Digital innovation in Asia: What the
world can learn
Companies
in the region are transforming their digital operations to great effect and
building some of the world’s most successful tech giants.
In Asia, a few factors make the impact of digital more pronounced than in other markets, including
social penetration, consumers’ openness to new technologies and the mobile
Internet, and willingness by companies to innovate. In this episode of the McKinsey
Podcast, McKinsey senior partners Alan Lau and Gregor Theisen talk with Cecilia Ma Zecha about what
makes Asia’s technological advances different from
the rest of the world and the lessons other regions can learn from Asia’s
innovations.
Podcast
transcript
Cecilia Ma Zecha: Welcome to this edition of the McKinsey
Podcast. I’m Cecilia Ma Zecha, an editor with McKinsey Publishing, based in
Singapore. Today we’re talking about digital trends in Asia, arguably the
hottest region in the world for e-commerce, search, social networking, gaming,
and ride sharing, just to name a few.
Digital innovation in Asia: What the world can learn
Asia has its own tech giants, such as
China’s Tencent, Alibaba, Baidu; Japan’s Rakuten and SoftBank, among others.
Here to tell us more about Asia’s digital landscape and how companies in the region
are transforming their digital operations are Alan Lau and Gregor Theisen, senior partners
and coleaders of Digital McKinsey in Asia, based in Hong Kong. Alan and Gregor,
welcome.
Alan Lau: Thank you.
Cecilia Ma Zecha: Can you start with some level setting on the
similarities and the differences between the advance of digitization in Asia
and the rest of the world?
Alan Lau: First, there is no one Asia. Economies are vastly
different between Japan, Korea versus China, Indonesia, and India. One of the
common myths is people think that developing Asia is behind in digital, and I
think it’s, in fact, the other way around.
The poor legacy in these developing Asian
markets, whether it is IT or digital penetration, or the traditional retail and banking infrastructure,
often means that digital is a great opportunity for the country to leapfrog. The most interesting
digital market in Asia is actually not the likes of Korea and Japan, but is
more China, Indonesia, and India. These are the markets that are really pushing
the boundary and innovating the most.
Gregor Theisen: As a Western European, Asia is the most
fascinating market I’ve seen so far, and that’s for three major reasons. First
of all, it’s around innovation. That’s not only China—we mentioned all those
the companies already—but that’s also happening in all the other markets like
India or Indonesia.
The second thing is about how they
leapfrog technologies. Most of these markets,
even though e-commerce or Internet-banking penetration might
be low, like in Thailand and Vietnam, social-network penetration is very, very
high. It’s much higher than in some of the developed markets. In these markets,
you find unique business systems and ecosystems, which exploit these
opportunities.
The third reason is that the people in
these countries, they’re open to new technology and mobile Internet. That makes
it much easier for businesses to capture the opportunities.
Alan Lau: As Gregor said, these users do not have
traditionally great services provided, whether it is in retail, banking, or
telecom. When digital tech comes up with new business models, it’s often new to
these consumers. Therefore, they’re more open-minded.
Cecilia Ma Zecha: India has a population of over 1.2 billion, but
there’s still a lot of potential for growth in broadband usage. There is a call
for greater digital infrastructure. So there’s still room for digitization to
develop in India. Why do you think that that market is leading in innovation?
Alan Lau: If I try to compare India with China, as you said,
the digital broadband penetration is still lower, which means that even at this
lower level, if we already see this amount of innovation, we definitely can
expect more. The other point is, with the attackers in India, they had the
opportunity to try something that many Western peers didn’t have the need to
try before.
For example, look at e-commerce. You have
leading companies like Flipkart and Snapdeal. The logistic challenge that they have
to deal with is completely different than the UK, Germany, or the US. A lot of
times the last-mile delivery is done by people going around on bike, and that
really leverages the cheap labor in the country. That’s also another reason why
markets like India would have the chance to innovate because they have to innovate. There isn’t a lot that they can copy from.
