BUSINESS power follows economic power. In the 1920s British firms owned 40% of the global stock of foreign direct investment. By 1967 America was top dog, with a 50% share. Behind those figures lie cultural revolutions. The British spread the telegraph and trains in Latin America. American firms sold a vision of the good life, honed by Hollywood and advertising. Kellogg’s changed what the rich world ate for breakfast, and Kodak how it remembered holidays. The next corporate revolution, as we describe in our special report this week, is happening in Asia. This too will change how the world lives.
Asian capitalism has brawn. The continent’s share of global GDP has risen from a fifth to 28% since 1984. It is the world’s factory, a diverse region of rivals bound together by supply chains. But it lacks brains and global savvy. Asia smelts 76% of the world’s iron and emits 44% of its pollution, but hosts only a tenth of its most valuable brands and venture-capital activity. Its multinationals punch below their weight, owning 17% of the world’s foreign direct investment. Wealthy Japan and South Korea have a cast of superstars, such as Toyota and Samsung. But few other firms command the world stage.
That is because Asian capitalism has been too cosy. In the boom between 2002 and 2010 easy profits were made at home—growth was fast and labour and credit cheap. Two-thirds of big Asian firms are state-controlled or “business houses” (often family-run). These incumbents tend to be chummy with the government and get cheap land and loans. Half of all billionaire wealth in Asia has been made in sectors, such as property, that are prone to cronyism, versus 15% in the West. Outside Japan, Taiwan and South Korea, innovation has been neglected. Mahindra & Mahindra and Great Wall, car champions from India and China, have a combined research-and-development (R&D) budget that is 3% of Volkswagen’s.
For Western firms, Asia’s shortcomings have been a relief. The iPhone shows why: although it is made by the hands of Chinese workers, it is the brains behind it, at Apple and at high-tech component-makers in the rich world, that take nearly all the profits. Now, however, the rules that have governed Asian capitalism for the past two decades are changing. Asian firms are having to become brainier, more nimble and more global.
The immediate motivation is underperformance: growth has slowed, and Asian shares have lagged American ones by 40% in the past three years. Three deeper trends are also at work. First, labour costs are rising, not least in China, and East Asia’s workforce is ageing. Second, Asia’s middle class is becoming more demanding. They are no longer satisfied with fake Louis Vuitton handbags; they want clean air, safe food and more leisure, and are madly in love with the internet. Third, competition has intensified from Western multinationals, which have invested $2 trillion in Asia. They also now use the same cheapish labour, and they generally have much more sophisticated supply chains, brands and R&D.
With their home markets no longer quite so safe, Asian firms are adapting—and becoming stronger. In response to rising wages, production (of clothes, for example) is shifting from China to South-East Asia and Africa, led by Japanese firms which are also worried about a war with the Middle Kingdom. Chinese firms such as Haier, which makes fridges, plan to automate factories and get into cleverer products. And as the Chinese push upmarket, the Koreans are redoubling efforts to stay ahead. Samsung’s spending on R&D rose by 24% in 2013. If they get their act together, India and Indonesia, Asia’s bumbling giants, will attract lots of factory jobs. Their best firms are also getting brainier. Once dismissed as “body shops”, India’s IT-outsourcing firms are now leaders in big data.
Rising consumer aspirations are helping internet firms disrupt traditional industries. Alibaba, a Chinese internet giant, is expanding into banking, telecoms and logistics. Analysts think it might be worth $150 billion, more than China’s steel industry. China’s drive to reform its state-owned firms is meant to make them more responsive to customers. Xi Guohua, the boss of China Mobile, plans to give shares to his staff. Across Asia demand for health care is likely to create a whole new generation of companies—the industry comprises only 4% of the region’s stockmarket, compared with 12% in the rich world.
In order to challenge foreign rivals, Asian firms are globalising, following the example of Samsung and Toyota. Lenovo, a thriving Chinese computer firm, has Western-style governance and many foreign staff. Huawei has overtaken Ericsson in telecoms equipment. India’s Sun Pharma is now one of the world’s biggest generic-drugs firms. Tencent, China’s Facebook, has hired the footballer Lionel Messi to advertise its services abroad. Sprawling business houses are evolving into focused multinationals. Tata Sons is now a superb IT firm and luxury-car maker tied to a ragbag of Indian assets.
Asian business needs to do much more. Big firms are spending 50% more on R&D than five years ago, but must get better at breakthrough innovations. Conglomerates must focus on a few areas where they can achieve global scale. Governments can do their bit, by freeing state firms from meddling and ensuring that powerful incumbents do not stifle entrepreneurs.
Western firms should pay attention. In some industries—aircraft manufacturing, for example—the barriers to entry are still immense, but in other sectors brands and technology will no longer be a shield from emerging Asian competition. The threat to low-paid Western jobs may recede. Haier’s Chinese workers are paid 25% of what its American workers get, up from 5% in 2000. Instead it may be copywriters, scientists and designers who feel the chill of competition from the East.
History suggests consumers will adapt fast. In 20 years, miracle cures for the old will come from Japan, the best web apps from India and couture from China. And cornflakes, once a cutting-edge food, will be rivalled by congee and dosas, sold in boxes by a global brand. Asian capitalism will change the world—even, maybe, what it has for breakfast.
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