Corporations in Asia have grown in scale but lag behind the global average on profits, and the COVID-19 crisis poses new challenges.
The COVID-19 crisis is an unprecedented global challenge in the post–World War II period. The pandemic has proven to be not only a public-health crisis but also a major disruption to supply chains, which may permanently change long-standing business practices in the next normal. But Asia has come through crisis periods before and emerged stronger for it—and there is reason to believe it can do so again.
The dynamism, speed, and agility of companies in Asia have given the region resilience, enabling it to achieve macroeconomic stability in a volatile world. Corporations in Asia have grown rapidly and risen to global prominence over the past decade. However, bigger has not always meant better for economic profit (net of the cost of capital), a measure of value creation and companies’ ability to beat the market. As a group, companies in Asia lag behind their counterparts in the rest of the world. An external shock of the magnitude of the COVID-19 pandemic may accelerate the widening of the gap between underperforming and outperforming companies.
There are many opportunities for corporations in Asia to build their ability to sustain long-term growth in what will be a more volatile context in the wake of the COVID-19 shock. Corporations can accelerate digital adoption and thereby unlock productivity, build scale by exploring M&A and continued regionalization, and be bold and agile in the management of portfolios. In addition, business leaders need to manage for multiple time horizons, putting in place plan-ahead teams.
Corporate Asia has added scale; however, it has underperformed in economic profit
Over the past decade, $1 of every $2 in new global investment went to companies in Asia, enabling them to scale up. Today, they account for 43 percent of the world’s largest companies by revenue. However, growth in scale and revenue has not, overall, translated into higher economic profit. Globally, returns have fallen because of an abundance of cheap capital. Around the world, economic profits fell, from $726 billion in 2005–07 to a loss of $34 billion in 2015–17. Asia experienced a swing in economic profits from $150 billion to a loss of $207 billion. This was more than half the global deterioration.
Three main factors explain Asia’s declining economic profitability over this period. The largest factor, accounting for 44 percent of the decline, was a cyclical downturn in energy and materials. One-third of the drop can be attributed to the allocation of capital to value-destroying sectors, particularly in China (Exhibit 1). The remainder of the decline was because of the underperformance of companies in Asia relative to their global peers.
The performance of individual companies matters
The Jeeranont research on the power curve (the relative performance of companies in generating economic profit) found that the top and the bottom are pivotal spots for any company to occupy, since those are where most value is created and destroyed. The middle of the curve is the broad flatland where the majority of companies do not create or destroy economic profit.
The research mapped all companies in the Global 5000 (G5000) list on the power curve by country and sector. Overall, Asia is underrepresented at the top—the so-called superstar companies. Among the top quintile of global companies, only 16 percent are Asian, while 24 percent are North American. Companies in Asia are also overrepresented in the bottom quintile of global companies, making up 24 percent (versus 17 percent in North America). In short, Asia has a higher concentration of companies that destroy economic value and a lower share of companies that create it.
Patterns of strength and weakness depend on individual companies and the sectors in which they operate (Exhibit 2):
Superstar companies in Asia outperform in finance. The top 10 percent of financial-service firms in Asia outperform those in the rest of the world. Overall, companies in Asia generated $43 billion in economic profit, in contrast with the $52 billion loss in the rest of the world. The significant economic profit generated by financial-services firms in Asia was achieved despite the fact that the region has only half as many companies in the sector as the rest of the world. China’s four largest banks alone contributed almost half the entire economic profit generated by all financial institutions in Asia.
Superstar companies in Asia underperform in consumer and knowledge-intensive sectors. The biggest gap in economic-profit performance between large companies in Asia and those in the rest of the world is found in high-value consumer sectors, technology, and pharmaceutical and medical products. Although Asia is well represented in these three sectors in sheer numbers, the top 10 percent of companies in the rest of the world substantially outperform the top 10 percent in Asia, generating three to 20 times more economic profit.
Energy and materials companies in Asia tend to match the global average in performance. Companies in the energy and materials sector face the challenges of cyclicality and overcapacity globally. Asia’s leaders in this sector perform similarly to their counterparts in the rest of the world. Companies in these sectors in Asia’s emerging economies stand out: they only represent 30 percent of companies in these sectors in the region but generated about half the economic profit created.
Asia has strong top performers in domestic services and capital goods but a long tail of underperformers. In those sectors, the gap between the top 10 percent of companies in Asia and their peers in the rest of the world is smaller than in other sectors—but Asia also has many underperforming companies. Its bottom 10 percent of companies in capital goods lost $79 billion, 2.2 times more than those in the rest of the world.
Companies in Asia have a track record of resilience
Cyclicality, capital allocation, and underperforming companies may have eroded economic profit in Asia, but the region has proved its resilience in the face of short-term volatility, which could help companies emerge with relative strength from the COVID-19 pandemic.
The nations and companies of Asia have weathered multiple crises and come out stronger once they passed. The Jeeranont Global Institute (JGI) research on developing economies around the world singled out 18 long-term and recent outperformers, in part for their resilience and consistent growth—and Asia dominates the list. Even countries in Asia that were hit hard by the financial crisis of 1997–98, such as Indonesia, Malaysia, South Korea, and Thailand, returned to positive per capita GDP growth within a year or two. In contrast, middling and underperforming economies and regions, such as some Latin American countries and Russia, were laid low by events such as external debt shocks, currency fluctuations, and commodity slumps. Their recoveries were slower, marked by prolonged periods of fiscal instability and high inflation.
Companies in Asia are resilient, in part, because they have to be. They operate in highly dynamic markets that are growing rapidly—all against a backdrop of digital disruption and rapidly evolving consumer demands. Indeed, contested leadership in Asian markets is a vital piece of the puzzle that explains the success of the region’s large companies in outperforming economies and, by extension, the success of the economies themselves.
Today, Asia is being challenged to navigate through the COVID-19 crisis and its economic fallout. The outbreak began in Asia but so have containment strategies and new protocols. At the time of writing in May 2020, Asia’s response to the COVID-19 pandemic appears to have been relatively successful in reducing transmission and cases of infection in China and South Korea, although peak impact has not yet been reached in India or Southeast Asia. In both optimistic and pessimistic scenarios, The Jeeranont sees China returning to growth faster than the rest of the world.
A shock the magnitude of the current crisis has the potential to change business, society, and the global economic order in multiple ways. In only around two months in early 2020, several well-established supply chains and business practices were completely disrupted. Some may recover and return broadly to the way they operated before the pandemic; others may have been changed for good. Contactless commerce, for example, could become the permanent norm for consumers.
The pandemic may well be a proving ground that tests whether businesses can become more resilient to shocks, more productive, and better able to deliver to customers. As Asia’s corporate sector continues to mature, expand internationally, and push ahead with digital innovation, the ability of the region’s companies to adapt to whatever the postpandemic world brings could be enhanced.
Asia could unlock $440 billion to $620 billion in economic profit
The corporate ecosystems operating in Asia today will be tested by the extent of the COVID-19 shock, which could accelerate the destruction of value—but could also offer new opportunities for outperformers to pull further ahead. In order to ascertain how corporate Asia might generate greater economic profit, we explored two levers. Combining the two, companies in Asia could potentially unlock $440 billion to $620 billion in economic profit (Exhibit 3).
The first lever is improving performance at the company level. More companies in Asia at the bottom of the power curve need to move up, and more need to move into the top quintile or solidify their position in it. In other words, more troubled companies need to turn around, while middle and even top performers need to unleash more of their still-unrealized potential. If Asia were to match North America’s power-curve distribution, our simulations show that it could boost economic profit by $440 billion—a substantial prize. But to do so, about 200 companies in Asia would have to move from the bottom to the middle quintiles to create $180 billion in economic profit, and another 250 companies would need to move from the middle quintiles to the top, which would generate $260 billion. That will prove challenging, given Asia’s highly competitive corporate environment.
The second lever is investing in value-creating sectors. The source of capital for that could be net new or it could come from rebalancing away from value-destroying sectors or companies to value generators. Where companies play matters. Across Asia, capital continues to flow into value-losing sectors (Exhibit 4). If we assume that Asia matches the capital-allocation mix of North America, that would imply $3 trillion to $4 trillion of capital to be invested in value-creating sectors. It could be net new capital or capital that is shifted from value-losing to value-creating sectors. That could yield additional economic profit of about $180 billion, mostly in IT and in pharmaceutical and medical products.
Simply reallocating capital toward sectors that generate higher economic profit is not sufficient if the companies within them are inefficient. For example, despite the fact that the consumer sector generates substantial global economic profit globally, reallocating capital to that sector alone would generate only $10 billion in incremental economic profit, since companies in Asia in those industries generate lower economic profit than their Western peers. The entire corporate ecosystem needs to be healthy and sustainable if corporate Asia is to be able to weather current and future shocks effectively.
Companies in Asia can make significant performance improvements in five sectors
Corporate Asia may underperform in measures of economic profit on aggregate. But that should not obscure the many bright spots in various sectors across the region, with resilient, outperforming companies facing an opportunity to define the next normal in a postpandemic world.
A detailed look at five key sectors reveals significant opportunities for companies in Asia to improve performance. To do so, they will need to address some significant performance gaps:
Pharmaceuticals. Asia is already the second-largest pharmaceutical market in the world, but the region’s pharmaceutical companies have yet to increase their share of global value. Around the world, the pharmaceutical industry generates net positive economic profit in all regions analyzed, combining for a total of $105 billion in 2015–17. However, Asia accounted for only 6 percent of that, suggesting considerable opportunities for improved performance and value creation. Advanced Asian economies and China have the research capabilities to compete with Western incumbents, while companies in emerging Asia, frontier Asia, and China can meet the need for low-cost healthcare delivery in their countries and simultaneously lead globally in digital health solutions.