Gregor Theisen: Let me add two points, Alan, regarding what you said about India. My first
point is that India has most of the digital talent in the world. It’s not only the home of the
Internet service providers. These companies focused early on developing digital
talent. I would argue we are talking about hundreds of
thousands or even millions of talents in that market.
They are driving not only the innovation in
India, but they are also the backbone for global innovation. My second point
there is, and you touched upon it, yes, of course, there is significant room
for improvement regarding the infrastructure side. Broadband Internet access,
high-speed mobile phone, or even reliable mobile-phone networks. However, they
are moving very fast at least in the key centers and major cities. These
markets alone are significant.
A lot of people look at unicorns. Unicorns
are defined as privately owned companies with valuations above $1 billion. If you look at the global unicorn landscape, 50–60 percent are based in the US.
The second market then, like Alan said
before, is China. The third market is more or less India. You have innovative
companies where people believe the valuation justifies their business system
and what they are doing. India already has these kind of unicorns there. There
are seven, eight, nine of them already, and much more emerging. So I would say,
yes, e-commerce penetration is low, around 10 percent. However, Internet
banking penetration, at least according to our surveys, is around 18 percent.
If you multiply that with the population, it is already a significant market.
Cecilia Ma Zecha: Alan, you’ve spent a lot of time looking at China.
Speaking of a very exceptional entrepreneurial class being an important factor
in driving innovation, that certainly is one of the key points of success for
the Chinese market. Can you talk more about that?
Alan Lau: The first thing to understand about China is that
you don’t have the same global names that you see everywhere else. Google,
Facebook, Instagram, by and large, are still the leaders in many of the Asian
markets. For example the number of Facebook users in Indonesia is larger than
the number in the US.
But I think China is the exception. It’s a
very well-known fact that there is the great firewall, which means that many of
these companies’ servers are blocked in China. As a result, it has created the
environment for the likes of Tencent, Baidu, and Alibaba to rise, starting from
about ten years ago. A common myth is people think that these are quick copycat
companies that looked to Silicon Valley to import their business model.
Indeed, it may have started that way, but
if you look at the past, I would say six, seven years, the market has gone
through, and these leaders have done a lot more than just copying. Take
Tencent, for example. They have a very popular service called WeChat, which is
very similar to a combination of WhatsApp and Facebook. Now they have 700
million users in China. In China, you’ve also got WhatsApp freely available.
But it is WeChat that is, by far, the dominant player.
The Internet leaders in China, like
Tencent and Alibaba have really innovated. Yes, they may have drawn the initial
inspiration from outside about ten years ago, but certainly in the past couple
of years, they’ve really developed a product and adapted it very much to the
local market, to the extent that now a lot of people from outside have been
looking to China for inspiration.
Cecilia Ma Zecha: Gregor, the retort is that government protection
enables local Chinese firms to thrive, blocks out competition, therefore,
Chinese firms don’t have to innovate, but instead they copy business models in
the West. Is that, like Alan is saying, not giving Chinese tech leaders enough
credit?
Gregor Theisen: I fully agree with what Alan said. I’m intrigued
by the degree of innovation that is happening in China. These are not only the leaders like Tencent, Baidu,
and Alibaba, who have innovated around existing social networks. But it’s much more about the businesses around
them, for example like in the banking or financial services world.
There are offerings out there in China
that are purely based on WeChat. I’m not aware of any other market where we
have a WhatsApp bank that is entirely operating in that ecosystem. And that’s
not only limited to financial services. How people sell and interact via these
social networks is also unique. Lastly, what I would love to add is, if they
innovate, they innovate at scale. It is rapidly not only a small start-up, it
is rapidly an entire business system, with real revenues, real impact, and real
clients.
Cecilia Ma Zecha: How has WeChat been able to succeed the way that
it has? Essentially turning one app into a full-scale mobile-payment service,
whereas many people in the West, for instance, are used to using different apps
for different things.
