Trends that are shaping the World – part 3

The third trend of seven is the increasing population migration from rural to urban areas – Urbanisation. The economic development witnessed in emerging economies has led to huge urban migrations as cities continue to be main drivers of GDP growth. This migration is occurring at a tremendous pace; the urbanisation rate in China for example has reached around 45% last year from a level of around 35% in 2000. This means that in less than 10 years over 130 million people or about a half of the US current population, have migrated to major cities in China and this looks set to continue. By comparison, urbanisation in the US stands at about 80% (i.e. 4 out of 5 people in the US live in urban areas).

What are the triggers for this explosion in urbanisation in emerging countries? Economic growth in urban areas far outstrips that of rural ones. This in turn provides jobs which then drives migration. Beyond this, services and infrastructure investment further accelerate the economic development and the cycle continues. It is this reinforcing spiral of demand, corporate investment and job opportunities which will continue to drive urbanisation of the next 10-15 years.

As urbanisation continues, there will be significant pressure points that Governments and the private sector will have to address if economic development is to continue. A study conducted by McKinsey identifies these pressure points as land, funding, human and natural resources.

Firstly, the land issue relates to urban sprawl, loss of arable land and traffic congestion. Governments should anticipate the growing proportion of people living in urban areas by providing the availability of decent housing and larger and more effective mass public transport.

Next to this, funding will be needed not only for infrastructure, but also for the provision of services. The provision of health care and educational services for migrants will become an important factor.  As an increasing proportion of the urban population will be from rural areas, there will be a huge need to develop skills for urban jobs in industrial and services sectors. This leads to the third pressure point, namely the need for high-skilled labour forces.

Even though the number of university graduates will rise significantly in the coming years, these people will move to mega-cities where more job opportunities with better benefits are. If an evenly distribution of talent is to be achieved, governments should address this issue, as otherwise shortages in labour supply will occur in small to mid-sized cities in emerging countries.

Finally, the demand for energy and water resources will likely surge as urbanisation increases. If continued economic development is to be achieved, resource efficiency will become very important.

Planning must be conducted across these four areas in order for the current and forecasted rate of urbanisation to be sustainable and for emerging economies to drive economic growth.

Trends that are shaping the World – part 2

The second of the seven megatrends that I will discuss in this blog over the next six weeks or so is the growth in personal wealth, particularly in emerging economies. Over the last decade, there have already been substantial increases in people’s personal wealth, a result of economic development, discussed in last week’s blog. Since 1990, Gross National Income (GNI) in China and India has grown 768% and 275% respectively versus 104% in the US. As a result, there has been a decline in the number of people deemed to be living in poverty as well as the development of middle classes in emerging economies. This looks set to continue over the next 10 to 15 years and at a greater pace.

There are several drivers behind this trend. The first is the increasing workforce and the shift away from Agriculture towards the higher value added Industrial and Service sectors. This has and will continue to drive significant increases in average salaries in emerging economies. The third aspect is the changing demographics and the change in family structures. The average household size is decreasing as is the number of dependant’s per income earner.

These three factors combine to drive higher levels of disposable income. The consequence to this will be an increased demand for goods and services from companies positioned to capture this growth.

Trends that are shaping the World - part 1

As we enter the 4^th Quarter, it is normally a time of reflection on the year gone by and also a chance to look ahead at what could await us in 2011. However, this time, we have decided to take a slightly different approach and take a longer-term view to think about some of the major global trends that are and will continue to shape the world over the next 10 to 15 years. You’ll see that these trends vary in their nature; some are economic, some are more political whilst other relate to the changing demographics and social make-up in both the developed and emerging markets.

The purpose of this blog is simply to provide ‘food for thought’. We will provide an overview of each trend every week. More detail on these trends and their impacts will be discussed in a whitepaper that will also be available on the website (www.point-consulting.com).

