New driving forces in Asia

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Dominic Barton, Global Managing Director, McKinsey & Company, was one of the keynote speakers at the Asia Business Forum, organised by London Business School's Asia Club, on 27 April 2013. He spoke …

Dominic Barton, Global Managing Director, McKinsey & Company, was one of the keynote speakers at the Asia Business Forum, organised by London Business School's Asia Club, on 27 April 2013. He spoke about the 5 mega-trends that are reshaping the global economy and raising the profile of many Asian countries and brands.

Find out more about the Asia Club:
Website: https://clubs.london.edu/asiaclub
Facebook: https://www.facebook.com/LBS.AsiaClub
Twitter: https://twitter.com/LBSAsiaClub

More in: Education , Business , Travel
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  • 1. New Driving Forces in Asia Asia Business Forum London Business School 27 April 2013 Dominic Barton, Global Managing Director McKinsey & Company
  • 2. Topics for discussion 1 The rise of Asia 2 Seizing the opportunity 3 Personal story in Asia McKinsey & Company | 1
  • 3. Five mega-trends reshaping the global economy The great rebalancing The productivity imperative The global grid Pricing the planet The market state McKinsey & Company | 2
  • 4. Incomes are rising in developing economies faster, and at a greater scale, than at any previous point in history Population at start of growth period Years to double GDP per capita Country Year 1700 United Kingdom United States Germany Japan South Korea China India 1800 1900 2000 Million 9 154 10 53 28 65 48 33 27 10 1,023 12 16 SOURCE: Angus Maddison; University of Groningen; Resource Revolution: Meeting the world’s energy, materials, food, and water needs, McKinsey Global Institute, 2011 840 McKinsey & Company | 3
  • 5. Old Shanghai … McKinsey & Company | 4
  • 6. … new Shanghai McKinsey & Company | 5
  • 7. 3 billion new middle class consumers Global consuming class1 Billions of people 4.88 3.25 Sub-Saharan Africa Middle East and North Africa Central and South America North America Europe Asia 3 billion 1.85 3.23 1.74 0.53 2009 2020 2030 1 Consuming class = $10 or more daily disposable income or $3,600 annual income (constant 2005 USD at purchasing power parity) SOURCE: McKinsey Global Institute McKinsey & Company | 6
  • 8. Emerging market consumption will be $30 trillion by 2025, nearly half of global total World consumption Emerging market consumption in 2025 $ Trillions Total 64 30 China 30 Emerging 8 India 3 38 Brazil 12 Russia 2 Mexico 1 26 34 Developed 3 Indonesia 1 Turkey 2010 2025 Poland Other SOURCE: McKinsey Global Institute 1 1 10 McKinsey & Company | 7
  • 9. 440 cities in emerging markets will fuel nearly half of the growth in global GDP through 2025 Emerging 440 (440 largest cities in emerging markets) Percent contribution to global GDP growth, 2010–2025 100% = $50.2 trillion 100 440 largest emerging market cities = 47% 26 of global growth 27 313 cities in Asia 4 28 China region 3 2 South Asia Southeast Asia 3 6 Latin America Middle East Eastern Other & Africa Europe & emerging Central Asia regions Developed countries Global growth Asian cities In China, 15-20 MM people move to a city each year – equal to adding New York City twice SOURCE: McKinsey Global Institute Cityscope 2.0 McKinsey & Company | 8
  • 10. Middleweight cities in emerging markets will contribute 4.5x more to global GDP growth than emerging market megacities Share of global GDP growth, 2007-25 Percent 100% = $54.9 T Emerging market middleweight cities (150 k-10 M people) 36 Emerging market megacities (10 M+ people) 8 Emerging market small cities and rural 30 Developed economies SOURCE: McKinsey Global Institute CityScope 1.1 26 Examples Surat, Gujarat West coast of India 4 million inhabitants 40% of India’s textile production Pekanbaru, Riau Island of Sumatra, western Indonesia 1 million inhabitants 7.3% GDP CAGR expected through 2030 Foshan, Guangdong Southeast China 4 million inhabitants China’s 7th largest city by GDP McKinsey & Company | 9
