Asia: Embracing the digital revolution

Global data flows have surged in the last decade, in contrast to global trade flows. With the battle for global competitiveness likely to be played out increasingly on the digital front, Asia is positioning itself for the digital revolution.

Virginie Maisonneuve Chief Investment Officer, Eastspring Investments

Sep 2018


Given the numerous studies that show linkages between trade openness and global economic growth, it is of little surprise that the trade tensions between the US and its trading partners1 have concerned many investors.

For two decades, global trade in goods grew about twice as fast as global Gross Domestic Product (GDP), soaring to 26.6% of GDP in 2008, up from 13.8% in 19862.

Since then, goods trade has been growing more slowly than world GDP, partly due to weaker demand, lower commodity prices as well as shorter global supply chains. Production is also moving closer to end consumers as manufacturers focus increasingly on speed to market. Protectionist moves by countries such as the US to slowdown off-shoring threaten to slow global trade flows further. McKinsey believes that the global goods trade may continue to decline relative to world GDP in the decade ahead2

Yet, while trade flows have declined, global data flows which include information, searches, communications, transactions and intra-company traffic, have surged. Figure 1 shows that used cross-border bandwidth has grown 45 times larger since 2005 and is projected to grow another nine times in the next five years.

Fig 1: Used global cross-border bandwidth has surged2

Fig1-rumours

This era of digital globalisation is expected to usher in a new competitive landscape. While trade has been dominated by large multinationals and advanced economies in the past, digital platforms are likely to allow more countries and smaller companies to participate.

Asia’s digital transformation

With the surge in global data flows, companies globally are transforming business operations, processes and activities by leveraging digital technologies and digitised data.

Companies are using data to engage customers better by delivering contextual and personalised experiences. Companies are also drawing insights from advanced analytics, enabling them to respond to customers in real time or even pre-emptively anticipating customer issues. Software and technology e.g. artificial intelligence (AI) are also being embedded into products and services, transforming business models.

With the battle for global competitiveness likely to be played out increasingly on the digital front, Asia is positioning itself for the digital revolution. The region already uses about two thirds of the world’s robots, making it the world’s largest growth market for the use of industrial robots. Korea leads in terms of robot density – the number of industrial robots per 10,000 workers – followed by Japan. See Figure 2.

Fig 2: Key countries for robot density3

Fig2-contagion

Asian companies are also increasingly harnessing digital technologies and embracing data-driven decision making. One-third of Asean’s large corporates mentioned “big data”, “advanced analytics”, “AI”, “machine learning” and the “internet of things” in their annual reports in 2016, up from only 6% in 20114.

In Capgemini’s 2017 survey of the top 10 global innovation centres, Singapore was ranked #2 after Silicon Valley, while Bangalore came in at #4. LinkedIn, for example, opened its first data centre outside of the US in Singapore in 2016. Google’s Next Billion Users division, which works on bringing the internet to more people, is also located in Singapore. Singapore’s manufacturing hub was ranked #1 in Asia Pacific for its superior ability to harness robotics and innovation. India, meanwhile, boasts of the world’s largest supply of digital talent and its innovations have already produced over 145,000 registered patents between 2013 and 2016.

In a recent study on which geographical clusters are generating the most patents, Shenzen–Hong Kong came in at 2nd place, while Beijing came in 7th. In both cases, activity is concentrated in the field of digital communications. Indonesia was also recognised as one of the top innovators among the emerging economies, ranking 31st and 32nd in innovation and business sophistication respectively.

Made in China

China is already one of the leading global hubs of AI development. It’s “Made in China 2025” policy is at the core of China’s efforts to move up the value chain and achieve global superpower status by 2050. The policy focuses on 10 strategically and technologically important sectors including robotics, aerospace, clean energy and advanced materials.
See Geopolitical Darwinism in the age of artificial intelligence.

