Asia’s business news agenda in 2022

In this episode of the Future of Asia Podcast, Jonathan Woetzel, senior partner and McKinsey Global Institute director, speaks to business journalists Robin Harding, Asia editor at the Financial Times, and Kevin Krolicki, Asia regional editor at Reuters, about the economic and business state of Asia. They look back at what worked in 2021, what did not, and what 2022 may bring economically on both regional and global scales. An edited version of this conversation follows. For more conversations on the Future of Asia, subscribe to our podcast.

Gautam Kumra: I am Gautam Kumra, chairman of McKinsey Asia, and you’re listening to the Future of Asia Podcast series. The Asian century has begun. The region is now the world’s largest economy. As Asia’s economies evolve further, the region has the potential to fuel and shape the next normal. In each episode, we are going to feature conversations with leaders from across the region to discuss what Asia’s rise means for businesses across the globe. Join us.

Jonathan Woetzel: Welcome to the Future of Asia Podcast series. My name is Jonathan Woetzel, and I’m a senior partner at McKinsey & Company, based in Shanghai. I’m also a director of our research institute, the McKinsey Global Institute (MGI). In this podcast episode, we’re looking ahead at the business news agenda for 2022. The pandemic continues to affect our communities, and across the region, response and recovery march on at different paces. We’re joined by two of Asia’s most senior journalists to discuss the business news themes that will matter to senior executives in the year ahead. Robin, Kevin, welcome. Pleasure to have you.

Robin Harding: Hi, Jonathan, it’s Robin from the Financial Times.

Kevin Krolicki: Hey, Jonathan, it’s Kevin from Reuters.

Jonathan Woetzel: Let me start with a little bit of a question about surprises. The year 2021 was full of them, both good and not so good. To you, what was the biggest surprise about 2021? Kevin, why don’t we start with you?

Kevin Krolicki: I think broadly, one of the surprises was both the degree of economic resilience in some areas and the persistence of economic disruption. Just to take, for example, the US economy. Headed into last year, there had been expectations that it would have been a more traditional, slower recovery. And in fact, if you look at what happened in the job market, it wasn’t 6 percent unemployment at the end of the year, as somewhat expected; it was much, much lower, with an outright shortage of workers—a critical shortage of workers in many areas. Similarly, despite everything we’ve been through, China’s economy is still growing, at around 8 percent last year. That’s on the positive side. On the persistence of disruption side, I think it was another year for many companies of hybrid or adjusted work. We saw a deepening through the course of the year of some of the supply chain disruptions that had started to emerge at the beginning of the pandemic and have since characterized the pandemic, although there may be some improvements; we can talk more about that.

Jonathan Woetzel: An economic bounce-back that was faster than expected, but a slower or a different kind of recovery on the work side and on the supply chain side. Robin, what was your big surprise?

Robin Harding: I was going to say something quite similar to Kevin. If you’d told me two years ago that we were going to have a massive global pandemic, the worst in 100 years, and that the world economy would be bigger at the end of 2021 than it was at the start of 2020, I would have been pretty surprised, and I wouldn’t have believed you. What’s happened with the economy throughout the pandemic has been a constant series of surprises. I don’t think many people anticipated the resilience in parts of the economy. People did see inflation coming to some degree, but maybe not quite in the form that it’s taken. One other surprise I would add is that in Asia, the arrival of the Biden administration has not changed the dynamics in the way we might have thought it would. It’s very much been a continuation of tension in Asia between the US and China with all the repercussions that has for regional trade, supply chains, tariffs, and so on. And that makes you think this is now a structural thing that’s here to stay for a very long time, instead of a one-off in the Trump administration.

Jonathan Woetzel: I’m going to pick up on that because it seems like there have been surprises and then there have been maybe less surprises, or surprises of a different kind. Would you say that you see some of these stories becoming, if you will, part of the landscape for the next year? What are the things that you’ve seen over the course of this pandemic or the last year that you think are not going to change going forward; that are basically new realities for us?

