Canada in the Asian Century

McKinsey & Company |

Canada in the Asian Century

May 30, 2013

4Front Atlantic

Dominic BartonGlobal Managing Director, McKinsey & Company

McKinsey & Company | 1

Topics for discussion

A new Asian Century is beginning1

Opportunities from Asia2

Implications for all of us3


Five mega-trends reshaping the global economy

Pricing the planet

The productivity imperative

The market state

The great rebalancing

The global grid


Old Shanghai …


… new Shanghai


What will these cities look like in 10 years?

Bogor, West Java, Indonesia

Anshun, Guizhou, China

Puducherry, India (Pondicherry)


3 billion new middle class consumers by 2030

3 billion

Asia

EuropeNorth AmericaCentral and South AmericaMiddle East and North AfricaSub-Saharan Africa

2030

3.23

2020

1.74

2009

0.53

1.85

3.25

4.88

SOURCE: McKinsey Global Institute

1 Consuming class = $10 or more daily disposable income or $3,600 annual income (constant 2005 USD at purchasing power parity)

Global consuming class1

Billions of people


Incomes are rising in developing economies faster, and at a greater scale, than at any previous point in history

SOURCE: Angus Maddison; University of Groningen; Resource Revolution: Meeting the world’s energy, materials, food, and water needs, McKinsey Global Institute, 2011

9

840

1,023

27

48

28

10

Country

154

53

65

33

1700 1800 1900 2000

India

12

16

China

South Korea 10

Japan

Germany

United States

United Kingdom

Year

Population at start of growth period

Years to double GDP per capita

Million


Million people

135

195

180

145

Consuming class

Belowconsuming class

2030

280

2020

265

85

2010

240

45

40 90Additional people in

the consuming class since 2010

In Indonesia alone, 90 million people – 2.5x Canada’s current population –will join the consuming class

McKinsey & Company | 9SOURCE: McKinsey Global Institute Cityscope 2.0

Percent contribution to global GDP growth, 2010–2025100% = $50.2 trillion

6

27

26

100

28

Global growth

Eastern Europe & Central Asia

Developed countries

Other emerging regions

2

3

Middle East & Africa

4

Latin America

SoutheastAsia

South Asia

3

China region

Asian cities

Emerging 440 (440 largestcities in emerging markets)

440 cities in emerging markets will fuel nearly halfof the growth in global GDP through 2025

47%of global growth

440 largest emerging market cities

=

In China, 15-20 MM people move to a city each year –equal to adding New York City twice

313 cities in Asia


Middleweight cities in emerging markets will contribute4.5x more to global GDP growth than emerging market megacities

SOURCE: McKinsey Global Institute CityScope 1.1

Developed economies

Emerging market smallcities and rural

Emerging marketmegacities(10 M+ people)

Emerging market middle-weight cities(150 k-10 M people)

100% = $54.9 T

26

30

8

36

Share of global GDP growth, 2007-25Percent Examples

Surat, GujaratWest coast of India4 million inhabitants40% of India’s textile production

Foshan, GuangdongSoutheast China4 million inhabitantsChina’s 7th largest city by GDP

Pekanbaru, RiauIsland of Sumatra, western Indonesia1 million inhabitants7.3% GDP CAGR expected through 2030


Chengdu

2010 GDP for urban clusters$ Billions

`

Chongqing

Nanning

Hefei

Changzhutan

Hangzhou

Nanchang

Shenzhen

Yangzi mid-lower

Coast West

Shandong Byland

NanjingShanghai

Guanzhong

TaiyuanCentral

Changchun-Harbin

Guangzhou(includes Foshan)

Kunming

Liao central-south

Jingjinji

Huhehaote

Cities can be grouped into clusters around a hub city – some clusters are already economically larger than entire countries

357

378

418

469

475

527

527

Guangzhou

Austria

Shandong

Belgium

Jingjinji

Switzerland

Shanghai


Urban clusters in China and their hub cities


Disruptive technologies will have enormous economic impact by 2025

SOURCE: McKinsey Global Institute analysis

0.2–0.3

0.1–0.5

0.2–0.5

0.2–0.6

0.1–0.6

0.7–1.6

0.2–1.9

1.7–4.5

1.7–6.2

2.7–6.2

5.2–6.7

3.7–10.8

$ trillion, annual

Mobile Internet

Automation of knowledge work

Internet of Things

Cloud technology

Advanced roboticsAutonomous and near-autonomous vehiclesNext-generation genomics

Energy storage

3D printing

Advanced materialsAdvanced oil and gas exploration and recoveryRenewable energy


Amount of data is exploding in all sectors globally

220 B photosstored

1 M transactionsevery hour

2 M searchesevery minute

4 B page viewsevery day

Mobile data traffic doubled in 2012

More data transmitted online in 2010, than all previous years

More information created than from 0 AD-2003

15 out of 17 U.S. sectorshave more data per company than the U.S. Library of Congress