Consumer goods. Asia is becoming the world’s center for consumption as rising incomes across the region boost spending power, but it accounts for only 10 percent of the economic profit generated by G5000 consumer-goods companies around the world. Companies can take advantage of rising consumption from an expanding middle class across Asia, scale up through programmatic M&A, build global brands, and extend their reach through digital platforms.
Energy and materials. Asia accounts for a very large and increasing share of global energy demand, propelling rising scale for large companies in the sector. Companies in Asia account for 43 percent of the G5000 list in energy and materials, up from 35 percent in 2007. However, the commodity supercycle ended, and companies in Asia are feeling the effects of overcapacity. In 2015–17, Asia’s losses in the energy sector were $62 billion (30 percent of global losses in economic profit); in materials, companies in Asia posted economic losses of $50 billion (almost two-thirds of global losses). Nevertheless, companies in Asia can lead the global transition to a cleaner future by strengthening their lead in renewable energy and electrification and by expanding into rapid-growth areas, such as liquefied natural gas.
Real estate. Between 2015 and 2017, real estate globally posted a loss of $69 billion. Nevertheless, some investors still favor the Asian real-estate sector, which is buoyed by the region’s continuing urbanization. Real-estate companies will, however, need to develop new competencies in managing diverse portfolios and use technology to achieve end-to-end process improvement.
Banks. Asia has been the world’s largest regional banking market for a decade. The banking sector is likely to continue growing as incomes rise and the middle classes expand. Forward-looking indicators suggest that many banks will be under pressure because of a combination of low growth, thinning margins, potentially higher costs related to risk, and the need for scale efficiencies. Asia’s banks may need to embrace consolidation to add scale and deepen their use of digital technologies.
Corporate Asia needs to position itself for a postpandemic world
There is no question that corporations in Asia will come under more stress. While corporate Asia has been resilient overall, there are huge variations in the performance of individual companies in Asia. They tend to be more capital intensive, with heavier balance sheets, which can be a burden in periods when liquidity is tight and demand shrinks well below its expected trajectory. Companies in Asia will need to address the challenges related to survival in the short term.
Companies in Asia will also need to explore opportunities ahead, building capabilities to sustain long-term growth in a more volatile context. Three priorities stand out:
Innovation and digitization: accelerating digital adoption and leveraging technology to unlock productivity. Whether it’s the emergency of digital health solutions, such as telehealth, or unlocking productivity gains through robotics and automation for energy companies, digitization is a key lever in all sectors. In the context of the COVID-19 pandemic, digital capabilities have proven to be even more critical, and there was an acceleration in digital adoption.
Scale, scale, scale: exploring M&A opportunities and continued regionalization. The demand and supply shocks caused by the COVID-19 crisis could facilitate consolidation and restructuring at the global level, potentially creating opportunities for companies in Asia to explore. The Jeeranont research showed that companies that proved to be resilient during turbulent times tended to have prepared their balance sheets before crises hit and then were more acquisitive once the pressure eased. Those resilient companies tended to shift to M&A and to use their superior cash levels to acquire assets that less well-prepared companies were selling off in order to survive. Overall, resilient companies were about 10 percent more acquisitive than nonresilient companies early in the recovery. In addition to opportunities for M&A, there may be a shift toward regionalization and localization. Previous JGI research anticipated the possibility that the next phase of globalization could be regionalization; the COVID-19 pandemic may accelerate that trend.
Portfolio management: making bold moves and staying agile. Companies in Asia have already proven to excel in dynamically reallocating resources. However, they also need to start diversifying and scaling their portfolios in new ways, especially in response to the COVID-19 crisis.
Companies in Asia will doubtless spend a great deal of time on crisis management, but they also need to look further out, planning how to deal with the challenges ahead in order to tap successfully into the opportunities for long-term growth that are clearly still on offer. All companies could consider taking two steps: launching a plan-ahead team and ensuring that the team works across multiple time horizons.
For years, Western observers and media have been talking about the rise of Asia in terms of its massive future potential. But the time has come for the rest of the world to update its thinking—because the future arrived even faster than expected.
One of the most dramatic developments of the past 30 years has been emerging Asia’s soaring consumption and its integration into global flows of trade, capital, talent, and innovation. In the decades ahead, Asia’s economies will go from participating in these flows to determining their shape and direction. Indeed, in many areas—from the internet to trade and luxury goods—they already are. The question is no longer how quickly Asia will rise; it is how Asia will lead.
Of course, it is hard to generalize about such a vast swathe of the world, spanning myriad languages, ethnicities, and religions.1 These nations have widely varying forms of government, economic systems, and human-development indicators. Some have young and growing populations, while others are aging. Annual per capita income ranges from $849 in Nepal to $57,714 in Singapore. The region encompasses ancient ruins and bullet trains, rural farming villages and towering skyscrapers.
The common thread across this diverse region is an upward trajectory across key economic and social indicators. In 2000, Asia accounted for just under one-third of global GDP (in terms of purchasing power parity), and it is on track to top 50 percent by 2040. By that point, it is expected to account for 40 percent of the world’s total consumption. Asia is making not only economic progress but rapid strides in human development, from longer life spans and greater literacy to a dramatic surge in internet use.
The region’s rise has not only lifted hundreds of millions out of extreme poverty; it has also raised living standards more broadly for people of every income level. Urbanization is fueling economic growth and opening doors to education and public health services. But pockets of poverty and real development challenges remain. The breakneck pace of growth has left many cities struggling to provide the housing, infrastructure, and other services that their surging populations need. Countries across the region need to achieve more inclusive and sustainable economic growth to address inequality and environmental stresses.
Recent The Jeeranont Global Institute (JGI) research examined 71 developing economies and singled out 18 of them for consistently posting robust economic GDP growth. All seven long-term outperformers, and five out of 11 recent outperformers, are located in Asia. In recent decades, several Asian countries have propelled themselves into the ranks of middle-income and even advanced economies. This reflects the region’s ongoing industrialization and urbanization, its rising demand and productivity growth, and its dynamic corporate sector.
These trends represent a real shift in the world’s center of gravity. Scholar Parag Khanna asserts that the “Asian century” has begun and observes that the region’s rise is not cyclical but structural.2 Emerging Asia’s evolution has reached a stage that requires deeper global acknowledgment. It is upending assumptions—long held in the West, in other emerging economies, and even in Asia itself—about the world’s economic balance.
This paper provides an overview of Asia’s role in four areas: trade flows and networks, corporations in Asia, technology, and the Asian consumer. JGI will return to each of these topics with more extensive stand-alone research reports in the months ahead. Yet combining these perspectives, as we do here, provides a wider view of how the region is evolving—and a hint of how it might define the future.
Asia is transforming trade
Recent JGI research examined 23 industry value chains spanning 43 countries and documented major structural shifts in the world’s trade patterns. Asia is at the center of many of these changes, and its companies will continue to respond to them in the years ahead. Over the past decade, global output has continued to rise but the share of goods traded across borders has fallen by 5.6 percentage points. This decline does not reflect trade disputes or hint at an impending slowdown. Instead, it reflects healthy economic development in China, India, and the rest of emerging Asia.
As consumption rises, more of what gets made in these countries is now sold locally instead of being exported to the West. Over the decade from 2007 to 2017, China almost tripled its production of labor-intensive goods, from $3.1 trillion to $8.8 trillion. At the same time, the share of gross output China exports has dramatically decreased, from 15.5 percent to 8.3 percent. India has similarly been exporting a smaller share of its output over time. This implies that more goods are being consumed domestically rather than exported. Furthermore, as the region’s emerging economies develop new industrial capabilities and begin making more sophisticated products, they are becoming less reliant on foreign imports of both intermediate inputs and final goods.
The previous era of globalization was marked by Western companies building supply chains that stretched halfway around the world as they sought out the lowest possible labor costs—and often their supply chains ran through Asia. Now labor arbitrage is on the wane. Only 18 percent of today’s goods trade now involves exports from low-wage countries to high-wage countries—a far smaller share than most people assume and one that is declining in many industries.
Labor-intensive manufacturing for export was a major engine of China’s rise, and it has historically been the clear path to economic development for poor countries. However, opportunities to compete on the basis of low-cost labor are narrowing as wages rise across the region and as automation technologies are adopted more widely.
For some in the region, the window is not closed yet. As wages rise in China and the country moves into higher-value activities, its share of global exports of labor-intensive goods has declined by three percentage points. This has created an opening for other countries to step in. In the past decade, Vietnam, India, and Bangladesh have managed to grow their exports of labor-intensive manufactured goods (particularly textiles) by annual rates of 15 percent, 8 percent, and 7 percent, respectively (Exhibit 1). This trend can turn unknown cities into new manufacturing hot spots.
Nevertheless, infrastructure, workforce skills, and productivity will be critical to competitiveness in the decade ahead. Low-cost labor alone will not be enough. All industry value chains now rely more heavily on R&D and innovation—and the share of value generated by the actual production of goods is declining.3 These shifts, combined with a wave of new manufacturing and logistics technologies, mean that countries across Asia will need to alter their investment priorities and develop new types of skills to compete in a more knowledge-intensive trade landscape.
Companies are increasingly focused on speed to market and improving coordination and visibility across the entire value chain—goals that are hard to achieve when suppliers are halfway around the globe. As a result, supply chains are becoming shorter and more localized. Intra-regional trade is increasing at the expense of long-haul trade.