Robin Harding: It’s always very tempting to extrapolate. And I do think we can extrapolate on the regional tensions between the US and China: that seems like it’s going to be a feature for decades. Inflation looks like it will be a 2022 story as well, although I think that could change very quickly. Certainly, right now, it’s a very big concern, but there’s a very plausible scenario where that drops off again. I think one thing that’s likely to be new or newer in 2022 is more criticism of Asia’s handling of the pandemic, and probably some relative underperformance in Asia. That’s not to say that there are real problems. But as we see the US and Europe getting back to normal because COVID-19 has spread so much, people are going to start looking at Asia and saying, “You’re still in quarantine, and nobody can travel.” I think that the handling of the pandemic and China’s zero-COVID policy is going to get more criticism. Then, simply because Asia did better during the pandemic economically, I think we’re going to see relative outperformance in the US and Europe. And that may also draw some attention.

Kevin Krolicki: If I could just expand on something Robin said, I think that’s right regarding Asia and COVID-19. I think a really interesting test case over the course of this year is China, which has had a zero-COVID policy and headed into the Winter Olympics with a kind of a “bubble within a bubble” strategy of containment. There are a couple of high-profile events, the Olympics and the Party Congress toward the end of the year. But I think it’s a really interesting and open question of how long that policy can persist against the trade-offs. And I’d be interested in your view there too, Jonathan.

Jonathan Woetzel: Let’s dig into some of this. We have regional differences in the recovery and the rates thereof. That’s going to be a story. We’ve got inflation, potentially, seeing how long that lasts. We have the issue of different approaches to handle the pandemic and the zero-COVID policy and to what extent that’s a sustainable policy at all. Last, we’ve got all of this regional tension. Quite a lot of things that we see going forward that could lead us to a belief about how unexpected 2022 might turn out to be. It seems a little daunting, but let’s dig into some of this. On the recovery, what have you been seeing in terms of the things that would lead you to believe that the economic recovery is going to really sustain itself? What are some of the leading indicators that you look at, whether it’s people going back to work, investments, or consumption?

Kevin Krolicki: Among the indicators that I would want to report on, there are the traditional indicators, and we all watch and report on those; then, and given just the extreme nature of some of the disruptions over the course of the last year, I think there are other indicators that bear watching too. Supply chain has been a constraint; it’s been a source of price pressure and, in some cases, outright shortage. Among the remarkable things about the last year, the US economy is booming, and grocery shelves in some US cities are almost empty. Again, against the metric of “If you’d told me that, I wouldn’t have believed that a year ago,” that ranks pretty high. Meanwhile, I’m here in Singapore where everything is imported, and there are no shortages; clearly, some economies and some systems have handled this better than others. But among the other indicators is the supply chain question—container shipping costs and delivery times for manufacturers reflected in the PMI [Purchasing Managers’ Index]. We’ve seen some improvement in recent months. It’s caused some to say that maybe this is just cyclic. But we can talk more about how much is cyclic. How much is here to stay? To what extent does “just in time” as a whole philosophy of operating need to be rethought or innovated?

Jonathan Woetzel: What I understand is that those are some indicators that executives are making sure they keep an eye on. One is on the cost side and the other is on supply chain itself. The availability of the whole supply chain might become one of those things that people really need to pay more attention to. Robin, what are some of the metrics that you’re looking at?

Robin Harding: First, I completely agree with Kevin on the general picture, but China doesn’t look as robust and there are some signs of slowing in the Chinese economy. When you look at the indicators around the property market in China, it’s clear that 2022 is going to be a relatively difficult year for the Chinese economy, and even relatively difficult years for the Chinese economy still tend to involve high levels of growth. But that definitely bears watching. I’d give a slightly more theoretical answer: I’m not sure that you need to pay enormously close attention to economic indicators to think that the recovery is going to stay robust this year. Governments have still been pouring the stimulus into the economy. You see everything moving in one direction across most advanced markets. It would take something quite significant to derail us in the short term. If I were an executive, I would not be obsessing over the economic data right now. I would be working on the assumption that we’re going to have a fairly robust global economic situation to deal with.

Jonathan Woetzel: In the absence of looking at those types of numbers, that the stimulus packages have been truly breathtaking and unprecedented, what else do we look at? What are some of the noneconomic indicators or areas that executives should keep an eye on?

