This article first appeared in The Edge Malaysia Weekly on October 30, 2023 - November 5, 2023
ARTIFICIAL intelligence (AI) is poised to be the next growth engine for Asia, with tremendous value seen to be created from the technology itself, according to experts at global consulting firm McKinsey & Co — despite scepticism that the idea of AI is way overblown.
“Technology will continue to matter. In terms of innovation, Asia did a fantastic job in embracing the digital economy as a consumer or as an adapter. But the next [year] will be the year of AI,” Jeongmin Seong, a partner at the McKinsey Global Institute tells The Edge on the sidelines of McKinsey’s Asia Media Day event in Seoul, South Korea.
“In the age of AI, can Asia continue to cultivate interesting use cases and diffuse the new technology across different economies? If it does well, it’s going to be a big catalyst.”
Having been in the spotlight over the past 12 months, generative AI in particular is expected to unlock up to US$4.4 trillion (RM19.1 trillion) in annual value globally, with a significant impact on high tech (US$240 billion-US$460 billion), retail (US$240 billion-US$390 billion) and banking (US$200 billion-US$340 billion), among others, if the use cases were fully implemented, according to Jeff Galvin, senior partner at McKinsey and Asia co-leader of QuantumBlack, the data analytics firm acquired by McKinsey in 2015. “An area that I’m particularly excited about is software development, as we see huge potential for generative AI in increasing efficiency in software development in all sorts of industries.”
Generative AI enables the creation of new structured content such as text and images. It is powered by Foundation Models trained on a broad set of data that can be adapted to a wide range of tasks. Compared with traditional AI, these models are typically better at interpreting and labelling unstructured data.
“Sophisticated investors know this powerful law — investing in a broad portfolio of opportunities to try to capitalise on the handful of winners. That is what’s happening. Broadly, things are a bit frothy now … but in the next three to five years, generative AI won’t disappear. It is going to be a real trend,” Galvin says when asked whether the AI hype could end the same way as the dotcom bubble.
He observes that companies are moving from “proof of concept” to scale implementation of generative AI. It is expected that more generative AI start-ups funded and founded in the last 12 months will start to bear fruit. At the same time, he says more industry-focused solutions will be available in the market instead of one-size-fits-all ChatGPT.
“I wouldn’t say that we have seen massive implementation at scale. It’s still in the general use case and trial phase. But Morgan Stanley is building a virtual knowledge assistant for wealth managers with GPT-4. Salesforce is integrating generative AI into its CRM platform. Walmart is using large language models to help customers in their digital shopping journey,” he says, though reminding companies to be aware of its key risks, such as the accuracy, security, privacy, fairness and intellectual property infringement issues.
Meanwhile, Lareina Yee, senior partner at McKinsey, points out that generative AI has changed productivity with some impact on knowledge workers.
“If you look at any industry that has a high degree of knowledge work, [such as] banking, consumer retail — because of the nature of the technology and the jobs and activities affected — you’re going to see some of the largest gains,” she says.
With the help of generative AI, Yee says the level of happiness among employees also increased significantly.
“There is a phenomenal study that looked at call centres. After a lot of statistical and mathematical research, the end result was that the call resolution time went down, and customer satisfaction went up. And the call centre agents were happier, especially the ones with less tenure because they were able to demonstrate an expertise at a faster, higher level.
“Why is that important? Well, if I can perform better, I can get rated better, get promoted faster and maybe get paid more at the end of the day. You are going to see this type of scenario run through a lot of industries, where we apply generative AI for knowledge work,” Yee says.
Asia, new ‘majority of the world’, could shape coming decade
Asia continues to demonstrate its resilience on the back of its diverse and dynamic economies. That said, the challenging period ahead could weigh on the region’s growth momentum. In assessing Asia’s outlook, McKinsey & Company’s analysis looks into five key domains, namely: (i) the world order; (ii) technology platforms; (iii) demographic forces; (iv) resource and energy systems; and (v) capitalisation.
As the world heads towards multipolarity, many Asian economies have become new poles in the global arena.
Despite the ongoing geopolitical risk in the Middle East, Jeongmin Seong, a partner at the McKinsey Global Institute, believes that the uncertainty could create more incentives for Asian economies to have more collaboration.
“If this works well, it will make the Asian economies relatively more resilient to this external volatility,” he tells The Edge. “Asia is the new majority of the world. There are opportunities for the Asian economies and companies to shape the coming decade.”
Asia accounts for more than half of global trade, as well as 60% of global trade growth. Asia is also home to 18 of the 20 fastest-growing corridors, while 13 of the 20 largest trade routes involve the region, according to Seong.
He points out that there is a huge interdependency across the Asian economies. “The majority of the chip production and export is done by Asia. Taiwan accounts for 60% of global chip production, with another 20% from South Korea. Then, a lot of chips go to China, which uses the chips for computer and telephone manufacturing. So, you can see a very intricate network of trade corridors across Asia.”
However, in the new era, the global landscape will become more competitive.
“The question for next year is whether this commercially pragmatic approach will continue to work in a more contested world.” Seong asks.
Having been the world’s manufacturing powerhouse, Seong observes a shift in Asia towards the tech agenda, which has been at the centre of geopolitical discussions. As such, he urges Asia to be more innovative, given that the region still has some gaps in terms of core tech.
“In the new era, manufacturing technology is getting commoditised and the value is shifting more towards software solutions and transformational technology.
“If you look at automotive passenger vehicles, software accounts for 10% of the value. In about a decade, it will account for 30% of the value. Therefore, how Asia continues to move up its innovation, especially in the so-called transversal technology, will matter in the coming decade.”
Asia has enjoyed a huge demographic dividend as it contributes to 55% of the global working age population growth. Nonetheless, the pace of ageing — especially in advanced Asian economies — is increasing rapidly, potentially resulting in a labour mismatch across the region.
“How can we solve this dilemma and boost productivity? We will need to improve the productivity of economies and the education system. We will need to have reskilling and upskilling programmes, together with the adoption of digitisation and artificial intelligence solutions to counter the forces from demographic changes,” Seong says.
Resource and energy system
Asia, as the factory of the world, will continue to consume more energy while having to fight the decarbonisation battle, which could be quite challenging for many Asian economies, says Seong.
“We don’t have enough base load, so the shift towards the energy transition could be more difficult,” he says, noting that Asia will probably need an all-in approach — across all sources of energy — to address the rising demand for energy in the region.
This is because Asia is highly dependent on imported energy and it is the world’s largest net importer of fossil fuels.
The global debt-to-gross domestic product ratio has exceeded 300%, for the first time in history. Last month, the Institute of International Finance said global debt hit a record US$307 trillion (RM1.4 quadrillion) in 2Q2023 despite rising interest rates curbing bank credit.
In the past, Asia was able to fund its economic growth, given its relatively high gross domestic savings of about 40% versus 15%-20% in Western economies. However, the macro environment is shifting — with rising inflation and interest rates as well as higher balance sheet risk, especially since 2000.
At the same time, the global economic growth is in a slower gear, so this begs the question of how Asia can continue to fund its economy and manage its balance sheet risks in a productive way, Seong says.
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