Future Shuk: When Markets Are No Longer Just Emerging

Are you ready for the next 20, 30 or 40 years? Brace yourself, writes Guy Rolnik;McKinsey hazards some astonishing forecasts, from the resurgence of emerging markets to a world online.

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Remember 1990? Let us recap. On the global economic map, China barely existed. The body shaping global policy essentially ruling the world was the G7, consisting of Japan, Canada, Italy, Germany, France, Britain and the United States. The Internet was an idea, no more.

A manufacturing outfit in Guangdong, that may not produce solely for the West much longer.

Fast-forward to today: China is the second-biggest economy in the world, after the United States. The forum shaping global policy is the G20, which includes China, India, Argentina, Brazil, Russia, South Korea, Indonesia, Turkey and South Africa, none of which counted for a hill of beans 20 years ago. About 1.5 billion people are connected to the Internet and some 4 billion cell phones are out there.

It is with that description that the economists of international consulting firm McKinsey & Co began their position paper for clients last year, as the financial crisis continued to growl. The McKinsey people were having a stab at something that most advisers avoid: making forecasts. Not just any forecasts, but for 20, 30 and 40 years.

Economic forecasts for the next year are common. Most have little value. Either they serve immediate economic interests or they merely extrapolate based on the past. Looking back, these summaries often dont even ask what the real story is, knowing that few care about decades-long underlying structural trends. They want to thrill at every transient titillation or drama du jour.

Even assuming that forecasting is all but pointless, the information the McKinsey analysts provide is fascinating.

The world is changing before our eyes. The challenges that people, companies and governments face are like nothing weve ever seen before.

Here is the future in five points, as foretold by the biggest consultancy in the world.

1 Global rebalancing: The biggest story in the next 20, 30 or 40 years is the emerging markets. We can assume that within the next 40 years, emerging markets including China and India will make up more than 50% of global output, as was the case 300 years ago.

The biggest driver of this economic miracle is the dramatic increase in the workforce, alongside a dropping birthrate: more workers combined with fewer mouths to feed create disposable income that grows at an exponential rate.

Here is another eye-popping figure. Every week, 1.5 million people leave their villages and move to the cities. Thats not every year or month, its every week: 1,500,000 people morph from farmers into urban workers. Most of that is in China and India. The result is productivity growth five times faster than the pace in the West.

True, it smacks of what happened in the Western economies during the 200 years since the industrial revolution began. But now the revolution is happening elsewhere, and its going to be a lot faster. Developing economies like China, India and Brazil will turn from suppliers of cheap goods and services to suppliers of capital, skill and innovation.

This isnt based on astrology. In the last decade, the number of Chinese, Indian, Brazilian and Russian companies among Fortunes top 500 list has doubled.

Heres another intriguing statistic. Each year, more than 70 million people in these emerging markets cross the threshold into the middle class. Within 10 years, says McKinsey, 40% of the world population will fall into the category of middle class, double the present rate.

Companies like Procter & Gamble are planning to add a billion people to their consumer pool, which presently numbers 4 billion.

Obviously this is a giant opportunity for companies, but also a challenge. The markets are tough and very different from one another, and from the West. These are markets where consumers have no brand loyalty, markets where tastes change at warp speed, markets where the aggregate purchasing power is growing fast but remains very low at the level of the individual consumer.

The winners will be companies that can adapt production and sell products for a fraction of their price in the West. Some companies are already proving that can be done.

But dont link the emerging markets just to low costs. China wont be just a sweatshop for the West anymore. Equipment makers like Huawei have been at the forefront of patent registration in the last year. Not one American company is included in the 10 most prolific patent registrants worldwide. India is the worlds biggest provider of technology workers and China is likely to pass the United States soon as the country with the biggest number of people involved in R&D. Some 1,000 multinationals maintain R&D centers in China, five times the figure a decade ago.

2 Productivity problems: The renowned economist Adam Smith called it the natural progress of opulence a bigger, younger workforce. In the emerging markets, the workforce is growing fast and in the West, its shrinking. The only way the Western governments can preserve their economies is to improve productivity: to create more with fewer workers. If that can be done throughout the economy, it will create jobs. In the United States, says McKinsey, every 1% of productivity-driven growth generates 750,000 jobs.

If the Western economies neglect to tackle their productivity problems, they will increasingly come into conflict with the emerging economies. The currency war that erupted in recent weeks is a clear expression of this. But currencies wont solve the problem over time, only better productivity. The challenge is enormous. In the 1970s, some 80% of GDP growth in the U.S. resulted from workforce growth. In the next decade, barring dramatic change in working hours per employee, the ratio will reverse: workforce growth will contribute only 30% of GDP growth.

To sustain rapid economic growth, 70% of GDP growth must derive from increased productivity. In Europe, where the workforce is not growing, 100% of growth must derive from increased productivity. In Japan, where the workforce is contracting, 160% of growth must derive from increased productivity.

That isnt all. Jobs in the West today are mainly for skilled people, not blue-collar workers. In the last decade, 85% of the jobs created in the U.S. demanded complex knowledge: information analysis, problem solving, discretion, creativity. That is because intellectual property, brand value, knowledge of processes and such like intellectual manifestations are responsible for 70% of the market value created in the U.S. during the last 30 years.

How can productivity be stimulated? McKinseys economists suggest thinking in the direction of stepping up competition, encouraging people to remain in the labor market for longer, and naturally, better education.