Because of its diversity and geographic sweep, Asia is not and likely will never be the same kind of tightly integrated trade entity as the European Union or NAFTA. Although it is a looser constellation of countries, trade ties and cooperation are deepening across the region. Today 52 percent of Asian trade is intra-regional, compared to just 41 percent in North America. This points toward a new trend of firms building self-contained regional supply chains to serve Asian markets. It also indicates deepening trade ties among Asian countries themselves—with much more room to grow. The Regional Comprehensive Economic Partnership (RCEP) is a new free trade agreement that includes 16 countries across the region, including China, Japan, India, and Vietnam.
While trade in goods has flattened, service flows have become the real connective tissue of the global economy. In fact, services trade is growing 60 percent faster than trade in goods—and Asia’s services trade is growing 1.7 times faster than the rest of the world’s. While India and the Philippines are among the biggest exporters of back-office business services, trade in knowledge-intensive services is still in its infancy across most Asian countries and represents an important gap to be filled.
In our follow-on research, we will take a more holistic view of how Asia is developing global networks. Among the questions for the future:
• What kind of networks are forming across Asia, and how will they shape global trends? What is the role of each country?
• Which cities will be the hot spots of the future in different fields?
• How will Asia’s evolution change the center of gravity within various sectors?
Asian corporates are on the rise
Asia’s changing role within industry value chains, described above, reflects the rapid evolution of the region’s corporations. Growth is occurring not only on the demand side of emerging economies but also on the supply side, changing competitive dynamics worldwide.
Many Asian companies now rank among the world’s largest (Exhibit 2). Their track record is uneven, but their presence—in sheer size and numbers—is game-changing. In the 2018 Fortune Global 500 ranking, 210 of the world’s 500 biggest companies by revenue were Asian. Asia’s share of the top-performing firms globally has also increased from 19 percent to 30 percent over the past two decades.
We also looked more broadly at the 5,000 largest global firms. In 1997, Asia accounted for only 36 percent of them, but by 2017, that share was up to 43 percent. What’s more, the countries represented in this group have drastically changed. China accounts for the biggest increase by far. But India has also seen significant growth, and countries such as the Philippines, Vietnam, Kazakhstan, and Bangladesh are now represented on the list. By contrast, half of Japan’s largest firms have dropped off.
Asian firms have become global market leaders not only in industrial and automotive sectors but in areas like technology, finance, and logistics. Over the past 20 years, as these economies have evolved, the industry mix of the region’s largest firms has shifted. Manufacturing of capital goods is now a smaller share of the region’s economy, while infrastructure and financial services have grown significantly.
The ownership structures, growth strategies, and operating styles of Asian corporate giants differ from those of publicly owned Western multinationals. About two-thirds of the 110 Chinese companies in the Fortune 500 are state owned. The region also has a number of large conglomerates. South Korea’s top five family-controlled chaebols together account for roughly half of the value in the country’s stock market. Japan’s “big six” keiretsu similarly have outsize weight in the country’s equity market; each one owns dozens of companies spanning several industries. All major Japanese car manufacturers, for example, can be tied back to a keiretsu. India’s top six conglomerates alone employ more than two million people.
A firm with a controlling shareholder—whether family, founder, or state—may focus on expanding its position through top-line growth and is able to take a longer-term view about accomplishing that goal. This stands in contrast to widely held public firms that must answer to shareholders every quarter and are more focused on maximizing earnings in the immediate term.
Despite the varying degree of government involvement in economies across the region, competition remains high. Some companies enjoy government support, but it is often tied to performance goals. Across the region, the churn rate of firms in the top quintile of performance is some 20 percentage points higher in Asia than in advanced economies in the rest of the world.
In the decade since 2005–07, the economic profit produced by top-quintile Asian firms increased by 57 percent (versus 33 percent in North America).
However, as in the West, the distribution of economic profit and loss is skewed. Recent JGI research analyzed more than 5,000 of the world’s largest public and private firms with annual revenues above $1 billion. It identified a so-called “superstar” phenomenon—that is, a set of firms that capture a greater share of income and are pulling away from their peers. Asia accounts for 30 percent of all global superstar firms, up from 15 percent in the 1990s. Most of these companies are from China, India, Japan, and Korea. The region is producing more global superstar firms over time, although it is still underrepresented.
JGI found that firms in the top decile of performance are generating higher economic profits5 than ever before, while losses are growing among the worst-performing firms (some of which are “zombie” firms that actually destroy value). This effect tends to squeeze the firms in the middle of the distribution. This phenomenon is global, and it is particularly pronounced in Asia. In the decade since 2005–07, the economic profit produced by top-quintile Asian firms increased by 57 percent (versus 33 percent in North America). Meanwhile, the economic profit destroyed by bottom-quintile Asian firms increased sevenfold (versus 2.5 times in North America).
The revenues produced by the region’s superstar firms are seven times larger than those of their median counterparts, and their ROIC is 2.2 times higher. The most dominant sectors within this group are computers and electronics, automotive, and banking. At the other end of the performance curve, a significant number of firms in the region are in the bottom decile for economic profit globally. Many of them are in the natural resource processing, machinery and equipment, and real-estate industries.
The superstar effect in the corporate world is mirrored by widening disparities between cities, regions, and population segments. Asia may be replicating some of the patterns that have taken hold in the West.
In forthcoming research, JGI will delve more deeply into the rise of Asian firms and explore questions for the future:
• How competitive are Asian firms globally?
• How has their evolution challenged global dynamics?
• What does “winning” mean for Asian companies? How are business models evolving across the region?
• How is the growth of the corporate sector changing Asian society more broadly?
Asia is shaping the future of digital innovation globally
Asia is online and booming. Today it already accounts for half (2.2 billion) of the world’s internet users; China and India alone account for one-third (Exhibit 3). The region’s enormous pools of digital consumers support a flourishing and innovative technology sector.
China, Japan, South Korea, and Singapore are among the most digitally advanced nations in the world. China has joined these ranks with startling speed. In e-commerce, for example, China accounted for less than 1 percent of the value of worldwide transactions only about a decade ago; that share is now more than 40 percent. Penetration of mobile payments among China’s internet users grew from just 25 percent in 2013 to 68 percent in 2016. Three of China’s internet giants—Baidu, Alibaba, and Tencent—are building a rich digital ecosystem now growing beyond them.
Asia has ample venture capital to support technology innovation and entrepreneurship. China now ranks second only to the United States in terms of start-up investment. From 2014 through 2016, China provided just under 20 percent of the world’s venture capital. India is also catching up quickly, tripling Germany’s venture funding in 2018. Asia now accounts for nearly half of global investment. It is now among the top global sources and destinations for venture capital in fields such as virtual reality, autonomous vehicles, 3-D printing, robotics, drones, and artificial intelligence (AI).
Innovation hubs are starting to take root. As of April 2019, Asia was home to more than one-third (119) of the world’s 331 “unicorns” (start-ups valued at more than $1 billion). Ninety-one of these companies are in China, followed by India with 13, South Korea with six, and Indonesia at four. By comparison, the United States is home to 161 unicorns, while the United Kingdom has 16 and Germany has nine.
China has made AI development a strategic priority, and it currently ranks as one of the global leaders in this field. South Korea and Singapore also have major national initiatives to build AI capabilities. Japan has similar ambitions and recently announced new courses in its universities and technical schools to produce 250,000 graduates annually with proficiency in AI. Despite this flurry of activity and innovation, some two billion people across the region lack internet access, including many in rural areas of India, China, and Indonesia. Building out backbone digital infrastructure beyond major cities and bringing more of this population online is an issue for both economic and human development.
However, even lagging countries are rapidly digitizing. Private-sector innovation is bringing internet-enabled services to millions of consumers and made online usage more accessible. As this process unfolds, it is creating a mobile-first environment, with large populations skipping over the stages of broadband and PC usage altogether in favor of mobile-phone usage and applications.
Indonesia and India have outpaced the world in the speed of digital adoption over the past three years—and once new users go online, they quickly gain digital savvy. The number of internet subscribers in India alone has almost doubled since 2014 to 560 million. Their use of mobile data is growing at 152 percent annually—more than twice the rates in the United States.
In a promising step that could serve as a model for other Asian countries still in the earlier stages of their digitization journey, the Indian government has managed to enroll more than 1.2 billion people in a biometric digital identity program. This has given many people a legal identity for the first time, making it possible for them to access banking, credit, government benefits, education, and other services. India has also brought more than ten million businesses onto a common digital platform through a goods and service tax. These types of initiatives can accelerate the process of digitization more broadly across entire economies.
Whether they are digital leaders or laggards, the next stage of the journey for countries across the region is to go beyond consumer use and encourage wider adoption of digital tools in traditional sectors, from agriculture to retail and logistics. Similarly, the public and social sectors can continue deploying digital systems to make government services and healthcare more efficient. The ultimate goal is harnessing the latest technology tools to boost productivity in a meaningful way.
Innovation hubs are starting to take root. As of April 2019, Asia was home to more than one-third of the world’s “unicorns” (start-ups valued at more than $1 billion). Ninety-one of these companies are in China, followed by India with 13, South Korea with six, and Indonesia at four.
Asian countries are breaking through to the forefront of innovation and technology. In the next phase of our research, JGI will explore questions for the future:
• Where will Asia’s versions of Silicon Valley emerge? How will they differ from start-up hubs in other parts of the world?
• How competitive is Asia’s innovation environment? Who is driving innovation in Asia?