Kevin Krolicki: To go to another microindicator of interest that has been defining the past year, if we look at chip availability and pricing, again there’s a question here about how much of these price increases are cyclic. How many of these price increases are here to stay? And initially, if we look at the demand for lagging last-generation chips: the automotive industry now with sensors with autonomous drive technologies, Internet of Things [IoT] applications, were really hungry for these chips. Demand is way up there, capacity is limited, and there’s still pricing power for the high-end chips. And you’re seeing across the industry, people saying that these price increases are here to stay for now. Of course, that hasn’t been the history of that industry, it’s tended to be boom and bust. That’s worth watching.

Robin Harding: Another indicator that I definitely would watch is labor costs and wages, specifically in the US but also in other countries, because if we are going to get sustained inflation, it’s going to become “because wages start rising.” And as executives in the vast majority of industries know, your biggest single cost is wages. You only get inflation over a sustained period of time when wages go up and people start demanding higher wages because they see higher prices. That’s how inflation over the long term gets going. I would be watching that very closely because it tells you what your biggest cost is going to be doing, and it tells you whether you should expect significant inflation over the medium to long term.

Kevin Krolicki: I think Japan is interesting on the question of what happens to wages. The Bank of Japan for a very long time has wanted to see what they would consider healthy inflation with wage-driven, consumption-driven inflation. We do a survey every month to look at what companies are saying, and in the latest one that we ran, about 54 percent of the companies we surveyed—a set of about 250—said they want to keep, or expect to keep, wages flat. And about 5 percent are looking to cut labor costs over the course of the next year. Something’s got to give there, or not.

Jonathan Woetzel: Let’s dive into labor a bit. I’ve seen analyses about the concern that people have—particularly in the US markets—about the uptick in labor inflation as being a function of it’s basically much easier to fire people than to hire them. We’re having a real drag here in looking for labor, and that’s driving inflation. How have you seen the labor picture play out in Asia? Is it a similar demand-side pull-through on wage inflation? Is there something else going on with subsidies and with what is effectively UBI [Universal Basic Income]?

Robin Harding: This is what I think is happening: you don’t see the same level of wage inflation or disruption in labor markets in Asia as you do in the US or Europe. I think that’s entirely down to the pandemic response. Asia largely controlled the pandemic, had relatively few cases, and didn’t disrupt its labor markets to anything like the same level as the US and Europe did. Consequently, as the US and Europe are reopening, there’s all this disruption. That’s what’s generating these dislocations in labor markets and high levels of wage inflation. The difference between Asia and the rest of the world is very telling on that. I think that’s quite optimistic if you’re a business because it means that this is a temporary disruption. It’s related to the pandemic, and most likely, we will eventually get back to the prepandemic environment where it was a constant struggle to generate inflation, or significant wage rises of any sort, and businesses had it very good in terms of their labor costs for a long time. That’s my basic assumption about what’s going on, but I wait for evidence to prove it one way or the other.

Kevin Krolicki: One story that we focused on over the course of last year that bears watching has an overlay with the agenda of ESG [environmental, social, and governmental] investors. And the “S” in ESG sometimes gets overlooked, but labor conditions in the manufacturing supply chain are in focus. In Malaysia, for instance, with a largely migrant manufacturing workforce, there has been pressure for better conditions, and that means higher costs. For example, women at an iPhone plant outside Chennai shut down the plant at the end of last year over working conditions. That bears watching through the supply chain from Asia as well.

Jonathan Woetzel: That would really be a big marker of change. And if we shift a little bit to that linkage between business and society saying that this pandemic and the times have triggered a new set of expectations across business. It’s certainly something we hear a lot about from the environmental side, in terms of climate expectations—now you’re talking about the social side. Is that something that you think will become more of a story in 2022 and onward? Have things really changed in terms of a different expectation of business in Asia?

Kevin Krolicki: Maybe it’s too early to say and I wouldn’t venture a forecast. But there are enough pressure points that are out there that I think it’s an issue that deserves attention.

Robin Harding: I’m a big old cynic when it comes to this. I feel that businesses are under a lot of pressure to take it seriously. And I meet an awful lot of people with ESG on their business cards. Whether something has fundamentally changed in business attitudes or the actual expectation of businesses, I’m not so sure.

Gautam Kumra: For years, observers have talked about Asia’s massive future potential. But the future arrived even faster than expected. The question is no longer how quickly Asia will rise; it is how Asia will lead. Keep listening to the Future of Asia Podcast.

