $1 billion or more); today, the region has 170 unicorns, accounting for 36 percent of the global total.
Investment. Asia’s share of start-up investment, which includes venture capital investment and initial public offerings, increased from only 16 percent in 2006–08 to 40 percent in 2017–19, accounting for 43 percent of global growth. China still accounts for a large share, but over the past decade, venture capital has increasingly flowed to Southeast Asia, too. Asia’s share of global R&D investment increased from 26 percent in 2006–08 to 34 percent in 2016–18, accounting for 51 percent of global growth.
IP creation. Asia captured 87 percent of global growth in patent filings over the past decade; in the period from 2016 to 2018, China alone accounted for 45 percent of the world’s patents.
Technology transformation has been enabled by Asia’s highly adaptable digital consumers, who are becoming enthusiastic about these technologies. The number of internet users in Asia has grown more than the number elsewhere, and the region is now home to half the global total. Asia’s e-commerce market revenue is projected to reach $1.4 trillion in 2020, nearly triple the market revenue in the United States. Mobile e-commerce spending accounts for 74 percent of total spending on e-commerce in Asia, compared with 37 percent in Europe and 31 percent in North America. App downloads have grown more in the region than in the rest of the world, reflecting Asia’s mobile-first approach to the internet, and its consumers are more likely to spend more time on those devices. The region accounted for 41 percent of all mobile app downloads in 2019.
Some Asian governments have been vital catalysts for the development of technology in recent years, steering its commercialization and execution. In China, for instance, the government’s stated aim is to develop a domestic AI industry worth nearly $150 billion by 2030. India has launched several programs that link technology and social development, such as the digital ID program, as a strategic tool for delivering government services, managing budgets, and increasing financial inclusion. Malaysia has formed digital free trade zones through which $65 billion of goods and services are expected to flow in the period to 2025.
Each of the Four Asias has strengths and challenges. Advanced Asia has strength and depth in technology companies but has far fewer unicorns than other major economies, and its economic growth is slowing. China has a rich ecosystem of start-ups, being home to 26 percent of the world’s unicorns, and has increased IP creation rapidly, but it continues to rely on imports of key specific technologies and, more broadly, of core IP. Emerging Asia has relatively low investment in technology and is not richly endowed with significant technology players. India, too, has fewer large technology companies than other major economies, and business dynamism is relatively constrained by some gaps in physical infrastructure. Moreover, there are risks that we cannot overlook, including potential disruptions to global flows of technology that could impede the rate of innovation and global GDP growth. Collaboration on technology can improve total factor productivity, which facilitates knowledge flows and the adoption of competitive solutions.
However, strengths in some parts of Asia can compensate for gaps in others: the Four Asias complement one another. For instance, the working-age populations of Advanced Asia and China are declining, but economies in the rest of Asia are projected to add 412 million people to their combined labor pool by 2040. Advanced Asia and China can offer funding and knowledge to their neighbors, and the rest of Asia can offer massive deployment and commercialization opportunities. The region as a whole can take advantage of these complementary factors to build resilience in the face of short-term volatility.
Between 2010 and 2020, about 50 percent of Asia’s GDP growth, equivalent to $6 trillion, came from total factor productivity, a broad measure of the contribution to the economy of technology and innovation, according to the McKinsey Global Growth Model. Over the coming decade, in order for Asia to maintain about 4 percent growth, technology needs to contribute 43 percent of expected total growth in GDP in the period to 2030—$7 trillion.
Asia has varying degrees of development in IP and in startup investment in emerging technologies
To gauge Asia’s potential to build further technological strength, we assessed two dimensions: (1) start-up investment based on funding for entrepreneurship (including both venture capital investment and initial public offerings); and (2) IP creation using patents with a strength index above 50 as our key metric. Of 33 technologies analyzed, Asia leads start-up investment in 11, IP creation in ten, and both start-up and IP creation in four (Exhibit 2).
