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The emerging markets growth story

Still exciting, but more nuanced

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Last Modified 6/7/2016 9:00 AM Eastern Standard Time
Printed 6/7/2016 9:07 AM Eastern Standard Time
The emerging markets growth story
Still exciting, but more nuanced
Copyright © 2016 McKinsey & Company. All rights reserved.
McKinsey & Company 2|
The next 20 years will be some of the most disruptive and exciting we have
ever seen, driven by 4 global forces
3
Major
demographic
shifts
1
Economic
power shifting
East and South
4
Shifting to
“new” state of
globalization
2
Accelerating
technological
change
See next pages
McKinsey & Company 3|
The world’s economic centre of gravity is shifting back to Asia
Locations weighted in 3D space by GDP
2000
1950
2010
2025
1940
1500
0
McKinsey & Company 4|
Global middle class1
, Billions of people
1.1
2013
2.8
4.2
2.1
2025 2030
2.8
5.0
SOURCE: United Nations World Population Prospects; McKinsey Global Institute CityScope
1 Annual disposable income $3,600 and over
2.2 billion
Asia-Pacific
Middle East & North Africa
Latin America
Europe
US & Canada
Sub Saharan Africa
There will be 2.2 billion new middle class consumers by 2030…1.7
billion of the additions will be in Asia-Pacific
McKinsey & Company 5|
Argentina
United States
of America India
Western
Europe
China
Africa also represents a huge opportunity for global growth
SOURCE: McKinsey Global Institute, Global Insights, McKinsey's Cityscope, The Africa Report, Standard Bank
~$2.2 trillion Collective real GDP
$1.4 trillion
Collective household
consumption (more than
Russia and India)
>40 million
Expected households in
middle class in 2030, from
15 million today
~700 million Expected number of
Internet users in 2025
~400 Companies with over $1 billion in revenues
>1 billion Expected size of labour
force in 2035
McKinsey & Company 6|
Middle class consumers in emerging markets will want to consume like
those in the developed world
2020E2010 2020E2010
13,050
8,350
80
44
+56%
+82%
Vehicles, Millions per year
Emerging market light vehicle production Emerging market airplane fleet distribution
Aircraft

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The emerging markets growth story

  • 1. WORKING DRAFT Last Modified 6/7/2016 9:00 AM Eastern Standard Time Printed 6/7/2016 9:07 AM Eastern Standard Time The emerging markets growth story Still exciting, but more nuanced Copyright © 2016 McKinsey & Company. All rights reserved.
  • 2. McKinsey & Company 2| The next 20 years will be some of the most disruptive and exciting we have ever seen, driven by 4 global forces 3 Major demographic shifts 1 Economic power shifting East and South 4 Shifting to “new” state of globalization 2 Accelerating technological change See next pages
  • 3. McKinsey & Company 3| The world’s economic centre of gravity is shifting back to Asia Locations weighted in 3D space by GDP 2000 1950 2010 2025 1940 1500 0
  • 4. McKinsey & Company 4| Global middle class1 , Billions of people 1.1 2013 2.8 4.2 2.1 2025 2030 2.8 5.0 SOURCE: United Nations World Population Prospects; McKinsey Global Institute CityScope 1 Annual disposable income $3,600 and over 2.2 billion Asia-Pacific Middle East & North Africa Latin America Europe US & Canada Sub Saharan Africa There will be 2.2 billion new middle class consumers by 2030…1.7 billion of the additions will be in Asia-Pacific
  • 5. McKinsey & Company 5| Argentina United States of America India Western Europe China Africa also represents a huge opportunity for global growth SOURCE: McKinsey Global Institute, Global Insights, McKinsey's Cityscope, The Africa Report, Standard Bank ~$2.2 trillion Collective real GDP $1.4 trillion Collective household consumption (more than Russia and India) >40 million Expected households in middle class in 2030, from 15 million today ~700 million Expected number of Internet users in 2025 ~400 Companies with over $1 billion in revenues >1 billion Expected size of labour force in 2035