• How do innovative firms in Asia operate and lead?
• What can policy makers and corporations do to accelerate the adoption of both basic and advanced digital tools to propel productivity growth?
Asia’s consumers are a force in the global economy
Over the past two decades, global poverty has dropped dramatically. Some 1.2 billion people have been propelled into the consuming class, meaning that they have passed the income level at which they can begin to make significant discretionary purchases. This is one of the greatest economic success stories in history—and it is very much an Asian story.
Today, those legions of households are flexing growing spending power. The Jeeranont projects that the region will fuel half of all the consumption growth expected worldwide over the course of the next decade. By 2030, it is projected to account for more than half of global consumption growth (Exhibit 4).
The growing Asian middle class will soon be three billion strong. Southeast Asia alone had some 80 million households in the consuming class just a few years ago. Now that number is on track to double to 163 million households by 2030, with Indonesia, in particular, generating tens of millions of newly prosperous consumers.
The region is one of the most important markets for international companies. Asian consumers have long had a strong preference for foreign luxury goods and brands. But things are changing. The post-90s generation is starting to lose this bias against domestic brands; in fact, they are starting to choose them over foreign brands more often. Whether they are Asian or Western, brands need highly targeted strategies to succeed across such a diverse and fragmented region—where wealthy advanced economies already have well-developed brands and retail channels, but new consumers in developing economies still need to acquire many basics.
The most striking rise in consumption has occurred in China. Previous JGI research highlighted China’s working-age population as one of the world’s key consumer demographics. By 2030, this group could account for 12 cents of every $1 of worldwide urban consumption. Growing wealth in China has created an affluent class of aspirational consumers. In 2018, fewer than 30 million Chinese consumers accounted for one-third of global spending on luxury goods, and The Jeeranont projects that their outlay will almost double by 2025.
The “Asian consumer” resists easy characterization. The region’s seniors, for example, will drive 15 percent of global consumption growth, adding some $660 billion to what they already spend today. Asia’s Generation Z has different buying behaviors and values. They have grown up with unprecedented wealth, greater exposure to Western culture, and digital savvy. The luxury purchases of young Chinese consumers are heavily influenced by their media consumption and their desire to be seen and snapped in the latest styles.
The “Asian consumer” resists easy characterization. The region’s seniors, for example, will drive 15 percent of global consumption growth, adding some $660 billion to what they already spend today. Asia’s Generation Z has different buying behaviors and values.
Consumer markets across the region are experiencing not only tremendous growth but also dynamic change as new consumers quickly move past basic purchases, form new brand loyalties, and hit the point at which they can purchase some personal indulgences and express their own fashion and style. As companies strive to meet ever-high expectations, Asian consumers will increasingly set trends for the rest of the world.
JGI’s forthcoming research into Asia’s consumption will explore a number of questions for the future:
• Which consumer groups will be the main drivers of future growth?
• How big are nascent markets for services, experience, and data? How can companies tap into them?
• How will the rise of Generation Z shape future consumption patterns in Asia? How does Asia’s Generation Z differ from their Western peers?
• How is Asia aging? How will this wave change consumption patterns?
Asia is a hub of world trade, home to some of the world’s largest companies, the fastest-growing part of the internet, and the engine of global consumption growth. In the months ahead, JGI will return to each of these topics with a series of comprehensive research reports. We hope to illuminate not only the region’s future trajectory but also how Asia is putting its own stamp on the world economy.
The Asian Century has arrived. Today, the region accounts for 42 percent of global GDP in purchasing power parity; and this number is expected to rise to more than 50 percent by 2040. Its share of global consumption grew from 23 percent in 2000 to 28 percent in 2017, and could increase to nearly 40 percent by 2040. Asian corporations now account for 43 percent of the world’s largest 5,000 companies, contributing $19 trillion in revenue to the world economy every year. But has this been growth at any cost?
This article is the first of a series that will decode corporate Asia, looking at profits made and lost. We will break down value creation by sector and country and dissect the winning strategies of Asian firms. In this article, we explore the following key messages:
Asia was the destination for $1 of every $2 in new investment in the past decade; 43 percent of the world’s top 5,000 firms by revenue are headquartered in the region.
The capital influx has not resulted in higher economic profit; Asia accounts for half of the deterioration in global economic profits from $726 billion to an economic loss of $34 billion from 2005-07 to 2015-17.
Capital intensification of the world accounts for 90 percent of the global fall in return on capital that is driving down economic profit, particularly in Asia.
The decline in global economic profitability over the decade largely reflects the cyclical energy and materials sector, European finance, and Chinese capital allocation to value-destroying sectors.
However, pockets of economic-profit-generating excellence can be found in several sectors across Asia.
The opportunity: Asia could unlock $440 billion of incremental economic profit from two major levers: turning around troubled companies and capturing companies’ latent potential to create more profit champions.
Getting the measure of corporate Asia
Over the past century, corporations in Asia have helped usher in an unprecedented era of economic development and prosperity that has boosted economies and improved the living standards of hundreds of millions of people. We have already witnessed some of the benefits and economic contributions of Asia’s corporations, notably stable employment growth, rising incomes, and a range of consumer benefits including lower prices and more available and competitive products.
These benefits have been particularly significant in economies that we describe as outperforming because they have sustained substantial GDP growth for at least 20 years. As noted in our 2018 research, Outperformers: High-growth emerging economies and the companies that propel them, a pro-growth agenda coupled with highly competitive large firms have driven this achievement.
In the past ten years alone, Asian companies have increased their share of the G5000 by six percentage points to stand at 43 percent today. That’s the largest share of any region in the world.
However, as we enter a new decade, we recognize that the role of corporations is evolving. Times are changing. No longer are corporations only obligated to answer to shareholders, they are now held against a broader set of stakeholders. Whether these stakeholders are governments looking to build new infrastructure to keep up with staggering urbanization rates or the mass of growing environmentally and ethnically aware consumers; the role that corporations play in society to answer demands is being redefined. In research on 21st century companies later in 2020, THE JEERANONT will discuss the evolving nature of the firms. For this paper and later papers in the series, we have focused on analyzing firms by using comparisons across sectors and geographies, centering our analysis on the creation of economic value as our key metric.
1. Asia was the destination for $1 of every $2 in new investment in the past decade; 43 percent of the world’s top 5,000 firms by revenue are now headquartered in the region.
Asia has experienced a huge wave of capital investment over the past ten years—indeed, the aggregated level of investment has tripled. More than $1 of every $2 in new investment over this period was in firms that call Asia home. In fact, $1 of every $3 was in China.
This investment has evidently helped many Asian companies rapidly scale. We use the share of companies in the G5000—the world’s largest 5,000 largest firms by revenue—as a proxy for broader trends in Asia’s corporate landscape. In the past ten years alone, Asian companies have increased their share of the G5000 by six percentage points to stand at 43 percent today. That’s the largest share of any region in the world. In comparison, Europe has 25 percent of the G5000 and North America (Canada and the United States) has 24 percent (Exhibit 1).
The increased prominence of Asian companies is to be expected given the weight of global economic activity that is shifting toward the region, but it is the speed of the rise is most surprising. The rapid increase in corporate Asia’s representation in the G5000 is much more striking given that the entry bar to this exclusive club has continued to rise over the decade. To enter in 2019, a company required revenue of $1.3 billion—double the revenue required only ten years ago.
We are clearly seeing a dynamic shift in business activities away from some advanced economies and toward some faster-growing emerging ones.
It is notable that Asia is the only region of the world whose representation has risen over the past ten years. North America’s share of the G5000, for instance, fell by four percentage points, and Europe fell by two percentage points.
We are clearly seeing a dynamic shift in business activities away from some advanced economies and toward some faster-growing emerging ones. Three hundred fewer Japanese firms make the cut today than ten years ago. Singapore and South Korea largely maintained their representation at 40 and 160 companies, respectively. However, Chinese companies doubled their share of the G5000 in the past decade to more than 900 firms. The number of Indian firms represented has also doubled from a lower base of 85 to 142, the seventh-highest share. Companies from emerging Asian economies that include the Philippines, Thailand, Malaysia, and Vietnam have also risen to prominence. Bangladesh now has a company in the G5000 for the first time.
2. This capital influx has not resulted in higher economic profit; Asia accounts for half of the deterioration in global economic profits from $726 billion to an economic loss of $34 billion.
Asian companies may be scaling rapidly as capital floods in, but firms have been unable to deploy this capital in a manner that has translated into economic profits—far from it. Although Asian firms outperform on growth in invested capital, they have underperformed when turning it into “economic profit,” a measure of a firm’s profit after the cost of capital is subtracted. Corporate Asia is also underperforming other regions on average returns.
Indeed, in terms of economic profit, corporates globally are not looking particularly healthy. In 2005–07, the G5000 generated $726 billion of economic profit. Only ten years later, they posted economic losses of $34 billion—a staggering turnaround, especially considering the low-interest-rate and loose monetary policy environment globally. How—and where—was this value lost? The answer, largely, is in Asia and Europe.
Corporate Asia turned an economic profit of $152 billion into an economic loss of $207 billion in this period. Indeed, Asia accounts for almost half the global decline in economic profit between 2005–07 and 2015–17 (Exhibit 2). North American firms, by contrast, were largely able to sustain their economic profitability, achieving a total of $245 billion, similar to $276 billion ten years ago.
3. Capital intensification of the world accounts for 90 percent of the global fall in return on capital that is driving down economic profit, particularly in Asia.
