How digital transformation is changing Asia’s economy

How digital transformation is changing Asia’s economy

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We are now entering the Asian century, according to the author and strategy advisor Parag Khanna. The McKinsey Global Institute (MGI) explains  that “in the nineteenth century, the world was Europeanized. In the twentieth century, it was Americanized. Now, it is being Asianized - and much faster than you may think.

“Asia’s rise has been swift. Home to more than half of the world’s population, the region has climbed from low to middle-income status within a single generation. By 2040, it is likely to generate more than 50% of world GDP and could account for nearly 40% of global consumption,” MGI adds. The region has an ever-increasing global share of trade, capital, people, knowledge, transport, culture and resources.

The combination of strong economic growth, increased urbanization, automation, the growth of the middle class and the rise of the digital economy is reshaping Asian economies, says Aidan Yao, Senior Emerging Asia Economist at AXA Investment Managers (AXA IM).

Asian Economies Embrace Digitalization

Bloomberg reports that Southeast Asia’s internet economy is set to top $100 billion this year. And the regional business landscape is changing, with an estimated 70% of new economic value created over the next decade set to be based on digitally enabled platforms.

Read More: Asia taps new technologies to drive growth and transform economies

Previously, this might have meant that the region’s economies would be vulnerable to domination by large Western tech groups, principally those based in the U.S. But today, Asia is embracing the digital revolution on its own terms, and many of the world’s largest tech companies and investors based in the region, such as China’s Alibaba, Tencent and Baidu, Go-Jek in Indonesia and Japan’s Softbank; all are providing a broad range of services, from e-commerce to fintech and cloud computing.

“Asian companies are exploiting recent advances in artificial intelligence (AI), robotics, cryptography and Big Data that promise to reshape the global economy and fundamentally alter the way we live and work, in the same way that the steam engine and electricity did in centuries past,” says Tahsin Saadi Sedik, Senior Economist in the International Monetary Fund’s Asia and Pacific Department. “In Asia, as elsewhere, the digital revolution is rippling across industries, from retailing and banking to manufacturing and transportation.”

Digitalization is a key priority for the region’s economies. Singapore, for example, recently doubled its budget for research in digital innovation, Bloomberg reports.

In Taiwan, tech giants including Google, IBM and Microsoft are already investing in the AI sector. The government’s Asian Silicon Valley Development Agency also has ongoing plans to raise Taiwan’s global market share in the Internet of Things (IoT) from 3.8% in 2015 to 5% by 2025.

The Need for New Jobs and Digital Skill Sets

For countries with aging populations such as South Korea, Singapore, Japan and China, robotics and automation offer a way to retain economic activity even as the size of the workforce declines. “For nations where the workforce is growing, such as India, Bangladesh and Indonesia, the challenge is to create jobs in the face of these trends,” Yao points out.

Sedik agrees. “Southeast Asia will face distinct challenges as the new technologies disrupt global value chains and undermine the model of labor-intensive, export-led manufacturing that has powered the region’s growth,” he says. “But the new technologies will also open opportunities for small businesses and offer the potential of enhanced productivity - something that Southeast Asia will need in order to move beyond middle-income status.

“Technological progress can boost productivity and growth, creating new jobs, transforming jobs and skills, with old jobs and firms disappearing and new ones emerging,” Sedik adds. He calls for policies to harness digital dividends including “revamping education to meet the demand for more flexible skill sets and lifelong learning.”

Digital Transformation in Asia

While Asia’s economies are enormously diverse, with different levels of development, education and infrastructure, “we are very strong believers in the importance of digital transformation in Asia,” says William Chuang, Portfolio Manager at AXA IM.

Google, Temasek and Bain, in their e-Conomy SEA 2019 report, state that the digital economy in Southeast Asia has tripled in size over the last four years to $100 billion and will triple again to $300 billion by 2025.  

“The internet economies in Malaysia, Thailand, Singapore and the Philippines are growing by between 20% and 30% annually, with no signs of slowing down,” the report says. “But ... the two pacesetters in the region are Indonesia and Vietnam, which lead the pack with growth rates in excess of 40% a year.”

Read More: How close are we to a cashless society?

E-commerce represents one of the key digital successes for China over the past decade, not just because of the technology itself but because it has enabled the creation of tens of millions of small businesses in the country. “The technology has become so cheap and so accessible that anyone can become an entrepreneur,” Chuang adds.

But it will be difficult for other countries to recreate China’s economic success, Yao argues. “China has a huge advantage: It has an enormous population and the ability to collect massive amounts of data,” he says. 