33%

8%

6%

2006

10%

2010

33%

9%

2009

36%

2011

16%

6%

2007

7%

25%

2008

20%

2011

34%

10%

Purchase decisions and sales are increasingly being made online –in both Western markets and in Asia

Online

Offline influenced by online

United States Shanghai

Online-related retail salesPercent of total retail sales


People will need to work longer, retire later, and engage in lifelong learning

10 working adults support 1 retiree

2000


2020


2050Emerging markets


We will also face a global shortage of skilled workersand a surplus of low-skilled workers

94

-45-41

Low-skillMedium-skillHigh-skill

Global balance of workers, 2020EMillion workers


The continuing rise of emerging markets will further strain global resources to an unprecedented level

Water FoodEnergy

Increasing gap between demand and supply of fossil fuels; e.g., by 2030 ▪ 25% gap for oil ▪ 30% gap for gas

10,000 years of historical food production thatmust be matchedin the next 50 years

~40% gap between supply and demand by 2030


After declining over the 20th century, commodity prices have more than doubled in the last decade

40

60

80

100

120

140

160

180

200

220

240

260

1990 2000 20101900 19801970196019501940193019201910

World War I

Postwardepression

Great Depression

World War II 1970s oil shock

McKinsey Commodity Price Index (years 1999 - 2001 = 100)

Turning point in price trend


Volatility – growth will not be a straight line(there will be asset bubbles)

Rising income inequality plus technology

Resource scarcity

Interregional conflict

Healthcare challenges – pandemics

Education does not keep pace with urbanization

Risks associated with pursuit of growth opportunities


The lifespan for companies is decreasingEstimated lifespan of S&P 500 companies, years

1822

30

45

90

20111995197519551935


Seven significant opportunities from Asia

▪ Consumers – $22 T consumption in emerging markets in 2025 and 2.7 B new middle class consumers by 2030

▪ Education – 1 B Asian youth to educate in any given year and a 36 M shortage of skilled workers in China and India by 2020

▪ Infrastructure – $57 T global demand over next 18 years, with $27 T expected spend in emerging Asia

▪ Tourism – approximately 80 million outbound Chinese travelers in 2012, growing to over 110 million in 2015

▪ Natural resources – 30% increase in global energy needs and 80% in steel needs by 2030

▪ Agriculture & food – 2x global increase in meat demand by 2050 due to rise of emerging markets, anticipated 60+% rise in meat consumption in China

▪ Health care – a $7 trillion global industry; costs expected to triple across Asia by 2020


Emerging market consumption will be $30 trillion by 2025,nearly half of global total

$ Trillions

2634

12

30

Developed

Emerging

2025

64

2010

38 Brazil 3

India

10

China 8

Total 30

1

Other

Poland 1

Turkey 1

Indonesia 1

Mexico

Russia 2

3


World consumption Emerging market consumption in 2025

McKinsey & Company | 24SOURCE: McKinsey analysis; Global Insight; Economist Intelligence Unit

2,823

2000

1,858

1990

817

2010

+245%

Asian consumers’ disposable incomes have been rapidly increasingover the last two decades

+165%

1990

N/A

20102000

381

1,010

1990

+133%446

2000

465

1,040

2010

Indonesia

+204%

20102000

2,464

7,480

2,989

1990

80247

522

201020001990

+553%

India

Turkey Vietnam

Urban China

Per capita disposable incomeUSD (2010 real terms)


The Chinese market already rivals Western markets in regards to consumption

2nd largest digital camera marketafter the US – more units than Japan, South Korea, and Singapore combined

Flat-screen TV sales of 50 million– 42 M sold in the US and Canada

Largest retail market for laptop computers(27 M units vs. 22 M units in the US in 2012)

Laundry softener sales have grown 20% annually for the past 5 years– surpassing sales in Germany and France

McKinsey & Company | 26SOURCE: FAO World Food and Agriculture to 2030/2050; FAO Expert Meeting on How to Feed the World in 2050; McKinsey analysis

Global growth by 2050

As incomes grow, caloric intake, especially from meat, will rise

892

~2x

475

2050E2010

Million tons of dairy

1.44

~1.5x1.00

2050E2010

Billion tons of cereals

464

227

~2x

2050E2010

Million tons of meat


China – the world’s largest market for meat at $300 B –has substantial room to grow further

45

50

57

66

76

109

130

+61%Japan

China

South Korea

Taiwan

EU-27

US

Hong Kong

Per capita meat consumption 2010kilo/year

50

85 90 94

50

15 10 6100% =

ROW

China

Dairy

383

Beef

260

Poultry

173

Pork

400

SOURCE: USDA, NBS

China’s share of consumption%, 100% = $B Total


22

120

79

22

119

74

23

119

77

22

116

93

21

109113

IndonesiaIndiaChina

20-24

15-19

10-14

5-9

0-4

School-age population, 2013Millions

AgesAsia has over 1 billion people to educate at any one time

436 M 583 M 110 M

India needs to put 50 million people through vocational training each year—and yet has capacity for only 4 million

SOURCE: Economist Intelligence Unit


Despite growing domestic education systems, China and India will not be able to meet demand for talent


In 2020

41M

23M

45M

13M

global shortage of tertiary educated workers

in China alone

global shortage of high school graduates

in India alone


0

50,000

100,000

150,000

200,000

2011-122010-112009-102008-092007-08

International students in the United States

China is sending more students abroad – while other countries stagnate

SOURCE: Institute of International Education

Turkey

Mexico

Vietnam

Japan

Canada

Taiwan

Saudi Arabia

South Korea

India

China


112

7870

57

31

+15% p.a.