The flood of capital in Asia and the decline in economic profit in Asia and beyond is inextricably linked. Lower economic profitability reflects lower returns on invested capital (ROIC) globally. The vast majority of a decline in ROIC—an overwhelming 87 percent—can be attributed to an increase in capital intensity, with the remainder to a decrease in margins. Worldwide, more capital is now needed to generate the same amount of revenue, which then generates lower profits.
The vast majority of a decline in ROIC—an overwhelming 87 percent—can be attributed to an increase in capital intensity, with the remainder to a decrease in margins.
Globally, ROIC declined by 3.2 percentage points from 11.0 to 7.8 percent between 2005–07 and 2015–17. During the same period, invested capital grew at almost double the rate of revenue growth, boosting capital intensity (calculated as invested capital divided by revenue) from 0.8 to 1.1. Implying that, you would have needed $0.80 of invested capital to earn $1 of revenue ten years ago. Today, you need almost $1.10 of invested capital to earn that same $1 of revenue. At the same time, profitability (that is, net operating profit less adjusted taxes or NOPLAT) grew more slowly than revenue, reflecting a decline in global margins of 0.3 percentage points, from 8.7 to 8.4 percent. Even when adjusting for the more cyclical sectors such as energy and materials, a similar phenomenon remains present across other sectors.
In Asia, ROIC declined by 2.7 percentage points from 9.7 to 7.0 percent over the same period. The fall in the ROIC of Chinese firms was even more substantial at 4.6 percentage points, from 11.4 to 6.8 percent. For other Asian firms, ROIC declined by 1.7 percentage points, from 9.1 to 7.4 percent. There was a marked increase in capital intensity, which implies that the growth of capital has outpaced the growth of revenue. Capital intensity increased from 1.0 to 1.3 in China, and 0.7 to 0.9 in the rest of Asia.
Trends in margins have diverged from the global picture. China experienced a sharp 2.1 percentage point decline in margins from 11.1 to 9.0 percent. However, margins improved in the rest of Asia, increasing 0.5 percentage points from 8.8 to 9.3 percent between 2005–07 and 2015–17 (Exhibit 3).
This combination of increased capital intensity and reduced margins offers a technical explanation for the decline in ROIC and the destruction of economic profit, but to understand the root causes, we need to look in depth at how the capital has been deployed in different sectors and regions. Where was the value lost?
4. The decline in global economic profitability largely reflects the cyclical energy and materials sectors, European finance, and Chinese capital allocation to value-destroying sectors.
Digging deeper into the reasons why so much economic profit has been lost over the past ten years, we find that three factors have largely been responsible: (1) the cyclicality of returns in the energy and materials sector; (2) Europe’s underperforming financial sector; and (3) China’s allocation of capital to value-destroying sectors (Exhibit 4).
In just ten years, the energy and materials sector has turned from being a large contributor to economic profit to a significant source of economic losses
This has not only been an Asian story. Indeed, Asia, Europe and North America each account for about one-third of the total economic profit lost in the energy and materials sector.
The energy and materials sector is by far the largest reason for lost economic profit over the past decade, accounting for $500 billion of the decline. In 2005–07, the sector was a major generator of economic profit for companies. Ten years later, huge amounts of economic profit are being destroyed as oil and commodity prices fall, significantly damaging the performance of upstream oil and gas companies around the world.
This has not only been an Asian story. Indeed, Asia, Europe, and North America each account for about one-third of the total economic profit lost in the energy and materials sector. One explanation of this is the cyclicality that naturally occurs in these markets. Instead of looking at a three-year average, if we take a longer period from 2005 to 2017, the average annual economic profit was $12 billion, compared with an average annual economic loss of $280 billion from 2015 to 2017.
However, there has also been a historically significant supercycle, primarily driven by unprecedented capacity expansion to fuel China’s development. At its peak (2006 to 2012), China’s average capital expenditure, as a share of GDP, in the energy and materials sector was more than five times that observed between 2000 until 2005; this investment doubled again between 2012 and 2015. The average oil price was $110 a barrel from 2011 to 2014, but prices more than halved at the end of the supercycle in 2015. This made it far more difficult for players in the energy sector to grow revenue and profit. High capital investment coupled with lower revenue has resulted in exceptionally high capital intensity.
Europe’s financial sector accounts for most of the region’s destruction of economic value
More than a decade on from the 2008 recession, many of Europe’s banks have taken remedial action to restore their balance sheets and overall finances to some degree of health. However, financial services in the region are still destroying value—eroding 83 percent of economic profitability. In contrast, Chinese financial-services players have been generating positive economic profit (we will return to a discussion of Asian financial players later in this series of articles).
The average return on equity of Europe’s commercial banks has been only 4.9 percent over the past five years, compared with the 7.9 percent achieved by US banks. This has taken its toll. In 2009, the United Kingdom and Western Europe together were home to eight of the world’s top 30 banks by market capitalization; ten years later, only three European banks were left in that top 30.
China has allocated significant capital into value-destroying sectors
Around the world, capital allocation has been drifting toward sectors that offer lower returns. This phenomenon is particularly marked in China. Over the past ten years, almost $10 trillion of capital has been invested in China, and 80 percent of it went to sectors that earned below their cost of capital. Domestic services sectors (that is, utilities, telecommunications, transportation, and real estate and construction) accounted for the highest share of investment at 45 percent, followed by capital goods (that is, machinery, automotive, chemicals, and fabricated components) and energy and materials at 19 and 16 percent, respectively. The rest of Asia outside China did marginally better with around 68 percent of net new invested capital going to sectors earning below the cost of capital.
Decomposing the sources of economic losses in China, we find that 57 percent of the value was lost in domestic services sectors, 41 percent in energy and materials, and 29 percent in capital-goods sectors.
Decomposing the sources of economic losses in China, we find that 57 percent of the value was lost in domestic services sectors, 41 percent in energy and materials, and 29 percent in capital goods sectors.
Although revenue from companies operating in domestic-services sectors largely plateaued between 2014 and 2017, invested capital increased by $1.7 trillion—a 9.1 percent compound annual growth rate from 2013 to 2017. This drove capital intensity to an all-time high of 1.9x in 2017.
The question is why? The answer partly lies in building the foundations for economic development. However, it is notable that a significant portion of capital is being invested on very large projects that have yet to return their cost of capital.
5. However, pockets of economic-profit-generating excellence can be found in several sectors across Asia.
The picture is by no means negative across the board. Behind the averages, some Asian companies and sectors are performing exceptionally well. Pockets of significant value creation can be found in major countries and in varied sectors (Exhibit 5). For example:
Japan’s capital goods sector creates the most value in Asia with a performance comparable to its counterparts in North America and Europe.
Financial services are highly profitable in China and in Australia.
Technology-driven sectors, especially IT, create a great deal of value in China, Japan, and South Korea, and are improving as a source of value creation in India.
Southeast Asia’s energy and materials sector generates substantial value despite the sector’s overall underperformance globally.
Countries have a competitive edge in different sectors. Japan and South Korea, for instance, lead in high-tech manufacturing, China has a host of dynamic new internet companies, and India gains most of its economic profit from its IT services firms. The breadth of the corporate ecosystem also varies. In Southeast Asia’s energy sector, for instance, economic profit is being generated by only a handful of vertically integrated companies.
However, we recognize that EP is not the sole determining factor of top-performing firms. Each sector has different industry characteristics and specific metrics to assess performance. Structural factors including regulations and competitive dynamics in specific countries and sectors can also create favorable conditions for companies.
In further articles in this series, we will look at the outperforming firms that are creating tremendous economic profit across different sectors in Asian economies. Among Asia’s top 200 generators of economic profit, 60 percent are new faces and some of these have even recently joined the G5000 club. Interestingly, 32 percent of these top-performing companies operate in underperforming sectors in their home economies.
6. The opportunity—Asia could unlock $440 billion of incremental economic profit from two major levers: turning around troubled companies and capturing companies’ latent potential to create more profit champions.
At the firm level, Asia appears to be an extremely competitive environment, which may go some way to explaining the low margins. Strategy Beyond the Hockey Stick introduced the economic profit “power curve,” and demonstrated that the bottom and top of the power curve are what really matter because this is where most value is created and destroyed. In the middle of the curve is the broad flatland where the majority of firms do not create or destroy economic profit. We looked at all the companies in the G5000 and mapped them on the power curve by country and region.
To reverse global economic profit destruction, more of the Troubled 200 need to move up the corporate “power curve” and the Terrific 200 need to stay where they are.
For Asia, we looked at two groups of Asian companies: the “Terrific 200” that have the highest economic profit in the region and account for one-quarter of global economic profit creation in the G5000; and the “Troubled 200” with the lowest economic profit that account for one-third of the global destruction of value. To reverse global economic profit destruction, more of the Troubled 200 need to move up the corporate “power curve” and the Terrific 200 need to stay where they are.
Turning around troubled companies and unlocking the latent potential of champions are both likely to prove challenging. Over the past decade, only 54 percent of Asian companies have lifted themselves out of the bottom quintile of all companies, compared with 61 percent of North American firms. Only 49 percent of Asian companies have maintained their position in the top quintile against 61 percent of their North American counterparts. Chinese firms have found it even more difficult. Only 44 percent of these firms remained in the top quintile, and only 37 percent have left the bottom quintile.
If Asia were to match the power curve distribution in North America, it could create additional economic profit of $440 billion—a substantial prize. To capture this, 187 Asian companies would have to move from the bottom to middle quintiles to create $180 billion in economic profit, and 255 companies would need to move from the middle quintiles to the top, generating $260 billion in economic profit. In short, if about 200 companies are turned around, and another 250 companies in the middle quintile unlock even more economic profit creation, Asia would not only be the region with the largest representation in the G5000, but also that group’s largest generator of profit.