Jonathan Woetzel: We should be, as my father would say, wise as serpents but innocent as doves. Bear in mind that there may well be quite a lot of storytelling, but we have to look at the reality of it, which brings us back to this question of labor and the recovery. One of the things we’re grappling with is the question of who really recovered fastest. And when we recovered and went back to work, was it the same work? Did technology and our response to the pandemic change our work? We’ve become more digital, more online, and more automated, which changes the demand for labor. Could that be something that’s also changing the economic outlook for labor, both in the US and maybe also in Asia? Did things change with work because of the pandemic?

Kevin Krolicki: I’m not sure. In our industry, information media, there’s no question. It was like we invented the virtual newsroom. And in some respects, we made process improvements over the course of last year. But it was a lot of work. If we talk about kind of the choke points—supply chain, the public-health system, or making an iPhone—those things can’t be done on a Zoom call. So I don’t know how broadly the changes that we’ve experienced can translate.

Robin Harding: I have two points on this. I’m convinced that some things that have fundamentally and permanently changed because there are some things actually work better on a Zoom call than they do in real life. My classic example of this is the parent–teacher evening. If you’ve got kids, if you go to the school, you’ve got to go around and meet all the teachers. It’s corridors full of parents trying to find the next classroom, the next teacher, and the schedule doesn’t work. When you do that online, you just click through the Zoom rooms: the whole thing is low stress, teachers can go home and they’re happy, and the parents are home and they’re happy. It’s a trivial example, but that’s something where the technology actually changes how the organization works. I’m not really sure what the places are where that is true, but I’m sure there are a lot of them. Where I don’t think it changes is—as we know, it’s been studied exhaustively and the evidence is very convincing—that there are big productivity advantages to people being together in an office. There are big productivity advantages to people living in dense cities close to each other. It facilitates innovation and collaboration. I don’t believe those business and economic facts have changed. I believe we will all end up back in the office. I don’t think everyone’s going to be working from home in the countryside, but there will be changes. And it may be ten years before we realize what fundamental, pandemic-related changes work.

Jonathan Woetzel: That’s a really subtle point. Technology moves on. It’s going to change the workplace, no question about it. But it doesn’t mean you’re going to lose the workplace. The workplace will evolve in some way, but the value of being in a place where you can communicate with people around your work is something we should be holding on to, if nothing else. That’s encouraging.

Kevin Krolicki: To that point, if you think about the type of work that has gone virtual and isolation-based in some respects, I think there is a pent-up demand to get back to something like a more traditional workplace on the part of management. I think that’s true in finance and in [information media]. Workers are not all the same on this score, but what’s been interesting to me is younger workers, particularly early career workers, are more strongly seeing the benefit of being in a physical workplace. It’ll be interesting to see how that changes over the course of this year and what COVID-19 allows.

Jonathan Woetzel: Getting to the point that there is something here that we’re discovering about work and where it’s valuable and where it’s less valuable. So rapid-fire, one-off interactions that require a lot of transaction costs, like parent–teacher interactions, are perhaps not so valuable. But a repetitive, ongoing creative exercise where there’s serendipity and the opportunity to sort of cross-fertilize, we need a lot of that. How do we rebuild our workplaces for that? How do we ensure that that type of interaction is maximized? This is a really exciting opportunity, I hope, for our real-estate listeners.

Let me turn to one other topic—we’ve touched on it already. It’s the supply chain. It’s coming back to what Kevin was saying about things that are secular and stochastic or cyclical and tying back to what Robin was saying about the tensions. As we see, for the supply chain, one of the observations is the regionalization of trade, and that people are starting to see a more “Asia for Asia, America for America, Europe for Europe” kind of world. What do you say about that? Will it kick off a new round of regionalization of supply chains?

Robin Harding: There are a few different things going on. There’s also a positive side of this in Asia, where we’re seeing big free-trade deals being made, and we’ve had the Trans-Pacific Partnership. Then there’s the RCEP [Regional Comprehensive Economic Partnership], a free-trade deal between China, Japan, South Korea, Australia, and all the ASEAN [Association of Southeast Asian Nations] countries. That’s the positive form of regionalization, the same regionalization that you got from NAFTA and the creation of the European Union. It creates trade because you have lower trade barriers within a region. What people worry about is the negative form of regionalization, which is the creation of trade barriers to protect your economy or for national security reasons. In general, I’m quite skeptical of those, because there are very powerful economic reasons why global supply chains emerged in the first place.