Alan Lau: First, we need to look at WeChat as not just one
app. Of course it has a very sticky high-frequency service, which is messaging.
But that is just a starting point. It is a super app because it is a portal to
many other services that are being offered.
For example, on the main page, you would
see the usual messaging interface. It’s very similar to WhatsApp. But if you
swipe right, then you see many other services that are offered. As Gregor was
saying, you can do your banking there. You can shop online. You can get a cab. You can
do online payments.
The global discussion and narrative has
been around app fatigue. That people have way too many apps on their
smartphone. They don’t want to be bounced off from one app or one website to
another to complete a set of services. In China, it’s the opposite. You can get
a lot of stuff done on WeChat or Alipay.
Cecilia Ma Zecha: What about the other leaders from China such as
Alibaba or Baidu? Anything that they could teach the rest of the world?
Alan Lau: It’s also around the theme of ecosystems. Of
course, Taobao and Tmall is the traffic driver. Everyone’s shopped on it. In
fact, the average number of transactions people had on Alibaba is 50 times a
year, which means people buy something every week. On top of that, what really
facilitates those transactions is Alipay, the payment platform. Alipay is the
anchor for Alibaba. They’ve also developed a whole bunch of services. Very
similar to WeChat, you can also shop online. You can get a cab. You can order
other local services.
But they are also diversifying from that
as well. One of the most fascinating services that I’ve seen recently is
something called Sesame Credit. In China, most people don’t have a credit
history. What Alibaba has done with Sesame Credit is to say, “Based on your
previous transaction history or borrowing history, I can automatically generate
a score for you.” If you had a high enough score, that allows you to do things
in a more convenient way. So, for example, if you have a score that is above
700, you can book a hotel without making a deposit. If you have a score over
800, you can get a visa to go to Europe without producing income proof. I think
if you have a score also around 800, you can get a priority listing on the most
popular dating sites in China. They’re creating all kinds of new cases, and
other new ecosystems.
Gregor Theisen: I always learn when I look into the Chinese
market. Every day, every second, there’s some innovation happening. I want to
step back, and say, yes, of course, these are leading innovators, and they’re
brilliant ecosystems. They also
benefit from the Chinese consumer because they spend
more time on the mobile Internet with their smartphone compared to many other
markets. In some other markets like Indonesia, they spend even more time. But
compared to Western Europe or North America, Chinese consumers spend more time,
and they love conveniences like one-stop shopping. We talked about WeChat,
Alibaba, all the ecosystems that drive that. But also, the willingness of the
consumer. Of course we can learn a lot in the other markets around the
ecosystems, what they are offering, and the integration, and the boldness of
integrating new business systems.
However, one always has to take into
consideration the consumer in the different markets: How will they react? And
what will they do? Having said that, there’s lots of room for improvement for
many other markets and many other players in the other markets. Because even
though the consumers don’t behave like the Chinese one, they behave in a way
that the demand is much higher than the current supply in these markets.
Alan Lau: I really like that point about the open-minded
consumer, and I do think it is a key part to the success that we’ve seen in
China. Let’s take another service, as an example. Qzone is the equivalent of
MySpace, I would say, or of Facebook.
They also have close to 700 million users.
There was a lot of debate early on to say, “I just want people to post more
photos. How do I do that?” One of the ideas within the company was to say, “I’m
just going to auto load the photo and pull it from the photo album into the top
of the app, so people can see it.” They can just click, and then they can post.
I think many Western counterparts might
also come up with the same idea, but it requires someone like a Chinese player
to push the boundary. It also required consumers that are open-minded who said,
“You’re not intruding in my privacy,” for that to take off.
Cecilia Ma Zecha: So Korea and Japan are the tech leaders in the
minds of many. How are they doing in the advance of digitization in today’s
world?
