Home / Management/ Asian companies scaling up on the back of wave of capital investment

Asian companies scaling up on the back of wave of capital investment


Comments / {{hitsCtrl.values.hits}} Views / Wednesday, 22 January 2020 00:39


Asian companies are scaling up on the back of a wave of capital investment, but this has not translated into higher profits overall.

Investment in Asia has tripled in just 10 years, a wave of capital that has propelled many Asian companies to greater scale. Today, 43% of the world’s largest 5,000 companies are in Asia. But scale has not always been accompanied by improving profitability. Over the past decade, large global economic profit has turned into an overall loss of economic profit. Half of that deterioration is due to underperforming Asian companies. 

Oliver Tonby, a McKinsey senior partner and chairman of McKinsey Asia, said, “Asian companies have built scale on the back of a huge wave of capital investment. The region has accounted for $ 1 of every $ 2 of investment in the past ten years. 43% of the world’s top 5000 firms are now from Asia. But that rise to prominence has not translated into higher profits overall.” 

Chris Bradley, a McKinsey senior partner in Sydney, said, “This is the dichotomy of corporate Asia. Scale is rising, but profits are sinking. That just isn’t sustainable in the long term so the challenge ahead for Asia is to unleash the latent potential of its top performers and elevate the performance of companies that are destroying value.” 

In the first of a series of articles that will decode corporate Asia – Corporate Asia; Rising scale, sinking profits – the McKinsey Global Institute (MGI) looks at profits made and lost. The key findings include: 

  • Asia accounted for over $ 1 of every $ 2 in new investment in the past decade – $ 1 of every $ 3 was invested in China. This investment has clearly helped Asian companies to build scale. In the past ten years alone, Asian companies have increased their share of the G5000 – the world’s 5,000 largest firms – by six percentage points to stand at 43% today. That’s the largest share of any region in the world. In comparison, Europe has 25% of the G5000 and North America (Canada and the United States) 24%.
  • The capital influx has not led to higher profit; Asia accounts for half of a global deterioration in economic profit (profit after subtracting the cost of capital) from $ 726 billion to minus $ 34 billion. Asia accounts for almost half the global decline in economic profit between 2005-07 and 2015-17. 
  • The flood of capital in Asia and the decline in economic profit in Asia and beyond is inextricably linked. Reduced economic profit reflects lower returns on invested capital (ROIC) globally. The vast majority of a decline in ROIC – an overwhelming 87% – can be attributed to an increase in capital intensity, with the remainder to a decrease in margins. Worldwide, more capital is now needed to generate the same amount of revenue, which then generates lower profits. 
  • There are three major sources for the global decline in economic profit. The cyclical energy and materials sector is by far the largest source, accounting for about $ 500 billion of lost economic profit in the past ten years; this reflects the fall in oil and commodity prices at the end of the “supercycle” that has significantly challenged the performance of upstream oil and gas companies around the world. Second, European financial institutions account for $ 158 billion of lost economic profit; despite remedial action, financial services players are still destroying value more than a decade on from the financial crisis. Third, China has contributed economic profit losses of $ 137 billion, reflecting a tendency to allocate capital into value-destroying sectors. Over the past 10 years, almost $ 10 trillion of capital has been invested in China, and 80% of it went to sectors that earned below their cost of capital.
  • However, pockets of economic-profit-generating excellence can be found in different sectors across Asia. Japan’s capital goods sector creates the most value in Asia and performs in line with counterparts in North America and Europe. Financial services are highly profitable in China and in Australia. Technology-driven sectors, especially IT, create a great deal of value in China, Japan, and South Korea, and are improving as a source of value creation in India. Southeast Asia’s energy and materials sector generates substantial value despite the sector’s overall underperformance globally. 
  • Asia needs to turn around troubled companies and capture the latent potential of top-performing companies. Over the past ten years, only 54% of the bottom 200 Asian generators of economic profit have lifted themselves out of the bottom quintile of all companies (vs. 61 percent of firms in North America). Only 49% of the top 200 Asian companies have maintained their position in the top quintile (vs. 61% of firms in North America). If Asia were to match the performance of North America in top companies maintaining their position and bottom companies improving theirs, the region could unlock $ 440 billion of economic profit. 

Jonathan Woetzel, a McKinsey senior partner and director of MGI, said, “Asia is clearly a region that is in transition. Many of its companies are riding economic development to grow scale rapidly but they are simply not returning their cost of capital. Nevertheless, there is huge potential. Asian companies could take the largest share of both the world’s revenues and of its profit.”


Share This Article

Facebook Twitter


DISCLAIMER:

1. All comments will be moderated by the Daily FT Web Editor.

2. Comments that are abusive, obscene, incendiary, defamatory or irrelevant will not be published.

3. We may remove hyperlinks within comments.

4. Kindly use a genuine email ID and provide your name.

5. Spamming the comments section under different user names may result in being blacklisted.

COMMENTS

Today's Columnists

Economy vs. environment – What you see in the mirror

Wednesday, 26 February 2020

Do we buy organic vegetables? Or are we cost conscious and buy the regular vegetables? Would we rather live in United States or United Kingdom which have higher air pollution levels, or would we live in Myanmar or....


Seven Kartajaya mantras for Sri Lankan marketers

Wednesday, 26 February 2020

Hermawan Kartajaya is the former President of the World Marketing Association and one of the top 50 marketing gurus who has shaped the world of marketing. His insight has made many companies change their business strategies....


When the saints go masquerading in

Tuesday, 25 February 2020

So that saintly MP has thrown a spanner in government’s works again. The pious member lashed out against a battery of citizens from journalists and lawyers to members of his own estate. Last week, much of his grievance was about the silence of the


So Sri Lanka; more like, so where are all the women in the hotel industry?

Tuesday, 25 February 2020

The tourism industry is a key service export of Sri Lanka. It is currently the third-largest export earner after foreign worker remittances and textiles and apparel and brought in $ 4.4 billion in 2018 alone, equivalent to 4.9% of the country’s GDP


Columnists More