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Economy

Digital tech to help ASEAN unlock up to $627bn in productivity

McKinsey report highlights countries' potential as 'factories to the world'

Labor costs in most ASEAN countries are lower than those in China.   © Reuters

SINGAPORE -- Disruptive digital technologies could help Southeast Asian countries become true "factories to the world," generating anywhere from $216 billion to $627 billion worth of productivity gains, a new report by U.S. consultancy McKinsey & Co. says.

The report includes a survey on how digital disruptions will affect manufacturers and technology companies across the Association of Southeast Asian Nations bloc. Of the 200-plus respondents, over 75% said they expect digital advances to boost their companies' revenue by more than 10% while lowering costs by the same amount.

Globally, McKinsey projects a manufacturing productivity increase of as much as $3.7 trillion. If the ASEAN gains hit $627 billion, they would account for 17% of the global total. 

Despite the optimism, the consultancy sees obstacles that ASEAN manufacturers must first overcome.

The "ambitions could be hindered by low labor productivity, [although] labor costs in most ASEAN countries are lower than those in China," the report states. Vietnam, which is seen as a close rival to China, is "87% less productive than China with respect to daily output per daily wage" for manufacturing productivity.

In addition, ASEAN companies may struggle to compensate for "insufficient experience with available technology as well as data shortfalls," which could hinder their adoption of new tech.

Malaysia's Petronas is one of a number of Southeast Asian companies moving to capitalize on digital technology.   © Reuters

Still, the report points to ASEAN companies -- from startups to major enterprises -- that have already begun introducing transformative digital technologies into their business models. The list includes Malaysian energy group Petronas and Indonesian mining equipment maker Trakindo Utama.

As this trend progresses, key industries such as electronics, consumer goods and pharmaceuticals "are poised to reap substantial benefits." McKinsey estimates a 30% to 50% productivity gain in electronics manufacturing alone.

One concern is that promoting automation, especially in the manufacturing sector, would lead to a decline in the overall number of jobs, noted Pritish Bhattacharya, a research officer at the ISEAS - Yusof Ishak Institute and associate editor of the Journal of Southeast Asian Economies. "Low-skilled and 'mature' workers will be the first to be affected," he said, "but remaining segments of the labor force will feel the heat, too."

In the five ASEAN countries that account for about 80% of the bloc's workforce -- Cambodia, Indonesia, the Philippines, Thailand and Vietnam -- nearly 56% of all employment is at high risk of displacement due to technology in the next couple of decades, according to a 2016 report by the International Labor Organization. 

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