Gregor Theisen: Korea and Japan, they have leading tech companies,
both of them. Most of the innovation happening there is within the companies,
especially on the tech side; they are leading innovators. However, they don’t
have this kind of start-up community ecosystem, vibrant community, where lots
of innovations are happening.
That is happening much more in the
boundaries of existing companies. However, if you look into these markets, they
benefit a lot from great infrastructure. They benefit a lot from investments
over a certain period of time, because both of these cultures, they are behind
new ideas, and they go after these new ideas for multiple years. It’s not that
you get one year, if it doesn’t work, we stop it.
Alan Lau: Korea and Japan are both very interesting markets.
Very, very different when it comes to digital because Korea does have a lot of
innovation, as Gregor said. Both in a traditional tech site, in hardware,
leaders like Samsung and LG. But also in digital.
If you look at some of the global services
that they’ve taken global, like Line, Kakao, these are messaging, but also
gaming services that are popular not just in Korea but also outside. In fact,
in many parts of Asia their e-commerce penetration is also very high. They just
haven’t got the same scale as China, as Gregor said. That makes it quite
different. I think Japan is a completely different market, and one that I think
many people still struggle to understand.
Cecilia Ma Zecha: How is it different?
Alan Lau: It does have major tech companies, admired companies
that people have known for decades: Sony, Mitsubishi, Toshiba. But when it
comes to digital and IT, and maybe Gregor can add to that, they have been very
slow to move.
Legacy IT issues in Japan are probably one
of the most challenging as we look across Asian markets. The idea that they
need to be disrupting their own businesses and making a lot of changes to the
legacy has been slow to catch on.
That doesn’t mean that things would not
happen. For example, when the iPhone was launched, people also said that it
would never take off in Japan because they’ve got a different system. They’ve
got Docomo. It’s a completely different industry environment. But it did take
off. When you have a fantastic service, and when you have an innovator that’s
really pushing a boundary, it will happen. It hasn’t happened yet.
Gregor Theisen: And we have another industry, the gaming industry,
and especially mobile, online gaming. I would argue that Japan is one of the
leading players in that global industry. They are innovating a lot. You see
that in certain subsegments of industries, they are able to innovate.
Cecilia Ma Zecha: Increasingly, companies around the world must
experiment with digital technology, and, in some cases, reinvent themselves at
the core to create new value. Talk about the transformational opportunities and
challenges that organizations in Asia face.
Gregor Theisen: First of all, I would separate out emerging Asia
from mature Asia because if you talk about the mature Asian markets and these
corporations, at the end, they face exactly the same challenges as American or
European companies. They have traditional legacy IT systems. They are in the
business for 50 or hundreds of years. They have an existing customer base. They
are used to a growth of 2–5 percent per year. These are all very stable
environments.
To embark on a digital transformation
requires top-down leadership. All functions need to be involved. IT architecture needs to be redesigned. Data architecture needs to be redesigned. But at the
end, it is more or less the same as what you do to
invest in Europe or in North America with these kind of companies.
If you move to emerging Asia or to
conglomerates, which have only a recent history of significant growth, they
have one key advantage. The key advantage is no legacy IT. That helps them
significantly to leapfrog and embark on a digital transformation journey. The
second key advantage most of these companies have is very strong top-down
leadership. Some of them are privately owned. They have very visionary leaders.
If you embark on an entire transformation of the entire corporation, a
visionary leader is extremely helpful, because they inject the entrepreneurial
mind-set, exactly what you need to have in order to be successful. So they have an advantage on the
legacy IT side, and they have visionary leaders. The third point I would add:
there is that you have digital talent available. Even
though everybody is looking for digital talent out there, the educational
systems, university graduates, they are more and more interested.
They are intrigued. And
in my view, they are trained much better to be
active and good contributors to a digital transformation than their peers in
many other markets. So they have access to a talent pool. They have visionary
leaders, and in some markets or some corporations, they don’t have legacy IT.