Internet companies tend to thrive where populations are large, agrees Vey-Sern Ling, Senior Industry Analyst at Bloomberg Intelligence. “They’re like telecom companies - they make a little bit of money from lots of people. That’s why the biggest opportunities are in countries with massive populations, such as China, India and Indonesia,” he says.

Many of Asia’s digital giants control their own suppliers or distributors, notes Jeremy Gleeson, Portfolio Manager of AXA IM’s global technology and digital economy strategies. “They see where the sticking points are for their own businesses and solve them themselves through innovation, recruitment, upskilling their employees or through takeovers, rather than looking to international providers.

“One thing that successful digital companies have is scale. Outside China, India is the obvious candidate in tech adoption, and we haven’t seen anyone take advantage of the opportunity yet,” Gleeson adds.

Why Asia's Diversity Is an Advantage for Digital Transformation

It can be difficult to sell across different Asian economies because language and cultural differences can limit the benefits of scale. And yet June Chen, an Associate at Monk’s Hill Ventures - a tech venture fund investing in post-seed-stage startups in Southeast Asia - points out that “successful startups in Southeast Asia are uniquely prepared to overcome such hurdles, as they are already accustomed to working within diverse environments. For example, in Indonesia alone, more than 700 languages are spoken across 17,000 islands.”

“In some ways, Asia has leapfrogged the West in adoption of digital technologies,” Gleeson says. “While Western economies saw an evolution from local stores to out-of-town shopping centers and malls, and then a shift to e-commerce, China missed out on that middle step—it went from local shops straight to e-commerce without building retail parks, unless you were in one of the Tier 1 cities. That means that the adoption of e-commerce was much faster and penetration much higher than in other parts of the world.” 

The development of banking in China has followed the same trajectory. “Being able to use a smartphone to conduct a lot of banking online rather than in a local branch has driven much quicker adoption of e-banking and e-payments than in many other countries,” he says.

There is a circular aspect to these developments, says Gleeson: “The ability to make digital payments has driven e-commerce, and e-commerce has driven the need for digital banking and payments. Other Asian countries are going down the same route.”

Read More: The transformation of retail banking in a digital world

India, Indonesia and the countries of Southeast Asia are about a decade behind China in terms of the development of their internet and digital economies, he adds. “If you look at what happened in China, it gives you a good idea of what will happen in these countries—but at an accelerated pace because mobile penetration is much higher.”

The potential investment opportunities in fintech and e-commerce

Ling believes the big opportunities are in fintech and e-commerce. “Fintech is a big opportunity—mobile payment technologies, anything consumer-related such as e-commerce, online-offline solutions such as ride-sharing, food delivery and the sharing economy. By contrast, many of the traditional areas of digital development, such as online gaming and advertising, have been fairly well penetrated in emerging Asia because Google and Facebook are everywhere.”

So far, the spread of the digital economy has been uneven, with growth concentrated in the region’s biggest cities, where earnings are higher and the infrastructure—both physical and digital—are in place to allow the digital economy to thrive. In Southeast Asia, “seven metropolitan areas (Bangkok, Hanoi, Ho Chi Minh City, Jakarta, Kuala Lumpur, Manila and Singapore) that house just 15% of the region’s population still account for more than 50% of the internet economy,” according to the e-Conomy SEA report. “People living in these metro areas buy six times more online than those living elsewhere.”

But the center of gravity of the digital economy is shifting from big cities to smaller cities and rural areas. “The internet economy has the potential to grow twice as fast in areas outside the big cities, bringing all Southeast Asians on board,” the report states.

This will introduce a large swath of the region’s population to services that have been out of reach for them, including banking, insurance and payments, as well as the opportunity to enter the digital marketplace and gain access to goods that they can’t buy locally.

The Future of Asia’s Digital Economy

Asia’s digital opportunities are the result of a deliberate strategy. Governments in its leading digitally-enabled nations have attracted skilled talent, installed infrastructure and established incentives to attract global tech giants.

“Governments and enterprises in the region understand the value of what these new technologies bring,” says Ashutosh Bisht, Senior Research Manager at research firm IDC.

In a world where over 60% of global GDP will be digitized by 2020, the potential for Asia’s digital economy is huge.  Investment in the digital transformation of business practices, products and organizations in the Asia Pacific region is estimated to reach $375.8 billion this year, according to IDC.

By encouraging investment in disruptive technological advancements, such as 5G, AI, cloud computing and IoT technologies, the region is building a digitally native mindset that will position it at the forefront of the global economy.