Tapping the Economic Power of Mega-Cities

Stephen DeAngelis

October 19, 2012

In a post entitled Emerging Markets and the Global Middle Class, I wrote: “Back in early 2011, some analysts believed that the global economy was on the verge of a growth spurt. [“Get Ready for a Growth Supercycle,” by Ian Breemer, Wall Street Journal, 2 March 2011] Breemer reported that a Standard Chartered report argued ‘that about 10 years ago, the global economy entered a “new super-cycle” of extended growth, one “driven by the industrialization and urbanization of emerging markets and global trade.” The expansion is likely to last for “a generation or more.” Forecasts in the report run through 2030.’ The report may have underestimated the debt crisis in the developed world, which has kept the global economy in turmoil. The projections, however, were not primarily based on activity in the developed world, but in emerging markets.” Christa Case Bryant writes, “By 2030, the global middle class is widely projected to at least double in size to as many as 5 billion – a surge unseen since the Industrial Revolution. This boom, however, is more global, more rapid, and is likely to have a far different – and perhaps far greater – impact in terms of global power, economics, and environment, say economists and sociologists.” [“Surging BRIC middle classes are eclipsing global poverty,” The Christian Science Monitor, 17 May 2011] There has been a lot of attention given to the economic superstars such as China, India, Indonesia, and Brazil — and for good reason. As noted above, China’s middle class numbers some 300 million people. That’s a lot of consumers; and consumers are good for business.

Developing a market entry strategy for emerging market countries, however, is not as easy as one might think. The challenge for manufacturers and retailers will be identifying what products are going to be desired by the emerging global middle class. Individuals that make up that “class” are not as homogeneous as they may sound. The competitive edge that companies will be looking for as they expand into emerging markets is going to come from Big Data analytics. One of the reasons that urbanized populations are going to obtain wealth faster than populations have done in the past is because they are more connected than past generations have been. This connectivity provides mountains of information about their likes and dislikes as well as their hopes and their dreams. Big Data analytic and Cognitive Reasoning solutions, such as those we are utilizing at Enterra Solutions, LLC, are capable of making sense of these mountains of data to find insights and provide recommendations to companies trying to establish a presence in emerging markets.

These analytic techniques will help manufacturers and retailers create market entry plans with a level of precision that they have not been able to achieve before and will allow them to market their products and services to populations in a very local and personal way. One of the criticisms of globalization is that it poses a threat to local cultures and ways of life. While exposure to the wider world will inevitably have an impact, new analytic techniques will also allow manufacturers and retailers to better tailor their products to help preserve local flavors and tastes. In a country like China, for example, the customs, habits, and cultures of the people found in coastal regions are very different than those of the people living in China’s interior. Emerging Big Data analytic solutions can help highlight those differences so that manufacturers and retailers get the right products to the right people in the right amounts. Sometimes the differences between regions (or even cities) are difficult to discern. Analytic techniques are now available that can recognize these differences in a deep, substantive way and on many levels. Targeted marketing will be critical if western companies are going to be successful in emerging markets.

The importance of targeted marketing is highlighted by study published in the Journal of International Affairs that discusses the economic importance of new middleweight and mega-cities that are destined to become hubs for wealth creation. [“The Future of the City : The Growing Economic Power of Cities,” by Andrés Cadena, Richard Dobbs and Jaana Remes, Spring 2012] Each city will have its own challenges and will generate its own unique opportunities for manufacturers and retailers. Both demand data and predictive algorithms are going to be essential if companies are going to thrive in the business landscape of the future.

Cadena, Dobbs, and Remes write, “Amid the gloomy context of the global recession, there is a ray of light: a massive wave of urbanization propelling growth throughout the developing world.” One might wonder why Cadena, Dobbs, and Remes would call massive urbanization a “ray of light” when what comes to mind for most people when they think of massive urbanization is the rise of slums, increasing health concerns, and intractable poverty. In the introduction to their article, they explain:

“By 2025, many of the six hundred cities expected to generate 60 percent of global GDP growth will be in the South and especially the East. The group will not just contain well-known megacities but a new breed of dynamic ‘middleweights’—midsized cities that are among the most powerful forces for global growth today. The rise of emerging-market cities is significant because these urban centers are proving to be the world’s economic dynamos, attracting workers and productive businesses.”