Alan Lau: That’s right. There are more similarities than
differences when it comes to a digital transformation between Asia and the rest
of the world. You still need to recognize that digital is not just having a
website or having a social-network account. But it’s about digitizing the
entire enterprise, as Gregor was saying.
It’s digitizing the process, and the
customer experience, modernizing your IT, injecting big data analytics and also
AI into your core operations. All of that needs to happen. Having visionary
leaders, as many Asian companies have, helps tremendously. Many of these are
founder-owned companies. They’re first-generation entrepreneurs, and they have
the skills, and the commitment, to drive through digital transformation.
That’s super important. The bottom-up
involvement is also critical. Maybe that’s where Asian companies are a little
bit more different than their Western peers. Because there is still the
traditional Asian culture, which is more hierarchical.
Which is, “This is my division. How do I
work with them? And do I break the boundary?” One of the terms that we use is
you need dragon slayers in the company. The visionary boss needs to empower the
digital leader to say, “You need to go work across functions to do things in a
different way and be empowered to do so.” This may not always come naturally to
Asian cultures. The top-down support would help. But you also need to create
that bottom-up culture, and people feel empowered to make changes happen.
Cecilia Ma Zecha: Finally, given everything that we discussed, what
would you tell CEOs who are listening to this conversation are the key
takeaways when it comes to understanding the digital landscape in this region,
and what’s distinctive about some of the transformational journeys that are
happening within organizations in Asia?
Gregor Theisen: I would say four points. My point number one is if
you are a non-Asian CEO or leader, have a close look into Asia and really spend
time on the ground. And not only in China. We discussed some other markets like
Indonesia and so on, because lots of innovation at scale is happening here.
My second point is, the degree of change
and the speed of change is significant. We talked about, we want to be
paperless in three years. These are corporations who have 100,000-plus
employees. We talked about, I want to reduce my cost base by 90 percent. Again,
in three to four years, some significant players. The speed is significant.
Learning how they do that, but also thinking about, we think, and I think, they
will not only focus on Asia but they will be in Europe and in North America
shortly with these kind of offerings.
My third point is how radical some of the
players in Asia are. But also for Asian players. If you embark on a digital
transformation, go all in. It is not, “Oh, I stop at a certain point in time.”
You either improve your customer satisfaction and the journeys or you don’t. If
you just embark on the journey and then stop, because you have traditional
channels, sales channels, you have legacy IT, whatever might stop you, then you
might be in a worse position.
It is a multiyear journey. It is a top-down
journey. But if you embark on it with the entire organization, you will be
successful. And the fourth point is, early on, think about the talent,
cultural, and organizational implications. What are the new talents I want to
integrate? Which ecosystem do I want to be part of? And what are the
implications for my organization?
Cecilia Ma Zecha: Alan?
Alan Lau: Gregor covered it very well. I’ll just add one
point for CEOs, which is, think about your digital board. In a survey that
McKinsey did, only about 15 percent of companies said that they actually had a digital-ready board.
Only 5 percent of them said they have a technology board. In a rapidly changing environment and paradigm, it is very important
to have challenges, to help management stay alert and be updated on what’s
happening.
That doesn’t mean just bring in a token
digital native ex-CEO to be on the board, because you wouldn’t typically have
11, 15 board members, and just having 1 or 2 is not enough. By all means, bring
people in with the relevant experience, but the rest of the board members also
need to get upgraded and be aware of the challenges and the opportunity that digital
brings. It’s important to see Asia as a market where a lot of innovation is
happening. People need to come see it. On top of that, don’t treat the large
Internet companies here, if I take China as an example, as just competitors.
They are your partners.
Cecilia Ma Zecha: Well,
thank you, Alan and Gregor, for your insights. And thank you for listening to
this conversation. If you’d like to find out more about our research and
knowledge, please head over to McKinsey.com.
http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/digital-innovation-in-asia-what-the-world-can-learn?cid=podcast-eml-alt-mip-mck-oth-1610
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