Technical innovation sets off major transformation in Asia

Economy March 25, 2014 00:00

By Noel Quinn

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Asian high-tech innovation, amplified by a growing appetite for research and development, is about to transform the region.

Much of the first phase of the Asian miracle has been driven by the production of high-tech goods – the tens of millions of smartphones, flat-screen televisions and computers that have flowed off production lines since 1980. 
But Asia is on the cusp of a potentially much larger revolution in which high technology, both in terms of process and product, will create a wave of transformation that could dwarf even the spectacular gains of the past three decades and induce profound changes in global trade and consumption patterns.
There is clear evidence that this shift is already under way. A 2011 survey by logistics firm UPS predicted by that by 2016 more than half of the trade lanes used by high-tech companies would be primarily intra-Asian.
But the current system is at an inflection point. Vast numbers of people in Asia are now reaching the point where they control sufficient discretionary income to move beyond subsistence and into aspirational purchases, with technology taking the lead.
These protagonists of the Asian century will change the region beyond recognition. In the future, the last 30 years of Asian economic development might come to be regarded as just the starter motor for the much larger and – crucially – more self-sustaining engine of growth that is already starting to crank up.
There was, and continues to be, an irony at the heart of “factory Asia”. Much of the assembly of high-tech products is in itself low-tech, as serried ranks of workers sitting at benches with soldering irons in their hands.
Despite the huge wealth that has flowed into Asia in recent years, the products that are assembled here generally generate much more profit outside the region. As an example, in their highly influential 2011 paper “Capturing Value in Global Networks”, Kenneth Kraemer and others estimated that China captured just 1.8 per cent of the retail price of an iPhone. 
Their analysis was further confirmation of the so-called smile curve that tracks the value generation of goods as they pass through the production process – high at the design stage, low during assembly and high again during retail and post-sales service.
But a self-reinforcing cycle of closely interrelated developments in Asia should see the region generating and capturing a much larger share of value.
At its most basic, this is a story of rising wages and wealth. If one takes China as an example, wages have grown at about 15 per cent annually over the past decade. This has been repeated to a greater or lesser degree across the region, creating a rapidly growing class of consumers whose first purchases are often made among the high-tech products they have been building.
We estimate that by 2050, emerging-markets consumers across the globe will buy 55 per cent of the world’s audio-visual, photographic and computer equipment, up from 24 per cent today.
And as wages rise, they are driving substantial investment in process technology to improve productivity. 
Historically, Western companies have dominated the supply of industrial machinery, but in recent years Asian companies have been buying relatively cheap Western machine-tool manufacturers for their technological expertise and building a solid skills base of their own.
Asian manufacturers are becoming increasingly adept at capturing Asia’s new demand. The region spent some US$490 billion (Bt16 trillion) on research and development in 2011, more than a third of the global total, up from a quarter in 2001, according to the latest US government statistics.
Some of the R&D spend is going into technology to improve productivity, a trend that should enable wages to continue to rise, but much is also going into product research. It is only a matter of time before China or India or Thailand has its own “Walkman” moment when it shifts from increasingly competitive behaviour in established product lines to creating breakthroughs that establish and dominate new product classes.
We are seeing a repeat of the virtuous circle that developed in the United States in the 1950s when rising wages created more demand, which further drove up wages, investment and productivity.
Between now and 2050, we predict that wages will increase by more than seven times in China, six times in India and nine times in the Philippines, to name just three countries.
Asian-designed products, assembled in the region and sold to Asians, would keep the most lucrative parts of the value chain within the region.
Noel Quinn is head of commercial banking at HSBC Asia-Pacific.