They explain that their “article explores the rise of both middleweight cities and megacities in the developing world.” The authors recognize the possibility that urban growth could go awry, so they draw “lessons from cities that have successfully blazed the trail to urbanization.” In the article, they “demonstrate how local governments can impact the scale and speed of economic development in their regions and how private investment in buildings and infrastructure today will shape the global economy in future decades.” The following graphic shows cities with populations of over a million in 2006. You can already see that mega-cities in the south and east were becoming more plentiful half a dozen years ago. At some point over the past couple of years, the world became urbanized (i.e., over half of the world’s population now lives in cities). Cadena and his colleagues report that by 2025 half of the world’s population will be living in Asian cities.

2006megacities

The conclusions drawn by Cadena, Dobbs, and Remes agree with analysis performed earlier by analysts from McKinsey & Company. Those analysts report, “Over the next 15 years, 600 cities will account for more than 60 percent of global GDP growth.” They provide a great interactive map that allows you to explore questions like: “Which of them will contribute the largest number of children or elderly to the world’s population? Which will see the fastest expansion of new entrants to the consuming middle classes? How will regional patterns of growth differ?” Below is static image of one of the map views.

600 cities

The above map makes it clear that demographic growth is not evenly spread across the surface of the globe; neither is economic progress. That is why targeted marketing will become so important. McKinsey analysts report, “More than 20 of the world’s top 50 cities ranked by GDP will be located in Asia by the year 2025, up from 8 in 2007. … In this new landscape of urban economic power, Shanghai and Beijing will outrank Los Angeles and London, while Mumbai and Doha will surpass Munich and Denver. The implications—for companies’ growth priorities, countries’ economic relationships, and the world’s sustainability strategy—are profound.” [“Urban economic clout moves east,” by Richard Dobbs, Jaana Remes, and Sven Smit, McKinsey Quarterly, March 2011]

As I noted in the post mentioned at the beginning of this one, most analysts agree that the greatest opportunities for companies looking to grow significantly will be found in emerging markets. The reason is simple: markets in developed countries are generally saturated and companies can only grow there at the expense of other companies — a zero sum game. The same is not true in emerging market countries. Consumers in emerging markets are also more optimistic about their economies than consumers in developed countries. According Cadena and company, emerging market citizens have good reason to be optimistic as they become more urbanized. They write:

“For centuries, cities have offered higher standards of living than rural areas. Economists estimate that from the birth of cities until at least the Industrial Revolution, the average income of city dwellers ranged from one-and-a-half to three times that of their rural counterparts. In China and India today, average urban incomes are roughly three times greater than rural incomes.”

Of course, most of those rural residents are involved in agriculture. As rural dwellers become city dwellers, more modern agriculture techniques are going to be required to replace lost workers and increase productivity to feed urban residents. Cadena and his colleagues go on to note that resources are better used by city dwellers (because of economies of scale as well as the cost of supplying basic services). The larger the city, they report, the greater the average cost reduction in basic service delivery. These growing mega-cities will be home to a new consumer class (i.e., the global middle class) that is the target for businesses seeking global growth.

And it won’t just be private sector organizations looking to gain insights from Big Data in order to improve the quality of life for urban dwellers. Governments will use Big Data to improve traffic flows, increase health monitoring, maximize benefit from limited resources like water and power, monitor for signs of natural disasters, and so on. That’s why I agree with Cadena, Dobbs, and Remes that there is a light shining in the middle of the economic gloom gripping much of the globe and that light is coming from cities that are just beginning to thrive in emerging market countries.