Exhibit 2
Asia has a high share of both patents and start-up investment in the following four technologies:
Mobile services. Asia has 81 percent of the world’s strong patents and half of venture capital and IPO funding, as well as the most growth globally in mobile and telecom services. Use of mobile, data, and other telecom services is growing at an unprecedented rate in the region. The global mobile applications market is expected to record an 18 percent compound annual growth rate from 2019 to 2024. In Asia, 20 percent growth is expected in superapps such as WeChat, multiservice platform Go-Jek, and ridesharing company Grab that offer multiple services on one platform. Asia is also home to some of the world’s largest telecom operators.
AI. Asia has a 48 percent share of AI strong patents and accounts for 42 percent of global start-up investment in AI technologies. Companies in China, Japan, and South Korea hold the most AI patents in Asia. Given high R&D spending by China, Japan, Singapore, and South Korea, and the fact that most R&D sectors such as biotech, materials, and computer sciences are driven by these technologies, use of AI is expected to increase. Moreover, India and China produce the most computer science graduates in the world each year and are training them to become data scientists and machine learning specialists.
Internet of Things (IoT). Asia has 39 percent of global strong patents and 56 percent of worldwide start-up investment in IoT technologies. China currently has the largest market share at 26 percent, followed by North America and Europe at 24 and 23 percent, respectively.
Manufacturing equipment. Asia accounts for 45 percent of world’s strong patents and 40 percent of worldwide start-up investment in manufacturing technologies. We explore more opportunities in the next section.
Asia has an above-average share of start-up investment in a dozen other technologies. Seven are consumer-facing, and Asia accounts for 51 percent of total start-up investment in them. On IP creation, Asia has a higher-than-average share of patents in ten technologies, namely cleantech, robotics and drones, wellness and beauty, agriculture technology, space technology, digital human resources management, augmented and virtual reality, industrial cloud technology, and nanotechnology. Most of these are manufacturing-related, emphasizing Asia’s rising innovation capabilities in manufacturing sectors.
China and India are home to more than two-thirds of urban technology hotspots. On three dimensions of technology output—technology company revenue, number of unicorns, and number of patents—we identified 50 Asian technology hotspots. Sixty-eight percent of them are in China and India, but most other Asian countries have at least one hotspot city, typically the capital.
Asia can capture four types of technological leapfrogging opportunities if current challenges are tackled
Asia's strong position on four elements—consumer demand, concentration of large manufacturing companies with a high share of global revenue, labor endowment, and active policy support—has been a catalyst for advances in technology in relevant sectors and has enabled a decline in technology costs over time. Four leapfrogging opportunities stand out, but there are bottlenecks, quality gaps, or other types of challenge in each of these areas, too. If they are overcome, there is an opportunity for further growth (Exhibit 3).
Exhibit 3a
Exhibit 3b
1. Accelerated consumer digitization creates huge opportunities throughout the value chain.
Asia accounted for 41 percent of global consumer demand in 2018 and is expected to represent 56 percent of global growth in that demand between 2018 and 2030. Across Asia, consumer adoption of digital technologies is accelerating at a sufficient pace for digitization to enable a jump or leapfrog from old to frontier technologies—in payments, for instance, skipping the credit-card-ownership stage and going straight to e-wallets. Widespread gaps persist in provision in consumer markets, and a considerable opportunity exists to reimagine the entire consumer experience in Asia, where citizens are so open to, and enthusiastic about, the following technologies:
Digitization of the consumer experience. Asia has taken a lead in social commerce and new digital business shopping models as COVID-19 further accelerates adoption. Significant gaps in provision and inefficiencies in Asian consumer markets suggest considerable potential in segments from finance to mobility to healthcare.
Creating cross-sector platforms to expand offerings and customer engagement. Digitization in consumer markets is just the starting point for an ongoing process. Digital payments, for instance, established a beachhead for other connected finance services to emerge, including consumer-facing digital banks, robo-advisory services, and online wealth-management tools. Consumer-facing technology companies that have loyal customer bases are expanding horizontally by becoming superapps. By offering complementary services to their user bases, technology companies that sit at the center of considerable ecosystems are connecting with consumers through multiple touchpoints, bringing down the cost of acquisition and marketing, and reaping even more network effects.
