Asia’s business leaders remain overwhelmingly optimistic about prospects for the region, but at the same time recognize that they will need to adjust to changing dynamics. A survey conducted by the Asia Business Council in collaboration with the McKinsey Global Institute found 80 percent of respondents expressing optimism about a new era for Asia, but three-quarters said that significant or transformative strategic shifts will be necessary. As one CEO put it, “Confidence coexists with uncertainty. Even top leaders are unsure of how unpredictable political and economic transitions will impact their strategy.”
Asia today is a powerful force—with 60 percent of the global population and 42 percent of global GDP. Within Asia, China is a particularly large player with 18 percent of the global population and 18 percent of global GPD. The dynamics between China and the United States, China and Europe, and China with the rest of Asia are a particularly defining element of this time. How Asian and global business leaders respond will help shape the world on five dimensions that characterize each era: world order, technology, demographics, resources and energy, and capitalization.
The world order is in mid-shift, from a unipolar world centered on the United States to a multipolar world with Asia as a major player. The region’s embrace of globalization has made it the world’s trade crossroads. Of the world’s 80 largest trade routes, Asia is in 49 on at least one end, and 22 on both ends. The region has 18 of the 20 fastest-growing trade corridors, and 13 of the 20 largest.
But trade tensions are rising, particularly around strategic goods related to national security such as semiconductors, energy, and various forms of intellectual property (IP). The nature of trade itself has changed quite a bit over the past 40 years with a shift from primarily physical goods to more data and IP. Asia could find itself in the crosshairs. Trade disputes are increasing both between Asia and the rest of the world and within the region. For instance, Japan restricted exports of chips to South Korea in 2019 before resolving the situation in 2023.
Amid such tensions, our latest research shows that trade reconfiguration is underway. Major economies such as China, Germany, the United Kingdom, and the United States have shifted to doing more trade with countries with which they are closer in geopolitical terms, and the United States has also moved some trade toward geographically closer partners.
How this “geometry” of global trade develops is uncertain, but it has the potential to influence the free flow of technology. That matters. Technological prowess is a key performance indicator for economies. Yet Asia remains heavily dependent on imports for the technology it needs. In 2022, China imported three times and India imported nine times as much IP as they exported. Generative AI is also shifting the technology landscape significantly as building the latest large language models is expensive. After studying generative AI use cases, we believe that three-quarters of the value from gen AI will come from four main areas: customer operations, marketing and sales, software engineering, and research and development. When combining generative AI with other technologies like traditional AI and automation, it could add 0.5 to 3.4 percentage points annually to productivity growth. Given stubbornly low productivity growth historically and challenging demographic trends, that would make a huge difference. How Asia will capture benefits from generative AI and participate in its development are key questions across technology.
Trade disruption could hinder Asia’s ability to move up the technology value chain. While the region has been the world’s technology manufacturing hub, it has not necessarily been its innovator. That is starting to change. Asia now accounts for 45 percent of world-class patents in clean energy and 43 percent in mobility technologies, while the United States remains ahead on cloud and edge computing and quantum technologies. Talent will be a key driver, and today China has 4 times and India has 3 times the number of STEM graduates each year as the United States.
Energy, too, is a major item on the agenda. Asia is the world’s largest consumer of energy—but many of its citizens still lack the energy they need. Per capita energy consumption is still only about one-third that of the average of the world’s advanced economies. And Asia’s economies remain heavily industrial, which consumes a lot of energy—57 percent of global energy used by industry was in Asia in 2021. So the region needs more energy—and that relies on free-flowing trade. China, India, and Japan source approximately 90 percent of their oil and gas from abroad.
At the same time as needing to secure more energy, Asia is facing the challenge of playing its part in the global energy transition. Asia’s manufacturing strength already means that it supplies many of the products needed for the transition. China assembles 66 percent of all battery cells, manufactures 54 percent of the world’s electric vehicles, and produces more than 80 percent of all solar panels. Asia’s own transition will be disproportionately hard because industry is hard to decarbonize. Nevertheless, CEOs still emphasized the need to double down on that effort given the strong views of consumers and voters. Innovation will, of course, be integral to that effort.
All these efforts will require continued robust economic growth and Asia’s demographics are not as positive a force as they once were. In the past, Asia benefited from a large, growing, young, and in some economies, highly productive workforce. But parts of Asia are aging quickly, particularly China, Japan, and South Korea. By 2050, 425 million people in the region will be aged 64 or over—equivalent to the total population of France, the United Kingdom, and the United States all put together. The corollary is that Asia needs another step-change in productivity to compensate. The challenge is that today, most of Asia’s young people are in relatively less productive industries.
The final dimension on the minds of Asia’s business leaders is how to pay for continued growth and innovation. Over the past 20 years, Asia mobilized $91 trillion of capital—more than any other region in the world—and that trend would need to continue. But there are two complicating factors. First, returns on capital in Asia are relatively weak. Second, balance sheet stress is rising with all types of debt, some of it exacerbated by COVID-related spending, and debt levels as a percentage of GDP are rising above the average for advanced economies.
In this new era, there is significant opportunity at stake— continued growth and rising standards of living for the majority of the world’s population. However, challenging geopolitics are shaping key areas. A continuation of disruption to trade would compromise the region’s ability to innovate and get the energy it needs. If innovation is limited, the energy transition gets that much harder. The ingenuity and dynamism that has helped Asia grow quickly over the last few decades will be critical to helping it thrive in the new era.
This article originally appeared in Forbes.