Still exciting, but more nuanced

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