Digitally enabling the entire value chain. Technological advances have the opportunity to permeate into more areas of the value chain through world-competitive digital commerce, innovative route-to-market solutions, and the digitization of business processes.
2. Manufacturing potential is significant on the back of strong large companies
On average, Asian companies contributed 41 percent of the revenue of the world’s top 5,000 companies—the G5000—between 2016 and 2018. In sectors including capital goods and information technologies, the share of global G5000 revenue from Asian companies was even higher, at 48 and 49 percent, respectively. High demand, a strong manufacturing ecosystem, and resilient supply chains give Asia a platform that could build even more momentum toward further advances in technology.
Broadly, Asia may continue to find it difficult to compete with leading players in legacy technologies. The region has a minimal footprint in certain nonmanufacturing value chains—semiconductor design, and operating systems. However, Asia has a distinct opportunity to forge a strong position in industries that are experiencing disruptive, dynamic change and in emerging newer technologies including advanced displays and EV batteries. Asia has made the most headway in industries where it has been able to use its prowess in manufacturing as an effective entry point.
In the case of smartphones, more than 90 percent of assembly took place in Asia in 2017, offering opportunities for upstream vertical integration. The region’s smartphone producers are internalizing the design and manufacturing of mobile application processors. Asia has been quick to adopt the latest communication infrastructure and reinvest in R&D to support innovation in a range of technologies related to mobile. Demand for 5G is high and growing in Asia, which is home to a majority of the world’s subscribers to this technology. The majority of global production capacity in the display panel industry is in Asia.
In mobility, with the exception of Advanced Asia, the region has struggled to catch up with others on core legacy technology. However, Asia has strong electric vehicle (EV) manufacturing ecosystems. The region has the most R&D in next-generation EV batteries that account for 40 percent of EV value added. The region is projected to account for more than 50 percent of the global automotive software and the electrical and electronic component markets. Asia has the potential to carve out a globally competitive position in these technologies given the region’s strong adoption of 5G, which enables the reliable high-speed connectivity that could support vehicle-to-everything (V2X). About half of V2X patents granted to the top ten applicants are owned by Asian enterprises.
To remain relevant and competitive, manufacturers need to act fast to keep pace with rapid technological change in their industries. Technology will have a significant impact on manufacturing companies’ operating and business models in the future. First, it will encourage greater investment in intangibles such as R&D, brands, and IP. Second, it will motivate businesses to offer a full stack of products and services, including software. Third, through automation, it will transform the factory floor and operations.
3. Expanding business technology services
Demand for digital services is soaring, and Asia’s strong talent base suggests that the region can develop considerable strength in this area. Globally, McKinsey estimates that about $800 billion to $850 billion may be spent on traditional IT services during 2020, and $200 billion to $250 billion—or 20 to 30 percent of the total—on digital IT services such as the design and integration of IoT, AI, machine learning, and blockchain. In five years, digital is expected to be the main driver, reaching $550 billion to $600 billion of an estimated $1.5 trillion of spending on IT services—40 to 45 percent of the total. Indeed, this may be an underestimate given that the COVID-19 pandemic and the resulting rise in physical distancing, triggered an acceleration in digitization.
Asia moderately increased its share of the global IT services market from 25 percent in 2006–08 to 29 percent in 2016–18. The top 200 Asian IT services companies earned about 43 percent of their revenue from outside the region in 2019. Asia represents one of the fastest-growing markets for some offerings. In Southeast Asia alone, spending on cloud computing, for instance, is expected to hit $76 billion by 2023. Players have doubled down on their commitment to, and presence in, Asia to increase the footprint of their data centers. Asia, and especially China and India, will drive growth in consumer markets, and therefore demand for IT services is expected to rise sharply. It is notable, however, that Asia accounts for relatively low shares of IT services demand, and it has fewer global firms overall than others to meet worldwide demand. Moreover, many firms still have traditional organizational models, and the quality of talent has room for improvement. Asia has considerable scope to raise efficiency and participate in global growth.