And as we saw with the US trade barriers created by President Trump, they haven’t made a big difference in terms of the trade picture. Though they cause some friction for businesses in particular areas, the fundamental forces driving trade are strong. The area where there’s a big question is semiconductors, because we’re seeing and hearing about all sorts of work going on by the US, the US with its allies, that’s aiming to wall off the semiconductor industry and essentially deny China the ability to create its own fully competitive semiconductor sector. That will prove to balkanize the system if China chooses to go ahead and create its own system. That’s all still in flux, and that’s a big 2022–23 news story that we’ll be watching very closely.

Kevin Krolicki: I think another area too—Robin, you called it the balkanization threat—but another area to watch is data. China has over the course of the last year made it very clear that there’s a national interest in the control of data. Sometimes that’s been couched in discussion about data privacy, but it’s really about the control of data. Meanwhile, the US has made it clear that it sees a national interest there. That has all kinds of implications for industries like the networked automobile, for example, and on how that evolves, and whether there are dual and competing standards.

Jonathan Woetzel: This is going to be a very interesting discussion, right? We’re going to wind up potentially playing with three separate sets of data standards, data privacy regulations, and data sovereignty requirements that are going to pose some significant challenges. Do you see businesses starting to respond, starting to take that into account as they are thinking through their capital or their R&D platforms?

Robin Harding: From talking to businesses so far, my impression is that they’re very concerned about data regulations. However, data is also the most malleable, free-flowing thing that businesses deal with. It is something they have a lot of flexibility in how they manage. Even at the software level, you can physically keep the data in one place, and it doesn’t affect your operations as much as you might think. But I do think that in semiconductors, you’re seeing real business decisions being affected by this.

A good example is the TSMC and Samsung decisions to make enormous capital investments in semiconductor fabs in the US and Japan. I’m still not sure it’s a permanent shift because there are powerful economic reasons why they all went to the Taiwan market in the first place. And those reasons will still reassert themselves if given a chance. Additionally, you have to re-up your investment of $10 billion or $20 billion every few years in order to keep a semiconductor fab going. These trends could all reverse themselves quite quickly. But we are seeing important capital investment decisions now being made with these forces in mind.

Jonathan Woetzel: You said you’re looking at it from the business side. What about for the consumer side? Did the pandemic do anything to Asianize or localize consumers along with everything else? Are we seeing any more regionalization from the consumer side—Asians for Asian brands and products? Is that also a feature of regionalization?

Kevin Krolicki: I don’t know if it’s an effect of the pandemic, but I think China for China brands is a trend we’ve all been watching. It’s striking that, for example, in the market for EVs [electric vehicles], foreign brands are less than one-third of the market in China. Premium automotive and luxury are areas where I think foreign brands had assumed they would be in a position of competitive strength for some time in China. Watching how that evolves would be very interesting. I think this is a McKinsey number, but, by 2030, the number of Chinese households—the upper middle class and higher-consumption brackets—is expected to be something like more than the US and Europe combined.

Robin Harding: I agree—this predated the pandemic. And I think the cosmetics sector is a really interesting example where you saw in Japan, and then in Korea, the emergence of large cosmetics brands, which are focused on Asian sensibilities and have since grown. But then what’s even more interesting is that once they grow big in their home markets and in Asia, they go global. You see brands like Shiseido from Japan now sold all around the world. One of the things I’m really interested in, and I hope our reporters are watching out for, is the emergence of Asian consumer phenomena that then go global, because those are fascinating stories. We had a great piece a few weeks ago about Shein, a fashion retailer, which is sort of the first new fast-fashion model to really emerge and succeed since brands like H&M and Zara. And I really didn’t know anything about this—classic sign of middle-aged man—but it’s fascinating. It’s about the new Chinese business model that has emerged and is now huge in Western markets.

Jonathan Woetzel: I know I’m not supposed to talk about companies specifically, but I’ve been on their website and I can tell you that’s a Chinese website. That works. It’s all flashing lights and things coming at you, and with Chinese prices. You can see this is a new thing.

