Is corporate Asia ready for the Asian Century?

IT IS official - 2020 marks the dawn of the Asian Century. Over the next two decades, the region will account for 50 per cent of global gross domestic product (GDP) and fuel 40 per cent of global consumption. As the epicentre of global growth and economic activity, it's no wonder that Asia has been the destination for US$1 of every US$2 in new investment in the past decade. What is a wonder is why Asia also accounted for half of the drop in global economic profits since 2005?

Corporate Asia - which now comprises 43 per cent of the world's largest 5,000 companies by revenue (G5000) - is also underperforming other regions on average returns. This means that the region still has significant stores of economic profit yet to be unlocked - as much as US$440 billion by our measures. To achieve this potential, companies in the region will need to move on two critical fronts - turning around troubled companies, and championing the winning qualities of leading profit makers.

Asian firms are not alone in experiencing falling economic profits, defined by profits net cost of capital - economic profits have been shrinking for companies around the globe due to a downcycle in the energy and materials sector, a weakening of Europe's financial sector, and widespread capital allocation to sectors that offer lower returns. The latter phenomenon is most pronounced in Asia, particularly in China.

Although China received US$1 for every US$3 of new investment in the past decade, 80 per cent of capital went to what have been value-destroying sectors - domestic services (utilities, transportation, real estate and construction), capital goods (machinery and automotive), and energy and materials. China's massive capacity expansion to fuel development translated into unprecedented capital expenditures in energy and materials from 2000 to 2017, during a period when the average oil price more than halved and hit the bottom lines of many energy players. Capital allocation in the rest of Asia was only marginally better - with about 68 per cent of net new invested capital going to sectors that earned below the cost of that capital.

To reverse this trend, Asian companies should look at the pockets of economic profit-generating excellence found in several sectors across Asia. Japan's capital goods sector is a leading source of value creation, and the technology sectors in China, Japan and South Korea are not far behind. In India, the technology sector is rapidly gaining ground as a value creator. And despite the energy and materials sector's underperformance globally, it is a source of substantial value creation in South-east Asia. Perhaps most tellingly, among Asia's top 200 generators of economic profit, 60 per cent are new faces, and many of these account for a significant portion of recent economic profits among the G5000.

REGIONALISATION OF TRADE

What distinguishes these profit-making pockets is their adroit use of technology to meet growing demand from the region's increasingly fickle consumers. Digital technology has driven the rise of stars such as ride-hailing services Grab (Singapore) and Gojek (Indonesia), and the beauty and lifestyle platform Zilingo (Singapore), by enabling them to offer goods and services at scale and by generating data that companies can use to tailor goods and services to increasingly differentiated Asian consumers.

"Asia for Asia" should be the mantra of all companies operating in the region. While the globalisation of trade may have levelled off, the regionalisation of trade is just getting underway. Intraregional trade in Asia already comprises 60 per cent of all trade and the slice is growing - in part thanks to cross-border data flows that digital technology facilitates, which in turn helps companies to improve operations across their value chains and fine-tune strategy.

To be sure, harnessing new technology is just one of the levers that underperforming Asian companies must pull to improve value creation. They will also need to modernise their organisations to meet the demands of the new century. Skilling or upskilling employees in the use of new technologies, partnering organisations that offer complementary capabilities, and managing with agility are vital to the success of corporate Asia going forward and will define the next chapter of Asia's rise.