The challenge for companies is huge. They have to step up productivity, which means investing vast resources in developing talent, and in matching between the greatest talents and the greatest opportunities. They have to improve teamwork.

One company that did make a productivity leap is the U.S. consumer electronics chain Best Buy, which operates in one of the toughest, most competitive markets in the world. It maintained its status by creating a work environment that is entirely results-oriented. The company sets its employees high goals but lets them get there their own way. That system increased its productivity 35%.

3 Beta Internet: You may think the last decade was marked by the Internet revolution. Some think that was just the forerunner, the beta, for the real thing, which will come in the next decade.

Cisco Systems, the biggest equipment maker in the world, says that in 2009, data traffic increased by 50%, never mind the worst financial crisis in a century. In China alone, 150 million hooked up to the Internet last year.

The most innovative companies will be those that ride the great wave of the global network. Some will be disruptive whippersnappers like Skype, a 7-year old company that today connects the greatest number of long-distance calls in the world, yet has no telecom infrastructure.

Some will be old companies that exploit the Internet to tap the masses, to find workers and to provide new services online.

The Internet makes any company, even the smallest, global. The only barrier is talent, entrepreneurial spirit and management.

McKinsey claims that Internet-driven change in consumer behavior will have the greatest influence on companies in the decade to come. Ostensibly weve seen it all: transparency in prices, more information for consumers, massive use of social networks. But the changes to come will be much more dramatic.

Fifteen years ago, 3% of the population had cell phones and 1% had Internet access. Today 50% have cell phones and 25% can go online. Technology is changing consumer behavior in ways considered unthinkable not long ago. Today, Americans read 30% more than they did a decade ago not books, but emails, text messages and social-network pages.

They also write like never before: 15 million Americans, which is 10% of the U.S. workforce, critique products online each week. Aside from friends liking products on social networks such as Facebook, online critiques are the main force driving consumer behavior, with double the influence of traditional advertising.

That snowball has just started to roll. Half the cell phones sold in developing markets are smart-phones with Internet connectivity. In China alone, more than 100 million people subscribed to third-generation cellular networks last year. The amount of data flowing on cellular networks nearly tripled.

This global network naturally poses terrifying dangers, too, firstly economic and social upheaval. The financial crisis of 2009 was just a taste. Companies must learn to look at the long-term and around them to understand where the next fatal blow could come from.

4 Must go green: If you thought going green is for loony-fringe tree-huggers, the next decade will astonish you. The tension between the rapid consumption of the planets natural resources and sustainability (our survival without irreversibly poisoning our nest) will dramatically increase, leading to far-reaching changes in regulation and in general and consumer behavior.

The emerging markets pose a planetary challenge. Their demand for oil, coal, iron and other minerals will grow at least 30% in the next decade, drastically increasing the cost of mining and supply. McKinsey postulates no quick fixes. Investment in present energy infrastructure is already vast and the shift from fossil fuels to alternative energies will take decades.

Great effort will be made and some $2 trillion will be invested in clean energy development during the next decade. McKinsey predicts that in 2020, the clean-tech industry will reach annual revenues of a trillion dollars.

5 Redefining the market state. Though capitalist market economics continues to spread, governments will not give markets a completely free hand. On the contrary, their strength will grow, for three reasons: 1) Even before the crisis, governments were contending with the negative effects of globalization. 2) The financial crisis birthed massive intervention by governments, tarnished the image of hands off American-style market economics, and showed the upside of Chinese-style market economics, with heavy government involvement.

3) As economic power spreads and splits around the world, creating a global consensus will be harder.

Governments everywhere will be torn between the need to advance their economies and the need to intervene in the market to preserve social stability and protect the people. They will have to cope with the fact that the fate of their citizens will sometimes depend on factors outside their borders: the global markets. The governments reaction to these dissonances will affect the global economy more than any other economic factor in the decade to come.

The greatest pressure will come from social gaps. In the last 100 years, the greatest gaps were between the West and the developing economies, where most people lived in poverty.

Hundreds of millions of people have clawed out of poverty in recent years and in the West (and China), gaps between the rich and poor widened at terrifying speed. Countries will face the dilemma, says McKinsey, of economic growth versus widening gaps.

Germany for instance decided to forgo 1% of GDP growth a year a third of its growth to strengthen its social protection mechanisms, making its society more equitable.

Social protective networks will be doubly needed in the decade to come as job security vanishes. Each year 15% of U.S. households face the loss of 50% of their income. In Brazil, it is 50% of households. The risk has passed from companies to workers and its the governments job to find solutions.

McKinsey advises businesses to support government intervention in the markets and hope it works. Tycoons who fight for the status quo simply dont understand the dangers, says the consultancy. If governments fail to cope with social challenges, the entire global economy will be at risk.

Throw the dice

And what does McKinsey advise its clients to do, given these five trends?
The next decade will be the time to lead, not follow. To innovate. To take big gambles. To realize that the management methods of the 20th century arent relevant any more, and are being rewritten by the minute. Corporate management is much more complicated than it used to be.

Companies have to answer not only to their shareholders, but to everyone else governments, the environment, their workers, the community, throughout which everybody and their grandma will be tweeting about them.

If you survived this article, and understood it all except for one thing what tweeting is then its good you read it. This article is for you.

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