  • 11. Cities can be grouped into clusters around a hub city – some clusters are already economically larger than entire countries 2010 GDP for urban clusters $ Billions Urban clusters in China and their hub cities 527 Shanghai Jingjinji 527 Switzerland ChangchunHarbin Liao central-south Huhehaote 475 Jingjinji Central 469 Belgium Taiyuan Guanzhong Shandong Byland Hefei Nanjing ` Yangzi mid-lower Shandong 418 Chengdu Hangzhou Chongqing Austria Guangzhou 378 357 Changzhutan Nanchang Coast West Kunming Shenzhen Nanning SOURCE: McKinsey Global Institute Shanghai Guangzhou (includes Foshan) McKinsey & Company | 10
  • 12. Emerging market cities will become the leading consumer markets globally – even for products catering to the elderly 2025 Rank xx Emerging xx Advanced Elderly, higherincome consumers Young entry-level consumers Laundry care products Municipal water demand 1 Shanghai Lagos São Paulo Mumbai 2 Beijing Dar es Salaam Beijing Delhi 3 Tokyo Dhaka Rio de Janeiro Shanghai 4 Tianjin Ouagadougou Shanghai Guangzhou 5 Mumbai Khartoum Mexico City Beijing 6 São Paulo Ghaziabad Moscow Buenos Aires 7 Osaka Sanaa Bangkok Kolkata 8 Chongqing Nairobi Istanbul Khartoum 9 Delhi Luanda Manila Dhaka 10 Nanjing Baghdad Johannesburg Istanbul 11 Guangzhou Kampala Belo Horizonte Dallas 12 New York Ibadan Porto Alegre Pune 13 Seoul Lusaka Buenos Aires Las Vegas 14 Hong Kong Kinshasa Tianjin Karachi 15 Wuhan Kano Tehran São Paulo SOURCE: McKinsey Global Institute McKinsey & Company | 11
  • 13. As people move to cities and incomes rise, so will demand for new homes, transportation networks, and other infrastructure Capital stock vs. GDP per capita by country and year, 1980–2008 $ Thousands, sample of selected countries, constant 2005 prices and exchange rates Capital stock per capita1 140 Japan 120 Italy 100 Germany US 80 South Korea 60 40 UK Urban China China 20 India 0 0 5,000 10,000 15,000 20,000 25,000 30,000 1 Stock of net fixed assets at the end of the year, assuming 5% depreciation rate for all the assets SOURCE: McKinsey Insights China; McKinsey Global Economic Growth Database; McKinsey Global Institute 35,000 40,000 45,000 GDP per capita McKinsey & Company | 12
  • 14. Emerging markets have much infrastructure capacity to develop before reaching the level of advanced economies Roads Road km per 1,000 sq km Japan Developed 181 40 China 23 378 118 66 United States Airports Airports per million sq km 72 320 Germany Indonesia Rail Rail km per 1,000 sq km 902 23 529 9 47 3 97 Developing Russia 6 5 35 Kazakhstan 3 6 23 SOURCE: CIA World Factbook 2012; Infrastructure Africa; Economic Research Institute for ASEAN and East Asia; World Economic Forum, Global Competitiveness Report 2011–2012; McKinsey Global Institute analysis McKinsey & Company | 13
  • 15. Topics for discussion 1 The rise of Asia 2 Seizing the opportunity 3 Personal story in Asia McKinsey & Company | 14
  • 16. Western MNCs have an enormous opportunity to shift their business to Asia By geography, revenues of advanced economy companies vs. World GDP Share from emerging markets Percent 36 17 ME and Africa Emerging Asia 6 16 2 World GDP Advanced economy companies’ revenues SOURCE: McKinsey Global Institute; company financials % of world % of GDP revenues 8 % of world % of GDP revenues McKinsey & Company | 15
  • 17. Emerging market companies are already growing faster than advanced economy rivals Revenue CAGR Company HQ in advanced economy Company HQ in emerging market 30.7 22.4 2.5X 17.9 ~2X ~2X 11.7 12.6 7.5 Growth in home market SOURCE: Growth decomposition database; McKinsey analysis Growth in developed market Growth in emerging markets McKinsey & Company | 16
  • 18. Lessons from successful companies in emerging markets 1 Design strategies at the city cluster level 2 Radically redeploy resources for the long-term 3 Organize for the markets of tomorrow 4 Understand emerging market consumers with granularity 5 Turbocharge the drive for emerging market talent McKinsey & Company | 17
  • 19. 1 Different city clusters have distinct characteristics, even in the same province Chengdu and Chongqing city clusters, Sichuan province Percent Population composition Age 1 Migrants Affluent >55 31 Share of wallet Income 24 2 1 Transportation & communication 28 19 13 7 35 29 7 9 Housing 9 10 Home furnishing 4 4 Recreation 15 14 69 15-34 28 27 Mass 20 14 0-14 13 13 14 79 32 99 Local 12 Healthcare 35-54 Apparel 61 6 Food New Mainstream Household products Poor 17 28 6 Chengdu Chongqing Chengdu Chongqing Chengdu Chongqing SOURCE: McKinsey Insights China – Annual Consumer survey (2012), McKinsey Insights China – Macroeconomic model update (Apr. 2012) Chengdu Chongqing McKinsey & Company | 18
