Asia’s technological path to growth

The COVID-19 pandemic shone a light on how far Asia has come in embracing digital technologies. From mobile-app-based track-and-trace systems to robots in the city of Shenzhen that checked citizens’ temperature, digital was at the core of the response. 

Over the past decade, Asia’s technological capabilities have expanded rapidly. Just a few figures give a sense of the scale of its transformation. Between 2006–08 and 2016–18, Asia accounted for 52 percent of global growth in the revenue of technology companies. The region’s global share of startup investment (including 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. And the region was responsible for 87 percent of global growth in patent filings over the past decade.

Although Asia still has to tackle gaps in core capabilities, this is a promising platform to develop even more technological strength. New research by the McKinsey Global Institute (MGI) focuses on the region’s position and prospects on startup investment and creation of intellectual property (IP), on the latter homing in on “strong” patents. MGI looked at 33 technologies, and found that Asia has built a strong presence in startup investment in 11, IP creation in ten, and both startup and IP creation in four. 

The four areas where Asia has a high share of both startup investment and strong patents are mobile services, artificial intelligence, the Internet of Things (IoT), and manufacturing equipment. In the case of mobile services, the region holds 81 percent of the world’s strong patents, and half of venture capital and IPO funding. Asia has a 42 percent share of AI strong patents, and accounts for 48 percent of global startup investment in AI technologies. On IoT, the region has 39 percent of global strong patents and 56 percent of worldwide startup investment in IoT technologies.

 

 

Asia can use these strengths to capture four broad opportunities if it can overcome several challenges:

1. Digitized consumer markets. Asia’s consumer markets are expanding and digitizing rapidly—and are benefiting from some of the most enthusiastic and tech-savvy customer bases in the world. The region accounted for 41 percent of global consumer demand in 2018, and is expected to account for 56 percent of growth in that demand in the period to 2030. There are still widespread inefficiencies that need tackling and suggest scope for more growth. Servicing Asia’s consumers requires an integrated digital model with, first, a digital interface with consumers, and then the creation of cross-sector platforms, and digitally enabling suppliers and customers so that they are part of a dynamic digital ecosystem. B2B digital players like Alibaba’s LST and Udaan in India are reducing the number of unnecessary intermediaries in the entire sourcing-to-payment process by orchestrating all supply-chain actors via a central node on their platforms.

2. Manufacturing technology. Asia has strength in manufacturing technologies, and world-competitive manufacturing companies. On average, while 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 coming from Asian companies was even higher at 48 and 49 percent. Asia’s technological transformation has been rapid and robust in sectors where it has been able to use its manufacturing prowess as an entry point. The region may find it challenging to close gaps on “legacy” technologies related to semiconductors design, for instance, but has the potential to forge a strong position in newer technologies, including advanced display and electric vehicle (EV) batteries. 87 percent of the patents owned by the top ten solid-state-battery patent holders belong to Asian enterprises.

3. Business technology services. Over the past decade, Asia has increased its share of the global IT services market from 25 percent in 2006–08 to 29 percent in 2016–18. Overall, the market is expected to grow at about five to six percent a year over the coming five years while digital IT services such as big data analytics and Internet of Things system design may grow even faster at over 20 percent a year during the same period. Asia’s tech talent puts the region in a good position to tap into this rising demand — although the quality of that talent needs to improve. Asia produced 76 percent of the world’s STEM graduates in 2016–18. India has the largest number of computer science graduates in the world—about 215,000 graduates each year.

4. Energy transition. Asia is an important player in the world’s transition to more sustainable energy, benefiting from concerted policy support. Renewable energy is expected to account for an estimated 40 percent of average annual global energy investments in the period to 2025. Already, Asia has the largest share of installed renewable capacity—45 percent, compared with 25 percent in Europe and 16 percent for North America—and the International Energy Agency expects that share to rise to 56 percent in 2040. In a push toward sustainability, South Korea and Japan are at the forefront of innovations using hydrogen as a fuel. Japan recently completed the Fukushima Hydrogen Energy Research Field, the world’s largest plant for the production of hydrogen from renewable energy. To become leading energy companies in the future, companies can consider bold capital allocation to diversify portfolios and deploy technologies to remove carbon from the value chain.

In what will be a challenging period ahead as the world economy emerges from the pandemic, speed, and strong collaboration between governments and business will be even more vital to support technology development and deployment. Asia has a robust recent track record on both. Asia moved online fast as citizens enthusiastically adopted digital solutions, and, during COVID-19, public-private collaboration reached new levels. Not all will be plain sailing. The pandemic acted as a catalyst for technological adoption, but it also proved that global supply chains are highly vulnerable. There is a possibility that disruptions in global technology flows could impede the rate of innovation in Asia and elsewhere. Overall, however, Asia has strong fundamentals to drive more technology-fueled growth.

Oliver Tonby is a McKinsey senior partner in Singapore, and chairman, McKinsey Asia. Jonathan Woetzel is a McKinsey senior partner and a director of the McKinsey Global Institute (MGI) in Shanghai.