  • 6. McKinsey & Company 6| Middle class consumers in emerging markets will want to consume like those in the developed world 2020E2010 2020E2010 13,050 8,350 80 44 +56% +82% Vehicles, Millions per year Emerging market light vehicle production Emerging market airplane fleet distribution Aircraft
  • 7. McKinsey & Company 7| By 2030, water demand will exceed supply by 40% SOURCE: McKinsey Global Institute analysis; DHL Globalization Index Growth in population and the rise of the middle class will place significant strain on global resources In Sub-Saharan Africa alone, water demand will rise ~300% by 2030
  • 8. McKinsey & Company 8| The next 20 years will be some of the most disruptive and exciting we have ever seen, driven by 4 global forces 3 Major demographic shifts 1 Economic power shifting East and South 4 Shifting to “new” state of globalization 2 Accelerating technological change See next pages
  • 9. McKinsey & Company 9| Exponentially Faster Smaller Cheaper Better The pace of digital disruption is accelerating SOURCE: Singularity University Calculations per second per $1,000 Computer type … all human brains ‘01 ‘23‘10 Apple MAC II Univac I Hollerith tabulator 1040 1030 1 1950 2025 20501900 1925 1975 10-10 2075 1010 1020 10-20 … 1 human brain … 1 mouse brain … 1 insect brain
  • 10. McKinsey & Company 10| 3 major drivers of digitisation SOURCE: Gartner; International Federation of Robotics # sensors shipped in manufacturing increased from 4.2B in 2012 to 23.6B in 2014 3 Data 1 Comput- ing power (Moore’s Law) 2 Connectedness and intelligence 0 1 0 1 1 0 1 1 0 1 1 0 Machine intelligence predicted to match a human brain by 2023 4.2 billion people in the world are online and connected
  • 11. 11 2003 2010 2015 2025 Connected devices Population 0.5 12.5 50+ billion 25 6.3 6.8 7.2 8.1 ~2008 more connected devices than people Growth in connected devices is exponential SOURCE: Statistisches Bundesamt; Deutsche Bundesbank; Prognos; Thomas Nipperdey; McKinsey
  • 12. 12 Digitization and analytics are driving massive improvements in efficiency – benefitting companies’ bottom lines Locomotive velocity Average miles per hour per day › Data analytics – optimized scheduling and predictive maintenance reduce down- time, increasing velocity › 1 mile per hour increase worth USD 250 million in annual profit 23 22 Digital- enabled 1 Typical
  • 13. 13 Technological advancement is driving productivity gains with less labor Detroit, 1990 $250 billion $328 billion Revenues $36 billion $1,467 billion Market capEmployees Silicon Valley, 2015 0.9x 0.1x 28x 1.2 million 155,000
  • 14. McKinsey & Company 14| The next 20 years will be some of the most disruptive and exciting we have ever seen, driven by 4 global forces 3 Major demographic shifts 1 Economic power shifting East and South 4 Shifting to “new” state of globalization 2 Accelerating technological change See next pages
  • 15. 15 By 2050… In Italy, Japan and Spain, one in three people is expected to be 65 or older 80% of people 65 or older will live in low or middle-income countries For the first time in history, there will be more people over the age of 65 than under the age of 14 The number of people worldwide aged 80 or older will quadruple to 400 million The proportion of world’s population over age 65 will double
  • 16. McKinsey & Company 16| Million people aged 15-64 Working age population1 SOURCE: Global Insight World Market Monitor; McKinsey Global Institute analysis 1 Working age population is all individuals aged 15-64 1,000 800 600 400 1,600 1,400 1,200 200 0 102000 201505 205045403520302520 NAFTA ChinaIndia Europe Africa Africa has the fastest growing young population, while most of the rest of the world is aging
  • 17. McKinsey & Company 17| The next 20 years will be some of the most disruptive and exciting we have ever seen, driven by 4 global forces 3 Major demographic shifts 1 Economic power shifting East and South 4 Shifting to “new” state of globalization 2 Accelerating technological change See next pages