  • 20. 1 Consumer preferences also differ across clusters, even between tier 1 cities in the same region – beverage example Top 5 beverage selection criteria Percent of respondents (“Mass” consumers - $6k-$16k/37k-106k RMB/year income) South National average Tastes good West Shenzhen cluster 67 Good value 13 -1 60 Healthy 59 Safe 31 Chengdu cluster 27 21 -3 14 -17 SOURCE: Mckinsey Insights China – Annual Consumer survey (2012) Chongqing cluster -3 -17 0 26 Makes me feel unique/special Guangzhou cluster -10 13 -7 -10 3 -10 -8 -6 -6 22 McKinsey & Company | 19
  • 21. 1 A city cluster approach increased revenues 50% and decreased marketing costs 12% at a consumer goods company ChangchunHarbin Jingjinji Liao centralsouth Shandong Byland Hefei Nanjing Huhehaote Taiyuan Central Guanzhong ` Yangzi mid-lower Shanghai Chengdu Hangzhou Chongqing Nanchang Coast West Changzhutan Shenzhen Nanning ▪ ▪ “One size fits all” China strategy ▪ Thin, dispersed sales and marketing coverage Generic, non-differentiated targets across all regions Guangzhou ▪ 15 prioritized city clusters segmented by consumer preferences and 2015 market size potential ▪ For each city cluster – tailored product portfolio, sales model, and marketing strategy McKinsey & Company | 20
  • 22. 2 Emerging market companies are reinvesting more aggressively than MNCs Average dividend payout rate 1999-2008, percent Fixed assets CAGR 1999-2008, percent 80 -51% 39 12 7 Mature market Emerging companies market companies +71% Mature market Emerging companies market companies McKinsey & Company | 21
  • 23. 2 Successful companies adopt a long-term investment mindset to build a sizeable, profitable business Years to break even Years to break even 8 4 10 7 4 8 8 9 7 7 11 SOURCE: Press search; company reports 7 McKinsey & Company | 22
  • 24. 3 Leading companies are reorganizing to reflect the rising importance of emerging markets Description ▪ Build a more dynamic HQ ▪ Streamline processes without standardizing more than necessary ▪ Rethink boundaries Group activities by non-geographic criteria, e.g., growth goals Move the HQ to (or create a virtual one in) emerging markets ▪ Ensure a constant flow of talent between the business units and the centre to build skills Examples ▪ Created new structure for global operations, e.g., for all growth markets, HR is in Manila and procurement is in Shanghai ▪ Shifted global base of its robotic business from Detroit to Shanghai to meet expected Asian demand McKinsey & Company | 23
  • 25. 3 Yum! Brands placed China at the very top of the organization Yum! total operating profit Percent CEO 15 President of Yum! China President of Yum! International President of KFC President of Pizza Hut President of Taco Bell CFO COO 18 21 … 41 67 SVP Ops KFC SVP Ops Pizza Hut SVP Ops East Dawning SVP Finance 56 SVP HR … 38 26 18 ▪ Full autonomy over strategic decisions ▪ Dedicated R&D centre develops 20+ new 2004 2007 2010 products/year SOURCE: Press search; company reports McKinsey & Company | 24
  • 26. 3 P&G elevated its China org to P&L responsibility P&L responsibility CEO Global business services Corporate functions Global business units Health, baby, and family care Beauty care Regional business units Market development organization North America Household care CFO Gillette Global MDO head Central and E. Europe, ME, Africa SOURCE: Press search; company reports Western Europe ASEAN, Austral-Asia, India Northeast Asia (Japan/ Korea) Greater China Latin America McKinsey & Company | 25
  • 27. 4 Successful companies understand emerging markets’ different preferences – for example, functional benefits still dominate decisions Top 5 key buying factors – mobile handset example % of respondents Functional benefits 80 Is durable Provides good after-sales service 42 Is a well-known brand 17 29 Is environmentally friendly 25 Meets my needs Emotional benefits 39 8 10 Makes my life more convenient 27 9 Shows my unique taste 3 SOURCE: McKinsey China Consumer Survey (2011); McKinsey Online Benchmark Survey (2011) 27 41 5 McKinsey & Company | 26
  • 28. 4 Localization is important – there are distinct sub-markets, distinct consumer behaviors McKinsey & Company | 27