The region has a wealth of tech talent that should put it in a strong position to tap into rising demand for business technology services. For example, India has ten times more software developers and architects than the United States, according to data taken from a global professional networking platform. Asian countries produced 76 percent of the world’s STEM graduates in 2016–18. India produces the most computer science graduates in the world—about 215,000 each year. However, the region will need continuously to improve the quality of talent and enhance organizational agility to capture growing global demand.
Looking to the post-pandemic future, Asian players can potentially raise efficiency and resilience in their delivery networks by focusing on key drivers of value: (1) a distributed operating model with a high share of remote working that could reduce costs by up to 10 percent; (2) digitally optimized delivery that can boost productivity by as much as 25 percent; (3) a virtualized talent life cycle using a mobile-first, online-apps approach to identify, engage, and track talent; (4) a distributed agile organization using new collaboration tools such as 3–D technologies, lab simulators, and digital workflows; and (5) next-generation infrastructure and facilities, again with a high share of the workforce working from home in the future.
4. Being at the forefront of the energy transition
Strong policy support from Asian governments is an important catalyst for the adoption of technology and has helped the region catapult into an even stronger position on a range of renewable energy sources. Asia is a critical link in the world’s global energy transition. By shifting its energy portfolio through capital reallocation, it can cement its position on renewable technologies and be at the forefront of the global energy transition. It has strong incentives to do so. The region is expected to account for 43 percent of energy demand by 2040 and 50 percent of the growth in demand. Moreover, Asia is arguably more exposed to climate risk than any other region in the world, and therefore has the additional task of addressing its rising energy needs sustainably.
Renewable energy is expected to account for an estimated 40 percent of average annual global energy investments through 2025, and Asia is a leading player. The region has both the largest share of installed renewable capacity—45 percent, compared with 25 percent in Europe and 16 percent for North America. Asia is expected to pull further ahead, with the region accounting for 64 percent of new renewable capacity additions globally between 2019 and 2040, taking its overall share to 56 percent by 2040, as projected by the International Energy Agency.
Asia's growth in renewables can be driven by India and China and by solar and wind. Asia has experienced some of the steepest drops in prices of electricity from renewables over the past decade, and this has spurred more installation.
Considerable innovation is taking place. For instance, South Korea and Japan are in the global vanguard of the use of hydrogen for fuel. Hyundai of South Korea developed the world's first commercial fuel cell EV in 2013. Japan's Toyota and Honda are producing fuel cell EVs at scale. Japan is also one of the most advanced markets for green hydrogen. The recently completed Fukushima Hydrogen Energy Research Field in Japan is the world's largest plant for production of hydrogen from renewable energy.
It is important that the energy companies of the future consider transitioning toward sustainable forms to remain relevant and to be seen as part of the solution to carbon emissions rather than the problem. Energy companies today can consider two broad directions. First, they can diversify their portfolio toward cleaner energy forms. Second, they can remove carbon from their value chains. Either of these options would be a significant shift and would entail a large amount of financing, investment in R&D and technologies, and bold reallocation strategies.
Speed, collaboration, and resilience will be the key arbiters of corporate technological success
In the COVID-19 era, three attributes appear to be vital to corporate success. The first is speed. The pace of technology innovation and adoption by Asian companies and consumers is fast and, indeed, unmatched by other regions. The second is collaboration. There is a strong case for corporations working in partnership within their ecosystems. The third is resilience. The pandemic demonstrated the fragility of supply chains in the case of a global shock; making those supply chains more resilient in what could be a more explicitly multipolar world in innovative technologies and geographies is a priority if companies and investors are to access the full variety of opportunities. Asia already has strengths in all three on which it can build.
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