Well, you brought up the EV, so I wanted to come back to climate. I take the point earlier, Robin, about let’s not get carried away here about businesses and their so-called credentials, but isn’t there a rising awareness of climate? As you mentioned, in Taiwan, I think people are starting to get a message here around hurricanes and the reality that Asia is that much more exposed to a changing climate. I don’t know if this is something that you started to see both from the adaptation side with people saying, “Let’s buckle down; it might be a bumpy ride,” and from a mitigation side saying, “Well, you know, are we going to fundamentally see a difference here and a change of our energy economics,” for example? What do you both think?

Robin Harding: I come from Europe. What I noticed most is the difference in attitudes. In Europe, caring about the environment and climate change is a quasi religion, something that people are really passionate about. They feel this existential anxiety about climate change, at least in some circles, and want to tackle climate change for very powerful, internally motivated reasons. A difference I see in Asia is that when I talk to businesses or governments, I find that people see it more as a technocratic problem, equivalent to sewage in the streets or something that needs to be managed and dealt with by investment in infrastructure.

When it comes to corporates, people say, “Well, there’s a big business motivation now.” When I talk to Japan’s car companies, they begrudgingly see EVs as something that will hurt their business unless they get serious about them. In one region, I see that real seriousness about environment and climate change, but except on the fringes in the richest parts of Asia, I don’t see the same European style of passion about climate change yet.

Kevin Krolicki: Zeroing in on the auto industry, we track the commitments of global automakers to EV and battery investment, and one thing that’s interesting to me that is over the past three years, those commitments have almost doubled. They’ve stated commitments of $500 billion over the coming years. At the same time, when you look at what’s selling, SUVs are now about 47 percent of global demand. I saw this eye-popping statistic: if the global SUV fleet were an individual country, it would be sixth in the world for carbon emissions.

Clearly, there’s still a disconnect between consumer preferences and where the investments are heading. It’s striking to me that companies—take Toyota, for example—that pioneered hybrid technology, for a long time were seen as leaders, and have a credible claim to what they’ve done to reduce emissions are actually now seen as behind the curve because they aren’t fully committed to EVs yet.

Jonathan Woetzel: Yeah, it’s a real predicament.

Kevin Krolicki: Again, something has to give there, because every other car is an SUV and we have $500 billion in investment coming for EVs.

Jonathan Woetzel: You’re framing up a real challenge. I’ll make a note that we are coming out with a big number soon around the net-zero transition and what that implies for capital expenditures, especially given the pipeline that we currently have of high-carbon capital expenditure. I can see that Asia will be right in the middle of that. That could be a big story for 2022–23 and in the future.

As Winston Churchill said, “I am also an optimist, as there doesn’t seem to be much point in anything else.” I’m going to ask each of you: What is the one thing that you might be optimistic about in 2022?

Kevin Krolicki: Going back to the maxim about the snake and the dove, I think I want to be a dove-ish snake or a snake-ish dove. Professionally, I’m barred from optimism or pessimism, but if you look at the resilience of the economy over the course of last year—the capacity of companies to adapt and innovate—I want to be optimistic about the capacity for upside surprise that’s still there.

Robin Harding: I work for a British newspaper—I’m allowed to have opinions. In general, I’m still enormously optimistic about Asia. If you look at what’s happened in Asia over the last 20 or 30 years, more than a billion people have been lifted out of poverty by economic growth, free trade, and the capitalist economic system. It’s truly one of the most awesome and inspiring success stories in human history, and it just ticks along every year without people noticing. It’s an amazing material transformation in people’s lives. It went on throughout the pandemic, hardly missed a beat, and it’s still going on. We just have to make sure we don’t mess it up by going back to a world of conflict between great powers and losing this basis of peace, which allows for prosperity. I’m tremendously optimistic just with that one worry.

Jonathan Woetzel: So well said. I could not add anything else. Thank you so much, Robin, Kevin. A wonderful dialogue. And let’s look forward to an optimistic 2022. Thank you very much.

Gautam Kumra: You have been listening to the Future of Asia Podcast by McKinsey & Company. To learn more about McKinsey, our people, and our latest thinking, visit us at McKinsey.com/FutureofAsia, or find us on LinkedIn, Twitter, and Facebook.

Comments and opinions expressed by interviewees are their own and do not represent or reflect the opinions, policies, or positions of McKinsey & Company or have its endorsement.