The seven trends we will be discussing are:

1.       The rebalancing of economic power

2.       Increasing prosperity

3.       Urbanisation

4.       Ageing population

5.       Connectivity

6.       Sustainability

7.       Global markets, national governments

Part 1 – The rebalancing of economic power

In the next 10 to 15 years we will experience a continuing rebalancing in the global economic power, led by Brazil, Russia, India and China (the ‘BRIC’ countries – a term first used in 2001). According the GDP forecasts, China will have the world’s largest economy by 2020, roughly 1.25 times that of the US (whilst it only accounted 12% of the US in 2000) and India the 3^rd largest economy, with its economy accounting for just under half that of the US in 2020. This shift will bring greater balance to the world stage both economically and politically and a more global platform for decision-making – the G8 became the G20 to reflect these changes.

For companies, this means that the ‘emerging’ markets will continue to be the avenue for growth, away from the traditional markets of the US and Europe. However, capturing this growth will require the right strategies to be developed and successfully executed.

The vast population numbers suggest a huge demand for products and services but it is worth considering that spending power in ‘emerging’ economies is less than one fifth of ‘developed’ economies. This suggests that affordability and therefore product pricing remain critical in gaining market share. This is reflected when analysing market share data by revenue and then by volume. In some industrial sectors, the market leader by revenue does not feature in the top 10 by volume. This should be worrying as unit share in emerging economies will likely drive revenue share as the economy and spend increases.

But it’s not all about price. Successful companies will be the ones who understand the markets and the customers’ needs and develop products to meet those, rather than focus on low cost products. An example of this is in the Wealth Management industry. There is significant disparity to the risk-profile of customers across different geographies. Part of these differences can be explained from how wealth was acquired by the individual. First generation millionaires versus second or third generation (emerging vs. developed) have very different risk-appetites and reward expectations and banks serving these clients need to enhance their offerings to make sure these differences are addressed.

The final point relates to the evolving competitive landscapes. The next 10-15 years will see the continued rise of companies from emerging economies. How many of those will be truly global players by 2025? This is challenging to determine as there are many factors that will shape the debate. In China for example, local companies tend to do well in slow-moving industries, where product and design changes are less frequent, there is a reliance of extensive distribution and where production cost accounts for a high percentage of the product price. On the other hand, multinational corporations (MNCs) tend to do well in fast-moving industries, where product changes and redesigns are frequent, the customers’ needs are changing, and where R&D and advertising is important.

However, this situation may also be evolving. Last year, the Chinese manufacturer Huawei, led the world in patent applications. No US Company was in the top ten. It will be interested to see how competition develops and what risks may arise from emerging players making inroads into the US and Europe markets.

What we can take from all this is that the rebalancing in the global economic power is and will continue to have a profound impact on global companies. There are new avenues for growth, and, as always, the winners will be those who can develop the right strategies and execute them successfully. In doing so, companies need to recognise the differences and subtleties in the market, customer and competitor landscapes and adapt appropriately. This will mean developing the ability to operate different business models across different markets in meeting the customer needs profitably.

Not all fun and Games in India

India has been in the media spotlight these last few weeks in the build up the 2010 Commonwealth Games in Delhi, scheduled to open on 3 October. Whereas hosting the event should have signaled India’s emergence on the international stage and an opportunity for important infrastructure investment, preparations have been dogged by allegations of corruption and incompetence. Conflicts of interest have come to light between Games organisers and private companies in the way contracts were awarded. Athletes’ accommodation described as filthy, facilities collapsing and the increasing concern over security has been a public relations nightmare for India.

Emerging countries are increasingly eager to host major sports events. In doing so, they have the opportunity to invest in infrastructure and to demonstrate a new and improved image. In recent years, both the 2008 Olympic Games in Beijing and, to a lesser extent, the 2010 FIFA World Cup in South Africa, have enjoyed relative success. Looking ahead, Brazil will play host to the 2014 FIFA World Cup as well as the Olympic Games in Rio two years later. Not to be outdone by the other BRIC countries, Russia will host the 2014 Winter Olympic Games.

India’s experience will no doubt throw into question the confidence of emerging countries to stage major sports events. Hosting such events remains a significant challenge and there is huge downside to getting it wrong. How much should we read into successes and failures at hosting such global events?