  • 18. McKinsey & Company 18| Executives say geopolitical instability is the #1 threat to global growth 1 N = 1,202; surveyed July 2015 SOURCE: McKinsey Global Institute survey, Economic conditions snapshot 75%1 of executives say geopolitical instability is a top 5 threat to global growth over the next 12 months… …this is more than cited defaults on sovereign debt (39%), slowing consumer demand (22%), and new asset bubbles (20%)
  • 19. McKinsey & Company 19| Our social problems are increasingly interconnected – the number of global refugees is at its highest level since World War II Refugees, internally displaced people, and asylum seekers worldwide Millions of people 60 51 43 3635343634 3232 2019 16 201920 05 1008 0906 0704022000 0301 1211 201513 14 ISIS emerges as an autonomous entity Intensification of sectarian violence in Iraq (Iraqi ‘Civil War’) Number of migrants surpasses WWII level
  • 20. McKinsey & Company 20| Some implications for business 5 “Microscope in one eye, telescope in the other” 1 Think about growth in granular terms 3 Digitise 4 Design a flexible organization 6 Invest in talent 2 Reallocate resources dramatically
  • 21. McKinsey & Company 21|SOURCE: McKinsey Global Institute CityScope 2.0 1. THINK ABOUT GROWTH IN GRANULAR TERMS The same top 45 cities will be responsible for 69% of Africa’s growth over the next decade Africa’s top 45 cities are responsible for 71% of African GDP Consumption in Africa is driven by a relatively small number of cities
  • 22. 22 Emerging market cities, especially in China, will become the largest consumer markets in many categories SOURCE: McKinsey Global Growth Compass Other emerging regions Developed regions China 1. THINK ABOUT GROWTH IN GRANULAR TERMS 2025 Sales Rank 2 Tokyo BeijingShanghai 3 Beijing MoscowBeijing 4 New York GuangzhouChongqing 5 Shanghai TianjinOsaka 6 Haerbin ChongqingTianjin 7 Tianjin ShenzhenGuangzhou 8 Wuhan TokyoShenzhen 9 Nanjing LondonWuhan 10 Bangkok WuhanChengdu 11 Xian Rhein-RuhrDongguan 12 Chengdu FoshanNanjing 13 Los Angeles HangzhouHong Kong 14 Shenyang ChengduFoshan 15 London NanjingSeoul 1 Chongqing ShanghaiTokyo Sports & energy drinks SpiritsFacial moisturizers
  • 23. McKinsey & Company 23| Median TRS CAGR of companies by degree of reallocation Percent, 1990-20101 Degree of reallocation Drowsy (31-49%) 8.5 Dormant (0-30%) 6.1 Dynamic (>49%) 10.0 SOURCE: McKinsey corporate strategy research program 1 n = 1,508 companies A company growing at 10% CAGR v. 6.1% would be worth twice as much in 20 years 2. REALLOCATE RESOURCES DRAMATICALLY Companies that re-allocate people and capital significantly – i.e., by 10- 15% per year – outperform in the long-run
  • 24. McKinsey & Company 24| Digitisation is also dramatically improving performance – e.g., crowdsourcing allows faster, smarter R&D 3. DIGITISE Hosted challenge via Kaggle to crowdsource new car accident injury insurance claims algorithm Within 107 days, improved predictive power by >270%
  • 25. McKinsey & Company 25| Haier is restructuring to become an ‘organisation of the future’ Most valuable brand in China for the past 13 years Market cap tripled from 2011-2014 Reorganised its 80,000-person workforce into 2,000 independent units Each unit manages its own P&L Employees paid on performance 4. DESIGN A FLEXIBLE ORGANISATION
  • 26. McKinsey & Company 26| 8 years 10 years 8 years 7 years 11 years Years to break even in China Long-term thinking is essential for long-term success 70-90% of company value is related to cash flow 3+ years out 5. MICROSCOPE AND TELESCOPE
  • 27. McKinsey & Company 27| AT&T is reinvigorating its talent management by partnering with a university and startup to provide low-cost worker training Telecom being disrupted – 2.6B will use smartphones by 2018 AT&T’s challenge: 280,000 employees, with skills becoming obsolete much faster than just a few years ago AT&T’s response: partnering to provide online MSc in Computer Science to employees 6. INVEST IN TALENT