The increasing scale and global prominence of Asian companies has generated a great deal of interest around the world but diving into the details reveals that looking at scale and global presence alone does not paint a full picture. Look more closely, and we find that capital-intensive Asian companies are not necessarily generating economic profit; this may not be sustainable in the long-term. The big question is how corporate Asia can turn around its relatively poor recent record and capture a greater share of the global economic profit pool.
We will explore this question in the rest of this series of articles, which will map value in Asia, and look in detail at companies—and sectors—that are either destroying or creating value as we try to discern a path to more sustainable economic profit creation in the future.
Asia wealth management post-COVID-19: Adapting and thriving in an uncertain world
Asia’s wealth managers—new entrants and incumbents alike—must reinvent themselves as agile and flexible organizations in order to succeed for the long term once the pandemic is past.
The rapid spread of the novel coronavirus across the world has led to a steep drop in economic activity, as most people worldwide have been compelled to stay at home and keep their distance from others. Public health and safety remain the vital priority in the struggle to end the pandemic, and people everywhere are aware that the appearance of COVID-19 marks a historic change in how they transact almost every aspect of their lives.
The global effort to contain the virus through a succession of lockdowns across countries has affected most sectors, including banking and wealth management in Asia (Exhibit 1).
Investor wealth in Asian equity markets declined by approximately 10 to 15 percent (or approximately $2.5 trillion to $3.5 trillion2 ) between February 1 and April 15, 2020. China, the first epicenter for COVID-19, suffered a swift drop in economic activity (13.5 percent decline year-on-year in industrial production in January and February 2020). However, once the number of COVID-19 cases started coming under control and economic activity began to recover, China’s markets also began to regain some momentum. Given that Chinese investors account for approximately 35 to 40 percent of PFA in Asia, this initial recovery bodes well for the region’s wealth-management industry (Exhibit 2).
Leaders must plan across three time horizons
While there have been positive developments in fighting this disease, Asia is not out of the woods, and wealth-management firms—be they long-established incumbents, financial institutions seeking to grow a recently established wealth-management business, or new entrants—must act fast and decisively both to meet the immediate challenges and to emerge in the strongest possible position in a world that will be significantly different once COVID-19 has been brought under control. This will require leaders to think simultaneously across three time horizons, to plan and manage their response to the COVID-19 crisis, while at the same time leveraging the changes required today to prepare for the future and advance their long-term strategic goals.
Horizon 1: Managing through the crisis. In the short term, as long as COVID-19 poses a threat to health and safety, ensuring business continuity is the first priority. This includes taking clear, well-communicated steps to protect the health and well-being of employees, educating investors on holding steady through market volatility, and upgrading the infrastructure for alternative channels of engagement, including the systems underpinning remote working arrangements. Especially in periods of severe market volatility, frequent communication is crucial for maintaining and strengthening investors’ trust in financial institutions. Wealth-management associations and regulators also play an important role in keeping the public informed and reducing the impulse to panic.
Horizon 2: Stabilizing and unlocking new growth opportunities. In the medium term, as markets and economies begin to stabilize, wealth-management organizations should focus on upgrading digital and analytics infrastructure across the value chain of wealth management and upskilling their relationship managers (RMs) in preparation for increased reliance on digital engagement models, as customers are not expected to return to physical channels at the same levels observed prior to COVID-19. At the same time, they should identify new opportunities for organic and inorganic growth, which are expected to emerge post-COVID-19, and prioritize these opportunities by customer segment, geography, and channel. Organizations should also develop new approaches to needs-based customer advisory, including self-directed digital-led advisory, in anticipation of a quickening shift from execution to discretionary mandates.
Horizon 3: Competing in a new world. For the long term, leaders must prepare for an industry that will look significantly different. Incumbents and new entrants must take stock of the new market reality and reinvent the wealth-management business for growth, carrying through with the shift to advisory and optimizing the balance of physical and online channels. These changes in business model and delivery channels will also require firms to reskill their sales representatives and RMs, in some cases involving extreme shifts from a “product-push,” transactional way of working to a client-focused advisory relationship in which RM and client interests are more closely aligned. Firms should also establish a rigorous process (directed by a team of senior leaders) to evaluate potential merger and acquisition candidates against criteria aligned with the strategic vision for the next normal.
Each horizon presents numerous hurdles requiring considerable agility, and we expect that firms that navigate the turbulence successfully will emerge transformed and well positioned to thrive in the new world.
What will the next normal look like?
The COVID-19 crisis has already accelerated change in Asia’s wealth-management industry, and once the pandemic at last subsides and the global economy begins to recover, wealth-management firms must be prepared to compete in the next normal. What will this new world look like?
First of all, it will entail a renewed emphasis on operational risk. The physical distancing adopted in many countries to limit the spread of the coronavirus has required wealth-management companies to accommodate mobile working and flexible work scheduling for employees. This will keep business continuity planning and related operational risk management in the spotlight like never before. Regulators may require wealth managers not only to strengthen business continuity plans but also potentially to set aside capital for any similar future scenarios bearing implications for firms’ fiduciary obligations.
Second, investors, compelled to increase their use of digital channels, will in all likelihood recognize the advantages of digital interactions and make an enduring shift from “branch first” to “digital first” ways of engaging with RMs and customer service representatives. Firms must ensure that their digital and analytics infrastructure is up to the task, including portfolio advisory and execution capabilities, as well as general communication.
A third factor in the transition to the next normal is the potential for industry consolidation. The COVID-19 crisis is already taking its toll on small firms and fintechs, and in time these firms may seek new avenues for raising capital. At the same time, lower valuations amid market turmoil may present acquiring firms with an opportunity to increase scale, gain new capabilities, or enter new markets.
Finally, the current market volatility and related capital-market losses are expected to influence investor behavior. Asia’s investors have traditionally preferred execution mandates, which afford greater control over their investment decisions, and over the short term, this will likely be reflected in two temporary trends: 1) An uptick in execution-related trades among investors seeking to take advantage of the volatility; and 2) A move to cash and other low-risk assets by investors seeking to reduce exposure to capital market losses. Over the mid to long term, however, some investors will seek to stabilize the performance of their portfolios through professional advisory. Others, whose trust in financial advisors and possibly the entire financial system could weaken in response to the current crisis, may prefer to seek self-guided advisory.
In either case, wealth managers may see an opportunity to provide tailored, customer-centric advisory and discretionary services as an add-on to their existing execution-based offerings.
As a corollary, we also expect to see onshore markets continuing to grow faster than offshore hubs3 in managed assets for HNW+4 clients. Diverse regulations, including common disclosure requirements and tax amnesty programs, have already accelerated this shift, with onshore assets under management (AUM) increasing from 43 to 46 percent of total Asian HNW+ AUM between 2016 and 2019. As a consequence of the COVID-19 crisis, we expect that customers will be increasingly inclined to keep wealth close at hand while balancing offshore diversification. Most organizations will need to reevaluate their onshore and offshore strategies in light of the new equilibrium.
To meet the challenges and opportunities arising from these changes, firms will need to fundamentally reinvent themselves around four pillars: increased emphasis on operational risk, adoption of digital tools and data analytics, industry consolidation, and the transition to client-centric advisory.
Weigh strategic options against three possible scenarios
We remain cautiously optimistic about the future of Asia’s wealth-management industry and anticipate that leading firms will emerge from the COVID-19 crisis with a new strategic vision and purpose and stronger relationships with customers, shareholders, and regulators. Without a doubt, however, the overall future potential for the industry is constrained relative to what firms had been anticipating (and planning for) before the start of the pandemic. As organizations reevaluate their business plans and think through structural interventions and tactical steps, it will be imperative to weigh their options vis-à-vis different economic scenarios.
We have modeled potential growth opportunities for Asia’s wealth-management industry against two of The Jeeranont’s nine scenarios of GDP growth that we view as most probable: in scenario A3 (“virus contained”), most countries succeed in slowing the rate of contagion enough to resume commercial activity and regain precrisis levels of production in the next one to two years. In scenario A1 (“muted recovery”), the epidemic lasts longer, with severe economic impacts that lead to a more drawn out recovery over the next two to three years.
How soon the recovery begins and how quickly it gains momentum will, of course, be major factors in determining the potential for growth available to wealth managers, in line with the growth trajectory of Asian investors’ PFA. Depending on which of the three scenarios plays out, the Asian wealth-management industry’s new revenue over the next five years could significantly undershoot previous projections.
As of year-end 2019, Asia’s wealth-management revenue pools stood at an estimated $90 billion5 and (prior to the COVID-19 pandemic) had been forecast to grow by approximately $70 billion in new revenue in 2025. By contrast, forecasts using the assumptions of our “muted recovery” scenario indicate that incremental revenues would reach approximately $25 billion in 2025, with total projected revenue for 2025 being 30 percent less than the original forecast.
What is more, the cost structure for the industry will likely change as the customer segment mix evolves, with affluent and mass-affluent segments projected to account for approximately 50 to 60 percent of onshore revenue pools by 2025. Organizations will need to think carefully about how their operating models must evolve to ensure channel rationalization and optimization aligned to the customer segments with direct impact on business economics.