  • 29. 4 Indonesian consumers are very brand loyal % of people when buying food and beverage in Indonesia 6% “I consider a few brands, but am open to another brand if they are on promotion” 2% “I always buy brand offering the best deal” 28% 63% “I consider a few brands, then choose from those predetermined brands” SOURCE: CSI Indonesia 2011 “I only buy the brand I prefer” McKinsey & Company | 28
  • 30. 4 The new middle class also uses the Internet more for researching online and offline purchases – China example New Mainstream Mass Percent of users who trust each information source I will not make a purchase before researching it first on the Internet Percent When purchasing consumer electronics (e.g., mobile phone) When purchasing personal care products 20 42 Internet 56 24 12 Online forum (e.g., Dianping) 43 65 16 Social media site (e.g., Renren, Kaixin) SOURCE: McKinsey Insights China – Annual Chinese Consumer Studies (2012) 49 79 McKinsey & Company | 29
  • 31. 4 5 South East Asian countries are in the top 30 users of Facebook Number of users 1 USA 163 M 2 Brazil 66 M 3 India 61 M 4 5 Mexico 8 Philippines 30 M 13 Thailand 18 M 47 M Indonesia 47 M 18 Malaysia 13 M 40 M 22 Vietnam 12 M SOURCE: Socialbakers McKinsey & Company | 30
  • 32. 5 Western MNCs are no longer the top choices for talent in Asia Western MNCs Top 10 preferred employers by country by business students China 2006 India 2011 2006 2011 1 P&G Bank of China 1 McKinsey ICICI Bank 2 McKinsey P&G 2 BCG Google 3 Citibank China Mobile 3 Lehman Brothers State Bank 4 HSBC CDB 4 ITC HDFC 5 China Mobile ICBC 5 Microsoft Microsoft 6 BOC CICC 6 Goldman Sachs BMW 7 PWC Citibank 7 Merril Lynch CICC 8 KPMG SGCC 8 P&G Reserve Bank 9 Morgan Stanley HSBC 9 Infosys IBM PetroChina 10 Accenture 10 BCG KPMG McKinsey & Company | 31
  • 33. 5 Leading companies understand what matters to talent in emerging markets – frontline talent example Ranking of payment incentives that help to retain frontline employees Percent of respondents ▪ Chinese workers tend to compare themselves with others 94 ▪ Performance-based wage system visible to all helps Performance based wage/bonus increase retention Lock-out periods 44 ▪ Fixed amount of salary not distributed until 3 years tenure ▪ Bonus paid at end of a year-long project Additional health insurance 41 ▪ Full reimbursement above mandatory insurance Extra retirement pension ▪ ~5% of Chinese companies have started pension funds, 22 with supplementary life insurance as the most common perk SOURCE: Nomura Research Institute; EIU; Watson Wyatt; McKinsey analysis McKinsey & Company | 32
  • 34. 5 Where labour markets are not yet fully developed, companies can step in to develop the supply – Infosys example Learning Centre, Mysore ▪ 337 acre campus ▪ 100,000 engineers trained so far McKinsey & Company | 33
  • 35. 5 Many MNCs have established universities in China to build nextgeneration leaders Motorola University Haier University Siemens Management Institute ▪ Different ▪ Management ▪ 10 majors programs designed to specific talent groups courses across corporate strategy, marketing, supply chain, and HR ▪ Haier internal management philosophy SOURCE: Expert interviews; literature research; McKinsey analysis available from engineering to management over a 3-year program ▪ Offered through Ericsson China Academy ▪ Leadership training ▪ Business skills ▪ Telecommunicati on technical training virtual, in-class room teaching, workshops and apprenticeship McKinsey & Company | 34
  • 36. Topics for discussion 1 The rise of Asia 2 Seizing the opportunity 3 Personal story in Asia McKinsey & Company | 35
  • 37. Personal experience in developing a successful career in Asia 1. Was “all in” in having Asian experience a. Moved to Seoul in 1998 and then to Shanghai in 2003 b. Took regular trips and vacations to many parts of the region (Cambodia, Thailand, Mongolia, others) 2. Made an effort to engage with local community, both formally (e.g., served as chair of Seoul International Business Advisory Council) and informally (e.g., taught migrant children on weekends with family) 3. Spent majority of time serving Asian companies, rather than MNCs 4. Built local friendships and relationships through work, study (wife was a student at university) and community engagement 5. Wrote extensively about Asia (both local and international publications) and published a book (China Vignettes) in 2008 McKinsey & Company | 36