the emerging markets growth story

WORKING DRAFTLast Modified 6/7/2016 9:00 AM Eastern Standard TimePrinted 6/7/2016 9:07 AM Eastern Standard Time

The emerging markets growth storyStill exciting, but more nuanced

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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


The world’s economic centre of gravity is shifting back to AsiaLocations weighted in 3D space by GDP

2000

1950

2010

2025

1940

1500

0


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


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 trillionCollective household consumption (more than Russia and India)

>40 millionExpected 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


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 yearEmerging market light vehicle production Emerging market airplane fleet distribution

Aircraft


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



3

Major demographic

shifts

1


4


2


change

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Exponentially

Faster

Smaller

Cheaper

Better

The pace of digital disruption is accelerating

SOURCE: Singularity University

Calculations per second per $1,000Computer type

… all human brains

‘01 ‘23‘10

Apple MAC IIUnivac 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


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 Data1 Comput-

ing power(Moore’s Law)

2 Connectedness and intelligence

0 1 0 11 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

2003 2010 2015 2025

Connecteddevices

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

Digitization and analytics are driving massive improvements in efficiency –benefitting companies’ bottom lines

Locomotive velocityAverage 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

2322

Digital-enabled

1

Typical

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



3

Major demographic

shifts

1


4


2


change

See next pages

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


Million people aged 15-64Working 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

0102000 201505 205045403520302520

NAFTA

ChinaIndia

Europe

Africa

Africa has the fastest growing young population, while most of the rest of the world is aging



3

Major demographic

shifts

1


4


2


change

See next pages


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%)


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 worldwideMillions of people

60

51

4336353436343232

201916201920

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


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

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

Emerging market cities, especially in China, will become the largest consumer markets in many categories

SOURCE: McKinsey Global Growth Compass

Other emerging regionsDeveloped regions

China1. THINK ABOUT GROWTH IN GRANULAR TERMS

2025Sales Rank

2 Tokyo BeijingShanghai3 Beijing MoscowBeijing4 New York GuangzhouChongqing5 Shanghai TianjinOsaka6 Haerbin ChongqingTianjin7 Tianjin ShenzhenGuangzhou8 Wuhan TokyoShenzhen9 Nanjing LondonWuhan

10 Bangkok WuhanChengdu11 Xian Rhein-RuhrDongguan12 Chengdu FoshanNanjing13 Los Angeles HangzhouHong Kong14 Shenyang ChengduFoshan15 London NanjingSeoul

1 Chongqing ShanghaiTokyoSports & energy drinks SpiritsFacial moisturizers


Median TRS CAGR of companies by degree of reallocationPercent, 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 muchin 20 years

2. REALLOCATE RESOURCES DRAMATICALLYCompanies that re-allocate people and capital significantly – i.e., by 10-15% per year – outperform in the long-run


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%


Haier is restructuring to become an ‘organisation of the future’

Most valuable brand in China for the past 13 yearsMarket cap tripled from 2011-2014

Reorganised its 80,000-person workforce into 2,000 independent units Each unit manages its own P&LEmployees paid on performance

4. DESIGN A FLEXIBLE ORGANISATION


8years

10years 8

years 7years

11years

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


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

the emerging markets growth story

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