Covid-19 and Digitalization in Southeast Asia: A Crisis Within a Crisis

A crisis is often perceived in business as a commonly occurring phenomenon which managers should be able to deal with. If we consider that crises are in fact uncommon, it helps to imagine solutions and responses which are better suited to the actual situations. Elements in a crisis may appear normal, but the overall situations are abnormal. Traditional thinking, procedures and rules, therefore, do not apply and normal solutions will more often than not be ineffectual. Covid-19 is unprecedented because it is a global health crisis which spawned a global economic crisis.

The acceleration of digitalization 

Covid-19 has accelerated the implementation of digitalization with regard to artificial intelligence (AI), and while many have considered this a positive thing, it has also emphasized the need for reform and structural change in many sectors. Artificial intelligence was always threatening to create havoc. What has changed is the timeframe that governments and institutions believed they had to prepare for the changes.

In just two months of the pandemic, digital adoption leapt five years forward. A McKinsey Global Survey of executives published in October 2020 found that companies accelerated the digitization of their customer and supply-chain interactions and of their internal operations by three to four years and their share of digital or digitally enabled products by seven years.

The McKinsey survey found that in the Asia-Pacific region the average share of customer interactions that were digital rose from 32 percent in December 2019 to 53 percent in July 2020, which McKinsey concluded to be an adoption acceleration of four years. They also found that the average share of products or services that are partially or fully digitalized, again in the Asia Pacific, rose from 33 percent in December 2019 to 54 percent in July 2020, which McKinsey concluded to be an adoption acceleration of 10 years.

McKinsey found that firms achieved increases in remote working in an average of 10.5 days, compared to an estimated 454 days prior to Covid-19, an acceleration factor multiple of 43. They found that on average firms were able to increase demand for online purchases and services from the previous estimated need of 585 days to 21.9 days, which they concluded to be an acceleration factor multiple of 27. They determined that the use of advanced technologies in operations from pre-Covid increased from an estimated 672 days pre-Covid to 26.5 days, an acceleration factor multiple of 25.

Upsetting cultural norms

Change requires some very hard decisions because everything today is linked and in many of the countries in Southeast Asia the list of “too delicate to touch areas” has traditionally been long. Covid-19 has brought a sense of urgency to the already budding but not widespread acceptance across the region of remote work. The biggest challenge for institutions was the compressed timeframe in which it all happened. It was a problem of hardware, connectivity, systems and a lack of digitization but also a failure of planning, organization and initiative.

Ten to 15 years was the typical timeframe for digitalization that companies were planning on before Covid-19. Instead of dealing with issues which required structural change, as the pandemic unfolded, many institutions initially adopted a wait-and-see approach. The uncertainty of when and how the crisis would end has been and continues to be an impeding factor because the business models have fundamentally been built on certainty.

The situation in Southeast Asia was chaotic. Many governments left lockdown decisions to regional governors or to the firms themselves. For employers, continuing to keep offices open was often the least disruptive and cheapest option. In Indonesia, employees struggled with remote working arrangements. Most of the apartments in cities such as Jakarta are small and shared by extended family, making it difficult to concentrate and to avoid background noise in meetings. The biggest issue was poor internet connectivity and technological infrastructure. Many firms also lacked cloud computing systems.

Public and private sectors

The private sector has more of a vested interest in AI than the public sector, which will face greater challenges in implementing digitalization. The public sector in developing countries usually employs more people than they need. In some developing countries, the civil service also offers lucrative incentives to resist change due to inherent and tolerated systems of corruption, which those involved will endeavor to preserve.

The key challenges 

Digitalization is being perceived both as a global job destroyer and creator, causing firms to rethink job requirements. Leaders thus need to invest in upskilling employees and to support and motivate them in the face of steep learning curves and highly demanding challenges.

How to enact change – especially structural change that threatens established systems – is a multi-level challenge, akin to changing a tablecloth without upsetting the plates of food already on it. Political leaders in Southeast Asia, most notably in Thailand, Cambodia, Laos, Malaysia, Indonesia and the Philippines, share several things in common. Their power is centered on small segments of their societies, backed by powerful militaries.

 The need to reform educational systems

 All ASEAN countries maintain two-tiered educational systems, which if digitalization comes into full bloom, will require major structural changes. Many families are making financial sacrifices to get their children into private schools. The market for private, international schools has exploded across Southeast Asia in the last decade. In Malaysia, 10.7 international schools are opening every year. Thailand has 172 international curriculum schools, up from less than 12 a decade ago. Malaysia has 142 and Singapore around 63. China doubled its private schools between 2010 and 2015 and is now home to 567 international schools, second only to the United Arab Emirates (UAE).

Arinya Talerngsri, managing director of the Southeast Asia Center (SEAC) in Bangkok, remarked in 2018, that with Thailand depending on its human capital, it is time for the country to change attitudes that once associated success in life only with high academic degrees. The problem affects all countries in Southeast Asia which rely on two-tiered educational systems. Artificial intelligence and digitalization are threatening to create disruptions and instability primarily in the lower tier. AI will widen the gap between knowledge workers and others and will further intensify the new inequality based on access to information.

The World Economic Forum 2020 “Future of Jobs Report” stated that skills gaps will continue to be high as in-demand skills across jobs change. On average, companies estimate that between 40 percent and 50 percent of workers will require reskilling by 2025. The vast majority of firms, however, underestimate the amount of time and resources it will take to retrain workers when mindset changes are required.

The adoption of advanced technologies at work will increase the need for workers with finely tuned social and emotional skills, capabilities that machines are a long way from mastering. This will affect education and training and put pressure on the existing two-tiered system, which benefits the upper social classes more.

As Covid-19 stretches beyond its second year, Southeast Asia sees the army in power in Myanmar, strongmen in power in Thailand and Cambodia, single political parties in power in Laos and Vietnam, and democracy eroded in Hong Kong, the Philippines, Indonesia and Malaysia. These more social control-focused regimes and indeed all the governments in the region are facing critical questions posed by the digitalization imperative: Do they want to try to create more balanced educational systems, or will they aim to preserve the status quo? Do political leaders across Southeast Asia really want their populations, especially the younger tech-savvy among them, to think, question and challenge the established order and practices?

The threat from structural unemployment

The challenges for Southeast Asia from the accelerated pace of digitalization caused by Covid-19 are formidable. Structural unemployment refers to workers who are unemployed due to permanent shifts in the economy, often driven by processes like technological change. This situation is exacerbated when there is a mismatch between the skills that the unemployed have and the skills firms need. The number of structurally unemployed people has been rising under Covid-19. That will continue with digitalization. Disruptions can be expected in education, communications, social services, healthcare, hiring, law enforcement and the civil service. Digitalization is creating divisions in society that will only grow more pronounced. The longer Covid-19 continues the more the timeframe for reform will be compressed and the deeper the divisions will be.

This article is based on an AsiaGlobal Paper published in November 2021.