McKinsey to Taiwan's Execs: Digitalize or Die

McKinsey to Taiwan's Execs: Digitalize or Die
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What you need to know

Taiwan is running out of time to stay competitive as the rest of the world embraces digitalization and the productivity gains it entails. It's about time the people at the top of its companies put digital at the center of their business strategy.

Taiwan is lagging in the global race to digitalize and its lack of ambition in the boardrooms of the nation's hi-tech companies in particular is the problem.

In what represents a clarion call for Taiwan’s aging and inflexible executives, McKinsey & Co. today said that Taiwan is falling behind its chief rivals as a result of its failure to digitize fast enough.

“Complacency is the biggest problem in Taiwan,” said McKinsey Senior Partner Bill Wiseman. “You’ve got to make a big bet. Management in Taiwan is either unwilling or don't know because they’re too insular.”

McKinsey has obvious skin in the game in urging CEOs to embrace digital, but the report released today, “Taiwan’s Digital Imperative: How a Digital Transformation Can Re-Ignite Economic Growth” nails some important home truths.

Taiwan’s productivity lags global leaders as well as neighbors like South Korea, and its productivity growth is decelerating fastest among mature economies, according to the report, which takes a deep-dive look at the levels of digitization across Taiwan’s economy.

“Productivity in Taiwan should be approaching that of global leaders like Japan and the U.S.,” Wiseman said. Instead it has stagnated and fallen behind that of South Korea, remaining ahead only of China among the economies studied in the report. Digitization and productivity growth walk hand-in-hand, but McKinsey’s Digitization Index places Taiwan far behind peers, particularly in manufacturing and services. "Companies have not put digital at the top of the agenda in the manner of GE - no companies in Taiwan have done that," said Senior Partner Jean-Frederic Kuentz.

Hi-tech, finance and government combined account for almost one-third of Taiwan’s gross domestic product, and McKinsey makes the case that each has big potential to close the digitization gap with the U.S., and in the process reap additional profit – up to US$5 billion in the case of hi-tech.

“Taiwan’s businesses must put digitization at the core of their strategy,” said Kuentz, who picked out U.S. exemplars such as G.E, John Deere and Rockwell Automation, all of which have instituted top-to-bottom digitization drives that have spawned entirely new business lines in software and services.

Taiwan’s government, while garnering praise for its aggressiveness in pushing digital government up to this point, is similarly urged to double down its efforts. “The government has been doing a lot but it will become more difficult due to low fertility rate, and the aging population,” said Albert Chang, managing partner of McKinsey’s Taiwan office, adding that a 9 percent reduction in working population going forward and higher than ever levels of debt to national output will put extra pressure on public services. He also flagged outdated regulations that are clearly not fit for purpose in today's gig-driven economies – notably laws on labor and tax – especially when compared with rivals like Singapore.

Discussion touched on what such a digital transformation will require: talent, wage increases and capital investment, for example, but the McKinsey team was adamant that these are secondary to impetus at the top of an organization. “It’s an executive ambition problem – we think execs and ministers should have greater ambition. That’s only going to come when someone at the top of the house drives,” Wiseman said.

On the costs of such a transformation, both Kuentz and Chang suggested a digital transition will effectively pay for itself in productivity improvements in the near term. Wiseman called out CEOs on their unwillingness to hire new blood, noting that the talent required to drive these changes, UX designers and robotics engineers for instance, are likely not in these companies already. Chang suggested any shortfall in Taiwan's national talent pool could only be solved by creating the necessary infrastructure for them to thrive in the first place – built it and they will come – as well as a more open attitude to immigration.

There was a palpable sense of frustration among the McKinsey team that many in Taiwan will share – it reflects the level of unfilled potential in Taiwan and the relative ease in realizing it, given the country's talent, if only there could be a cultural revolution.

The nature of questions raised at the report release conference captured the depth of the psychological shift that needs to take place, with more than one reporter questioning how the team had come to conclude that complacency among Taiwan's managers was to blame, while another expressed disbelief that we can have come so far since Taiwan’s glory days as an electronics manufacturing powerhouse.

Unwillingness to bet large, or indeed bet at all, is a problem anyone who has played for resources or pushed new ideas in a Taiwanese company will understand. McKinsey is not alone in realizing that the time for such low risk tolerance is over. It's time Taiwan's executives woke up from behind the wheel.

Editor: Olivia Yang