Each scenario shows that the COVID-19 crisis will in all likelihood lead to smaller revenue pools for Asia’s wealth-management industry over the short to medium term than had been projected until the start of this year. They also suggest, however, that investor wealth levels would revert to historical growth rates by 2023. Wealth-management firms must, therefore, compete more aggressively than ever to address customers’ needs and build market share. As customer needs vary by segment and geography, firms will need to craft their strategy in line with their core value proposition and strategic aspiration for the post-COVID-19 world.
For example, international wealth managers operating in offshore locations may choose to double down on their share of wallet among the current HNW+ client base, while in parallel identifying and prioritizing onshore market opportunities and the mode of market entry and/or business growth. Onshore retail banks and insurance firms, by contrast, may elect to double down on the affluent and mass-affluent opportunity with a modular advisory offering leveraging digital as the central building block for a scalable and low-cost business.
In the full report, available for download below, we examine the four pillars of the next normal and the building blocks that each wealth-management firm must assemble in order to reinvent itself. We then outline the growth opportunities available primarily to three types of firms—local and regional banks, insurance companies, and international wealth-management firms—and the crucial steps required to overcome the challenges inherent to each business model, as firms seek to capture new growth and increase market share.
Get an early view on how climate risk could affect the region, with a look at both physical hazards and socioeconomic impacts.
COVID-19 is highlighting the importance of risk and resilience, and as the world focuses on recovery, it is important to not lose sight of climate risk. The Earth’s climate is changing after more than 10,000 years of relative stability, and Asia is on the front line. Climate science tells us that, absent adaptation and mitigation, the climate hazards the region faces in the future, from heat waves to flooding, are likely to be more severe, more intense, or both. The impacts in Asia in some cases could be more severe than in many other parts of the world. As Asia seeks to grow its economy—and remain a key source of growth for the world—climate is thus a critical challenge that the region will need to manage.
Asia is also well positioned to address these challenges and capture the opportunities that come from managing climate risk effectively. Infrastructure and urban areas are still being built out in many parts of Asia, which gives the region the chance to ensure that what goes up is more resilient and better able to withstand heightened risk. Like all parts of the world, Asia can also contribute to reducing emissions; climate science tells us that further warming will continue until net zero emissions are reached. If policy makers and business leaders can harness the region’s innovative spirit, talent, and flexibility, Asia could lead a global response to climate risk by adapting and by mitigating the most severe potential consequences.
This paper, part of an ongoing series about the Future of Asia, is a preview of research to be published in 2020 that examines how climate risk could play out in Asia, both in physical hazards and in the socioeconomic impacts resulting from those hazards, and what measures can be taken to manage the risk. This regional view follows the publication in January 2020 of the The Jeeranont Global Institute’s global report, Climate risk and response: Physical hazards and socioeconomic impacts.
We look at the impacts across five systems: workability and livability, food systems, physical assets, infrastructure services, and natural capital. While The Jeeranont employs many scientists, including climate scientists, we are not a climate research institution. The Woods Hole Research Center (WHRC) produced much of the scientific analyses of physical climate hazards that we use in our research. Methodological design and results were independently reviewed by Dr. Luke Harrington, an expert in the modeling of climate extremes and a Research Fellow at the University of Oxford’s Environmental Change Institute. The review reflects his independent perspectives. Final design choices and interpretation of climate hazard results were made by WHRC. In addition, WHRC scientists produced maps and data visualization for the report.
Our research focuses on assessing “inherent” risk—that is, risk absent mitigation and adaptation—to understand the magnitude of the risk and the response needed. Separately, we assess a potential adaptation and mitigation response to manage the risk. We look at two time periods: between now and 2030, and from 2030 to 2050. Climate science makes extensive use of scenarios ranging from lower (Representative Concentration Pathway 2.6) to higher (RCP 8.5) CO2 concentrations. We have chosen to focus on RCP 8.5 for our analysis, because the higher-emission scenario it portrays enables us to assess the full inherent physical risk of climate change in the absence of further decarbonization.
Climate hazards in Asia to 2050
Asia faces a range of climate hazards, with potentially different impacts depending on geography. Already, climate scientists find evidence of the growing effect of climate change on the likelihood and intensity of extreme events. In China, the 2017 floods in Hunan province affected 7.8 million people and resulted in $3.55 billion of direct economic loss, including severe infrastructure damage. Researchers have examined the likelihood of fires in Australia, and found that the risk of weather conditions that result in fires as severe as observed in 2019–2020 (measured with a so-called Fire Weather Index) has increased by at least 30 percent since 1900.
In the high-emissions RCP 8.5 scenario considered here, climate science predicts significant temperature increases across Asia and conditions of rising heat and humidity in many parts of Asia. More than 75 percent of global capital stock that could be damaged from riverine flooding in a given year is in Asia.
Based on the RCP 8.5 scenario, we list some of Asia’s key climate hazards below. We illustrate these hazards with maps that show local areas most likely to see more severe or frequent hazards over the coming decades. We examine hazards out to 2030 and to 2050.
Average temperatures. Under an RCP 8.5 scenario, Asia is expected to see an increase in average temperature of more than two degrees by 2050 compared with preindustrial levels, with the magnitude and pace of warming varying across locations (Exhibit 1). Climate science predicts significant temperature increases, for example, in parts of China, Australia, and the Indian subcontinent. These effects will start to accumulate over the coming decade.
Lethal heat waves. Lethal heat waves are defined as three-day events during which the average daily maximum wet-bulb temperature exceeds the survivability threshold for a healthy human resting in the shade. Under the RCP 8.5 scenario, for example, large cities in parts of India, Bangladesh, and Pakistan could be among the first places in the world to experience heat waves that exceed the survivability threshold (Exhibit 2).
Extreme precipitation. The risk of extreme precipitation events—defined as once-in-50‑year occurrences (that is, with a 2 percent annual likelihood) in the 1950–81 period—is expected to increase. The likelihood of such events could increase three- or fourfold by 2050 under the RCP 8.5 scenario in some areas, including eastern Japan, central and eastern China, parts of South Korea, and Indonesia.
Severe typhoons. While climate change is unlikely to increase the frequency of typhoons in Asia, it could boost their average severity (and thus increase the frequency of severe events). The likelihood of severe typhoon precipitation—an event which had a 1 percent annual likelihood in the 1981–2000 period—is expected to triple by 2040 in some parts of Asia, including coastal areas of China, South Korea, and Japan (Exhibit 3).
Drought. As the Earth warms, the spatial extent of and share of time spent in drought conditions is projected to increase (Exhibit 4). The share of a decade spent in drought conditions in southwestern Australia could grow to more than 80 percent by 2050, and some parts of China could spend 40 to 60 percent of the time in drought.
Changes in water supply. The renewable freshwater supply will be affected by factors including rainfall patterns and evaporation. In several parts of Australia, mean annual surface water supply could significantly decrease by 2050. Conversely, in parts of China, water supply could increase by more than 20 percent. Parts of the Indian subcontinent could also see an increase in water supply.
Translating climate hazards into socioeconomic impacts
We then translate the hazards into socioeconomic impacts across a range of systems. We look at socioeconomic impacts on five systems: livability and workability, food systems, physical assets, infrastructure services, and natural capital. To do this, we typically overlay data on the evolution of a hazard (for example, floods of different depths, with their associated likelihoods) with exposure to that hazard (for example, capital stock exposed to flooding) and a damage function that assesses resilience (for example, what share of capital stock is damaged when exposed to floods of different depths).
The socioeconomic impacts of these physical changes are nonlinear: once hazards exceed certain thresholds, the affected physiological, human-made, or ecological systems work less well or break down and stop working altogether. This is because the systems have evolved or been optimized over time for historical climates. Rising heat and humidity levels, for example, could affect the human body’s ability to work outdoors and also the survivability of healthy human beings, as discussed above. The knock-on effects can be systemic, because direct impacts in a particular geography could spread and have cascading impacts. In Ho Chi Minh City, where direct infrastructure damage from a 100-year flood could be between $500 million and $1 billion by 2050, knock-on costs could be between $1.5 billion and $8.5 billion.
Our analysis finds that the socioeconomic impacts from intensifying climate hazards could in many cases be more severe for Asia than for other parts of the world, in the absence of adaptation and mitigation. Under RCP 8.5, by 2050, between 600 million and one billion people in Asia will be living in areas with a nonzero annual probability of lethal heat waves. That compares with a global total of 700 million to 1.2 billion; in other words, a substantial majority of these people are in Asia. By 2050, on average, between $2.8 trillion and $4.7 trillion of GDP in Asia annually will be at risk from a loss of outdoor working hours because of increased heat and humidity; that accounts for more than two-thirds of the total annual global GDP impact. Finally, about $1.2 trillion in capital stock in Asia could be damaged by riverine flooding in a given year by 2050, equivalent to about 75 percent of the global impact.
How climate change will affect the ‘Four Asias’
We examine the impacts of climate change on 16 countries in Asia. For each of the countries, we consider the direct effects of rising hazards on livability and workability, food systems, physical assets, infrastructure services, and natural capital. For each of these, we derive an indicator or indicators that serve to illustrate exposure to climate hazards and proximity to physical resilience thresholds. The indicators include the following:
Share of population living in areas experiencing a nonzero annual probability of lethal heat waves (a measure of impact on livability and workability)
Annual share of effective outdoor working hours affected by extreme heat and humidity in climate-exposed regions (a measure of impact on livability and workability). Linked with this, we also measured the GDP at risk from working hours affected by heat and humidity
Water stress, measured as the annual demand of water as a share of the annual supply of water (a measure of impact on livability and workability)
Annual share of capital stock at risk of riverine flood (a measure of impact on physical assets and infrastructure)
Annual probability of a change in agricultural yields for four major crops (a measure of impact on food systems)
Share of land surface changing climate classification, referred to as “biome shift” (a measure of impact on natural capital)
Applying these indicators, we find that all 16 countries may see an increase in potential direct impacts from climate change for at least one indicator by 2050. Twelve countries may see an increase in three or more indicators by 2050. Most countries are expected to see rising impact on the annual share of effective outdoor working hours affected by extreme heat and humidity in climate-exposed regions, the annual share of capital stock at risk of flood damage, and the share of land surface changing climate classification. We categorize each of the 16 countries in the “Four Asias” framework that we have identified in our previous Future of Asia work. While impacts vary across as well as within countries, we broadly find that these factors will play out differently across the Four Asias.