To help achieve its goal, the government has established five national manufacturing innovation centres and 48 provincial manufacturing innovation centres, with the aim of setting up around 40 national manufacturing innovation centres by 2025. Subsidies, loans and bonds worth around USD1.5 billion have been set aside to pursue the “Made in China 2025” objectives, with another USD1.6 billion coming from local governments5.

Reaping the digital dividends

Spending by Asian businesses and governments on digital technologies is expected to exceed the US’ USD437 billion spend in 2018. Investments in digital technologies are expected to pay off – digital transformation is expected to add USD1.2 trillion to Asia Pacific’s Gross Domestic Product by 20216. For China, AI-led automation is estimated to be able to add 0.8 to 1.4 percentage points to GDP annually7.

For companies, Figure 3 shows that early adopters of AI in Asia achieve higher profit margins relative to their peers, particularly in manufacturing, financial services, transportation and logistics.

Fig 3: Superior profitability and sizeable value pools created from AI adoption in ASEAN8

Fig3-contagion

Yet, the economic impact of the current wave of innovation is still difficult to measure - it takes time for systems to adapt before they can fully take advantage of such advances. The benefits of many digital services, such as the use of search engines, email, digital maps and social media, are also currently not captured in GDP or productivity measures, despite providing significant value to individuals9.

Forging ahead

Asia’s digital readiness is the result of a deliberate strategy by Asia’s governments. They have attracted skilled global talent, put in place infrastructure and established incentives to attract foreign direct investment to create leading digital eco-systems.

To stay ahead, Asian governments will need to further develop the region’s data infrastructure and establish a robust data governance framework. Long-term investments also need to be made in education to build the right skill sets for the future as well as re-train workers who will be displaced by the digital disruption. It is estimated that new technologies have the potential to automate roughly half the work activities performed in Asean’s four largest economies – Indonesia, India, Philippines and Malaysia10.

While the high tech, telecoms and financial services sectors in Asia appear to have led the way in terms of developing a digital strategy, other industries also need to be forward looking in making digitalisation a strategic priority.

As Asia forges ahead in the digital era, Asian governments and companies will need to adopt a thoughtful approach in addressing both the challenges and opportunities that digital revolution brings. Only by doing both can Asia enhance its competitiveness, thereby sustaining economic and earnings growth in the years ahead.


Virginie Maisonneuve

Chief Investment Officer

Eastspring Investments

How to invest in Eastspring's fund(s)

Source:
1Gries and Redlin 2012, Edwards 1997, Wacziarg and Horn Welch 2008
2McKinsey Global Institute. Digital Globalisation: The new era of global flows. March 2016
3International Federation of Robotics. 2017.
4McKinsey Global Institute. Artificial Intelligence and Southeast Asia’s Future. September 2017.
5South China Morning Post. “The real target of Trump’s trade war is ‘Made in China 2025’”. 5 September 2018. 6Microsoft/International Data Corporation. February 2018. “Unlocking the Economic Impact of Digital Transformation in Asia Pacific.
7McKinsey Global Institute. Artificial Intelligence: Implications for China. April 2017.
8McKinsey Global Institute. AI adoption and user survey; McKinsey Global Institute analysis, HIS. September 2017.
* AI adopters with proactive strategy are firms that are big data and cloud services users and report their strategic posture towards AI to be “Disrupting our industry using AI technology is at the core of our strategy”, “We have changed our longer term corporate strategy to address the AI threat or opportunity disruption” or “We have developed a coordinated plan to respond to AI threat of opportunity but have not changed our longer term corporate strategy”.
^ Profit margin is self-reported and calculated based on operating profit margin as a share of turnover, for continuing operations and before exceptional items.
# Value pool is calculated based on profit margin difference between proactive AI adopters and non-AI adopters multiplied by the CY2015 sectoral revenue in ASEAN.
9World Economic Forum. The Global Competitiveness Report. 2017 – 2018.
10McKinsey Global Institute. Artificial Intelligence and Southeast Asia’s Future. September 2017.

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