Asia: The Furnace in Which a New Era for the World Is Forged

Asia has come of age over the past 30 years, becoming a powerful global presence. But a potentially more testing environment is unfolding, and the very fact that Asia is now at the nexus of major forces shaping the world puts it in the spotlight as never before. It may well face heightened versions of global challenges, McKinsey’s new research suggests. Handling those effectively will determine whether the region can maintain momentum in a new era.

Central to Asia’s surge in recent decades was its embrace of globalization. Of the world’s 80 largest trade routes, Asia is in 49 on at least one end, and 22 on both ends. It is also home to 18 of the 20 fastest-growing trade corridors, and 13 of the 20 largest. Today, Asia is the world’s trade crossroads, but it could find itself in the crosshairs of trade tension—on the back of a rapidly changing world order. In the past, this was largely unipolar and centered on the US hegemon, but a multipolar world is emerging, with Asia now a major player. Geopolitical rivalry is rising, and trade is often the focus.

Trade disruption can create risks in other vital areas. Take technology. In an increasingly tech-enabled world, innovation is core to competitiveness. Thus far, Asia has been a world-beating tech manufacturer (and considerable consumer), but not necessarily a world-leading innovator. Its largest economies still depend on imports of core technology. In 2022, China and India imported three times and nine times the value of intellectual property as they exported respectively.

The technological imperative is not all about trade, of course. All economies are striving to climb the innovation curve. For its part, Asia needs to shift its excellence to where that value is—and it increasingly lies beyond tech manufacturing in software and solutions, and in technologies that permeate across sectors—transversal technologies. Here, Asia is scoring some successes. Of all the unicorns related to transversal technologies formed since 2016, 27% originated in Asia. The region accounts for 45% of world-class patents in clean energy and 43% in mobility technologies. It is also showing promise in artificial intelligence and machine learning; immersive reality tech; space tech; bioengineering; and Web3.

In energy, too, Asia still relies on smooth interconnections with the world. The region’s economies are the world’s largest importer of fossil fuels, collectively accounting for $775 billion in net imports in 2021—of which 70% came from outside the region. And that reliance is increasing. In 2001, Asia imported 2.5 times more oil from outside the region than from within it. By 2021, this had grown to 3.7 times. This dependence matters. Asia is already the largest energy consumer in the world, but still needs a lot more to maintain its momentum of growth. Asia’s per capita energy consumption is only about one-third that of the average of OECD economies—signaling the region is still “under-energized.”

But securing the energy it needs to grow is not Asia’s only challenge; in parallel is its shared imperative of striving toward net zero. Asia is in a strong position to help the rest of the world reduce its emissions. China assembles 66% of all battery cells, and manufactures 54% of the world’s electric vehicles. It also accounts for about 74% of the production capacity for EV battery components, and for more than 80% of global manufacturing of solar panels. At the same time, Asia faces an uphill battle in its own decarbonization because its economies remain so industrialized. And Asia is by far the largest industrial user of final energy, with 57% of the global total—and industry is the most energy-hungry and hard-to-abate sector.

In search of continued growth momentum, there are two other pieces of Asia’s jigsaw that may not slot into place as smoothly as in the past. One is demographics. In the past, Asia’s largest economies, China and India, each benefited from strong demographics. Both had lots of young workers and surging productivity. But now China and other high-productivity advanced economies in Asia are aging rapidly, potentially leaving them short of labor. Over the region as a whole, there is more than enough labor. The loss in working-age population in China and advanced Asian economies is almost offset by the addition of 200 million working-age people in Emerging Asia and India. The issue is that most young workers are in lower-productivity economies, so Asia needs another productivity revolution.

The second puzzle piece is capital. Asia has experienced the largest and fastest capital deepening of any region in the world and has the potential to mobilize the largest amount of capital in a new era. But the environment for capital attraction and raising may no longer be as benign. China’s growth engine appears to be shifting to a lower gear, and amid rising interest rates, balance sheets are under stress. Asia needs to up its relatively poor returns on capital—and that requires a deeper, more dynamic, and efficient financial system.

Looked at in the round, these are big challenges—and Asia’s business leaders recognize it. In a new survey conducted by the Asia Business Council in collaboration with MGI, three-quarters of respondents said that significant or transformative strategic shifts will be necessary on a broad front. They recognize that the years ahead could be very different from the recent past, and that they need to adapt. But there is no panic or negativity. The survey showed an even greater majority of more than 80% expressing optimism about a new era for Asia.

Chris Bradley is director of the McKinsey Global Institute and senior partner at McKinsey, based in Sydney. Gautam Kumra is the chairman of McKinsey's offices in Asia, based in Singapore.