following the great recession:
The Great Rebalancing

McKinsey and other sources indicate that an economic restructuring will bring opportunities and challenges to American businesses and the time to plan is now.

A rapidly growing middle class in a dozen emerging nations is predicted to shift the world’s center of economic growth away from developed nations toward developing countries in this decade. Leading analysts including McKinsey expect this economic restructuring to demand a higher level of innovation for American businesses to survive and thrive.

What does this mean for the future of your company?

McKinsey has recently published a new report which calls “the vibrancy of emerging market growth” a major disruption which is reshaping the global economy in the next ten years. They call this a “tipping point in fundamental long-term economic rebalancing that will likely leave traditional Western economies with a lower share of GDP (gross domestic product) in 2050 than they had in 1700.”

Understanding the global impact of emerging market growth
A rapidly growing middle class in a dozen emerging nations, currently two billion people who spend $6.9 trillion annually, is expected to increase its spending to $20 billion annually over the next decade—about twice the current consumption of the United States.

The McKinsey report identifies two socio-economic movements that are driving this trend, which are currently underway:

Declining dependency ratios. Virtually all major emerging markets are undergoing demographic shifts that historically have unleashed dynamic economic change: simultaneous labor force growth and rapidly declining birthrates. Simply put, there will be more workers, with fewer mouths to feed, leaving more disposable income.

The largest urban migration in history. Each week, nearly one-and-a-half million people move to cities, almost all in developing markets. The economic impact brings dramatic gains in output per worker, as people move off of subsistence farms and into urban jobs. China and India are seeing labor productivity growth at more than 5 times the rate of most Western countries as traditional agrarian economies become manufacturing and service powerhouses.

As reported in the last edition of InSIGHT, emerging populations are now accessing the global grid in staggering numbers—consider there are 233 million mobile web users in China alone. They have joined the ranks as consumers with sophisticated tools enabling them to shop anywhere and their actions are being felt. The recent quarterly earnings reports of nearly every global consumer products company—from Kraft to Nestle—noted upticks in profits, driven primarily by unexpected gains in emerging markets. This new middle class is fast becoming a powerful market force and their buying preferences will determine the new market leaders.

Over the next decade, these emerging market economies are expected to shed their role as suppliers of low-cost goods and services—the world’s factory—to become large-scale providers of capital, talent, and innovation. McKinsey and other economists warn that if the West is going to grow in this new economic environment, that growth will be fueled by productivity improvements and innovation. “For all companies—both established multinationals and emerging-market challengers—this great rebalancing will force major adjustments in strategic focus… More and more, global leadership will depend on winning in the emerging markets first.”

Seizing the opportunity of emerging markets
Consider that more than 70 million people are joining the middle class globally each year, virtually all from emerging economies. By the end of the decade, approximately 40% of the world’s population will have achieved middle-class status by global standards, up from less than 20% today. This means opportunity for consumer markets: Proctor & Gamble, for example, hopes to add a billion new customers to its ranks in the coming decade, adding to the nearly 4 billion the company touches today.

To tap the riches from these new markets however, established organizations must reinvent and adapt their business models to meet different market needs. Hindustan Lever, for example, uses everything from bicycles to bullock carts to deliver products to large reaches of India, so they can position themselves in the emerging market.

Technical innovation: the next frontier
Emerging markets are no longer just a cost play—a deeper underlying trend positions them as innovation centers. Last year marked the first year ever when an emerging-market company—the Chinese telecom manufacturer Huawei—led the world in patent applications. No US company was listed in the top ten. Today, India supplies more technology workers than any other country and China is on track to pass the United States as the home of the largest Research & Development (R&D) workforce. Currently, more than 1,000 multinational companies operate R&D facilities in China, five times the level of a decade ago. McKinsey predicts that “as more and more talent center spring up across emerging markets and skills deepen, new innovation ecosystems will emerge.” McKinsey counsels global companies to focus on innovation to win in low-cost, high-growth countries that their survival elsewhere may depend upon it.

Learning to manage multiple business models
Established Western multinationals will be challenged to figure out how to thrive while competing across different types of markets. Both developed and emerging markets require innovation at breakneck speed; temptation to under-invest in potential long term revenue growth in new markets will need to be balanced with pursuing here-and-now profit gains in established markets.

Some innovative companies are getting it right: GE, for example, has devised an electrocardiograph machine for the Indian market which can be sold for $1,500, which is less than a fifth of the price of traditional ECG monitors in Europe and the United States. GE’s innovation has helped bring a new level of healthcare to millions of Indians, as well as create a monitor it can sell for $2,500 in developed markets. Based on this experience and others like it, GE is now developing over 25% of its healthcare products in India and plans to deploy then in both emerging and advanced economies.

What’s the rebalancing mean for your company?
First, becoming mindful of larger world trends is key to individuals and companies making good decisions today, which will impact tomorrow’s future. The American workforce has weathered the Great Recession, and while we are welcoming indications of recovery in Information Technology departments, we are also seeing that expectations have changed, as well as business strategies. The Great Rebalancing will be another major disruption to “business-as-usual” thinking in the years to come. Wise experts are suggesting we begin to make the mental shift now and target strategies and skills which will enable us to compete more effectively into the future.

Questions to ponder are how does innovation fit into your company’s strategy and culture? How can your company position itself to take advantage of increased competition from and sales to emerging markets?

Technology leaders can choose to view this trend through the lens of opportunity. By fostering innovation, as well as challenging ourselves and our team members to keep skills current, technologists can provide tremendous value for their companies as we navigate the decade of the Great Rebalancing to emerge more competitive in America.

 

Contact Software Consortium or call 1-877-850-9393 if you would like to discuss how to leverage our top-level talent to empower your business.

 

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