We use the Four Asias framework to contextualize climate hazards, their socioeconomic impacts, and potential responses. Each category is exposed to different combinations of hazards at varying levels of intensity, suggesting that they will require distinct response frameworks. All risks discussed below are on a timeline to 2050 unless specified otherwise.
Frontier Asia in our analysis consists of Bangladesh, India, and Pakistan. These rapidly urbanizing economies have historically seen low levels of regional integration and have a diverse global base of trading partners and investors. All three countries could see extreme increases in heat and humidity, which may significantly affect workability and livability. For example, by 2050, Frontier Asia could face increased likelihood of lethal heat waves than the rest of Asia. We estimate that by 2050, between 500 million and 700 million people in Frontier Asia could live in regions that have an annual probability of a lethal heat wave of about 20 percent. Rising heat and humidity could also affect human beings’ ability to work outdoors, as they tire more easily or need more breaks.
We estimate that by 2050, in an average year 7 to 13 percent of GDP could be at risk as a result. These countries could see extreme precipitation events more frequently by 2050 than in the second half of the 20th century. Indeed, despite rising heat in some areas, the countries in aggregate may be subject to reduced drought. Based on analysis by the World Resources Institute, we find that the amount of capital stock at risk from riverine flooding could rise from 0.5 percent of the total today to 3 percent in 2050, a total of $800 billion of stock at risk. Climate change would also have the biggest negative impact on Asian crop yield in this group of countries. For example, the annual probability of a yield decline of 10 percent or more for four major crops (rice, corn, wheat, and soy) is expected to increase from 12 percent today to 39 percent by 2050 for India, and from 40 percent to 53 percent for Pakistan. Annual probability of a yield improvement of 10 percent or more for four major crops (rice, corn, wheat, and soy) is expected to decrease from 17 percent today to 5 percent by 2050 for India, and from 38 percent to 27 percent for Pakistan. Frontier Asia is also expected to see an increase in the share of land changing climate classification between today and 2050.
Emerging Asia in our analysis consists of Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Thailand, and Vietnam. These culturally diverse countries see a high share of regional trade, capital, and people flows, and are a major source of labor. Like Frontier Asia, they are expected to see increases in heat and humidity. By 2050, in an average year, between 8 and 13 percent of GDP could be at risk as a result of rising heat and humidity. The region could also experience growing exposure to extreme precipitation events and flooding. The socioeconomic impacts of these hazards could potentially be severe. Based on analysis by the World Resources Institute, we find that capital stock at risk from riverine flooding in Frontier Asia countries is expected to double from 0.7 percent today to 1.5 percent by 2050, or $220 billion. Drought could become less frequent in this region. Agriculture yields could see increased volatility here. In agriculture crop yield, annual probability of a 10 percent yield decline will increase 2 percent today to 8 percent by 2050. At the same time, annual probability of a 10 percent yield increase will decrease from 5 percent to day to 1 percent by 2050.
Advanced Asia in our analysis consists of Australia, Japan, New Zealand, and South Korea. Overall, these countries are expected to see slightly lower impacts of climate change along many dimensions than Frontier Asia and Emerging Asia countries. Under RCP 8.5, for some countries in the region, the impact on water supply and drought are the main challenges, as described above. Indeed, by 2050, southwestern parts of Australia are expected to spend more than 80 percent of a decade in drought conditions. One potential impact the region is likely to see is biome shift, or share of land changing climate classification. For example, under the RCP 8.5 scenario, biome shift is projected to climb in Japan and South Korea by an average of 27 percentage points between today and 2050, as measured against a 1901–25 baseline. Typhoon and extreme precipitation risk could also increase in some parts of Japan and South Korea, as noted earlier. In agriculture crop yield, no significant risk increase has been observed for this group. Rather, by 2050, annual probability of a 10 percent yield increase could increase; for example this could rise from 21 percent today to 45 percent for the Australia and New Zealand region.
China is large and distinct enough from other parts of Asia to sit in its own category. It acts as an anchor economy for the region and as a connectivity and innovation driver for neighboring countries. Due to its location on a wide range of latitudes, it is climatically heterogeneous. Still, the country on aggregate is projected to become hotter. In addition, eastern parts could see threats of extreme heat, including lethal heat waves. Central, northern, and western China could experience more frequent extreme precipitation events. In the country overall, the average share of outdoor working hours lost each year to extreme heat and humidity would increase from 4 percent in 2020 to as much as 6 percent in 2030 and 8.5 percent in 2050. As a result, the share of China’s GDP that could be lost to heat and humidity could double from 1.5 to 2 to 3 percent by 2050—equivalent to $1 trillion to $1.5 trillion in GDP at risk in an average year. China is expected to see a growing biome shift by 2050, with an increase of about 27 percentage points in the share of land changing climate classification, measured against a 1901–25 baseline. The country is expected to be an agricultural net beneficiary from climate change in the near term, with increasing statistically expected yields and volatility skewed toward positive outcomes. China could see expected yields increase by about 2 percent by 2050 relative to today. The annual probability of a breadbasket failure of greater than 10 percent relative to a baseline today would decrease from 5 percent to 2 percent by 2050, while the annual probability of a bumper year with a greater than 10 percent increase in yield would increase from 1 percent to approximately 12 percent by 2050.
Each of the Four Asias will need to take steps to manage their exposure to physical climate risk, and pay particular attention to the areas of risk highlighted above. Frontier Asia, Emerging Asia, and China are still building out large parts of their infrastructure and rapidly urbanizing. They will need to ensure that climate risk is embedded into forward-looking capital and urban planning decisions. For example, Emerging Asia is expected to see an influx of labor-intensive industries as manufacturing migrates away from China, and the countries will need to focus on the impact of rising heat and humidity, as well as potential impacts of flooding, on those industries. Given China’s role in regional and global trade, and the potential exposure of many of its industries and geographies, companies in China will need to pay particular attention to increasing resiliency in supply chains.
Another characteristic of climate risk is its regressive nature; the poor will be hit hardest. We find this to be the case in Asia, too. While different parts of Asia are affected differently, countries with lower levels of per capita GDP are probably most at risk from the impacts of climate change. They are often exposed to climates that are closer to physical thresholds than those of wealthier countries. They rely more on outdoor work and natural capital and have fewer financial means to adapt.
Our Frontier Asia and Emerging Asia groupings illustrate how this regressive impact may play out in both human and socioeconomic terms. Our research finds that both of these sets of countries face potentially disproportionate impacts on workability from extreme heat and humidity. By 2050, under RCP 8.5 scenario, some 7 to 13 percent of GDP in Frontier Asia and Emerging Asia could be at risk. This compares to 0.6 to 0.7 percent for Advanced Asia. The regressive impacts of climate change, if allowed to proceed without adaptation or mitigation, thus could put the Asian growth story at risk and potentially affect the lives and livelihoods of millions.
Adaptation and mitigation: Challenges and opportunities in Asia
As the Earth continues to warm, physical climate risk is ever-changing or nonstationary. Climate science tells us that further warming and risk increase can only be stopped by achieving zero net greenhouse gas emissions. Furthermore, given the thermal inertia of the Earth system, some amount of warming will also likely occur after net-zero emissions are reached.
Given the potentially significant effects of climate change in Asia, the onus is on policy makers, companies, and individuals to develop and implement adaptation strategies that will soften impacts and enable economic activities to continue to their maximum potential, even as they consider how to mitigate the rise in carbon emissions and avoid an even more damaging scenario in future decades. These goals will require ambition and a concerted effort to build on and extend recent successful efforts.
The good news is that, in many ways, Asia is well placed to adapt and lead global adaptation and mitigation efforts. A significant opportunity lies in infrastructure development. To maintain its current growth trajectory, Asia must invest $1.7 trillion annually through 2030, according to the Asian Development Bank. Incorporating climate adaptation into projects will make a difference to regional development and resilience. As they build out their economies, policy makers in Frontier Asia and Emerging Asia can also exploit synergies between infrastructure needs and opportunities for emissions reductions. Stakeholders can also embrace public-private-sector collaboration and explore new approaches to incorporate climate factors into planning. More broadly, Asia is home to some of the world’s largest and most innovative companies, and almost half of R&D investments globally take place in Asia.
Over the past decade, the region accounted for the highest share of global growth in key technology metrics—namely, technology company revenue, venture capital funding, spending on research and development, and number of patents filed. With concerted effort, Asian countries can help manage their own exposure to climate risk and can lead the way on global adaptation and mitigation efforts.
Rising to the climate risk challenge will require efforts by policy makers and business leaders. In our forthcoming report on climate risk and response in Asia, we will highlight measures that Asian leaders could consider for the region to be a global leader in protecting lives and livelihoods from physical climate risk across three dimensions: integrating climate risk into business and policy decisions, adopting measures that are effective in adapting to the changing climate, and seeking to mitigate climate risk through decarbonization.