+26% p.a.

2012201120102005 2015E

Overseas tourism has soared in China and is expected to grow further

SOURCE: CEIC, China tourism yearbook, Euromonitor

China outbound travelersMillions


% of total respondents

SOURCE: Insights China; 2010 China Consumer Survey, focus groups; team analysis

Relieving pressure and escaping to nature are Chinese travelers’top motivators

63

11

19

Increase foreign exposure

Learn knowledge and culture

Relieve work pressure & relax 10

44

8

14

Other (e.g., visit family)Shopping

Entertainment(e.g., karaoke)

Folk culture

Historic sites

Natural landscape(e.g., sea, mountains)

59

% of respondents

The first thing that we seek is natural landscape, especially things that we can’t see here such as the sea

Wuhan participant

Primary purpose for travelTop 3 motivations for travel

McKinsey & Company | 33SOURCE: McKinsey Insights China; McKinsey Global Economic Growth Database; McKinsey Global Institute

1 Stock of net fixed assets at the end of the year, assuming 5% depreciation rate for all the assets

Demand for infrastructure rises as income increases

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000

Capital stock per capita1

140

120

100

80

60

40

20

0

GDP per capita

Urban China

ChinaIndia

Germany

South Korea

Japan

Italy

UK

US

Capital stock vs. GDP per capita by country and year, 1980–2008$ Thousands, sample of selected countries, constant 2005 prices and exchange rates


Length of expresswaysThousand km

Length of railwaysThousand km

AirportsNumber of airports

Capacity of container terminalsM TEU (20-foot equivalent units)

12090

78

+33%

202020102007

China plans to rapidly expand infrastructure

100

6554

+54%

202020102007

244192

152

+27%

202020102007

240

13695

+76%

202020102007

SOURCE: CIA factbook; S&P; World Bank; IWG; Difu; Yearbook of China Transportation and Communications; team analysis


Pudong District, Shanghai

$27 trillionAsia infrastructureinvestment need2013-2030

SOURCE: Lujiazui Road, Pudong District, Shanghai

$57 trillionglobal infrastructureinvestment need2013-2030


Emerging markets have significant infrastructure capacity to develop

SOURCE: CIA World Factbook 2012; Infrastructure Africa; Economic Research Institute for ASEAN and East Asia; World Economic Forum, Global Competitiveness Report 2011–2012; McKinsey Global Institute analysis

3

6

23

40

66

Kazakhstan

Russia

Indonesia

China

United States

Germany 181

Japan 320

6

5

3

9

23

72

118

23

35

97

47

529

902

378

Developing

Developed

AirportsAirports per million sq km

RailRail km per 1,000 sq km

RoadsRoad km per 1,000 sq km

McKinsey & Company | 37SOURCE: Global Insight; IEA; UN Environment Program (UNEP); FAO; World Steel Association; McKinsey analysis

398

654

+33%

2030

4922010

2000

5682020

+80%

1,847

2,290

1,271

761

6,350

+41%

5,500

4,500

4,000

234

191

137

287

+50%

Rising middle class, urbanization, and infrastructure build-up will drive strong global resource demand

FertilizerMillion tonnes

WaterCubic kilometers

SteelMillion tonnes

Primary energyQuadrillion BTU1

1 British Thermal Units

McKinsey & Company | 38SOURCE: McKinsey 2011 global copper, iron ore, steel, and metallurgical coal models

31

20 +55%

2,5591,935 +32%

1,178837 +41%

Global demand for basic materials will also rise significantlyGlobal demandMillion metric tonnes

Coal

Iron ore

Copper

2010 2020


China and India will account for over 60% of the growth in energy demand through 2030

Energy demandQuadrillion BTUs (British Thermal Unit), Percent

41

20

5

31

Share of growth%

4

SOURCE: McKinsey analysis

42% 36% 33%

28% 27% 28%

2030

654

9%

100%

5%

2020

578

India

China

Global(e.g., planes)

OECD & EU-27

7%

25%

5%

2010

492

5%

20%

5%

Rest of world

25%

McKinsey & Company | 41SOURCE: Compete to Win, Canada Competition Policy Review Panel, 2008

What will it take to deliver to our grandchildren the same measure of progress we have enjoyed? We believe that it will take a more competitive mindset.

We must embrace competitionas savvy and determined players with a focus on Canada’s interests.We must skate harder, shoot harder and keep our elbows up in the corners.


Yukon

BritishColumbia

Alberta Manitoba

Newfoundlandand Labrador

Northwest Territories

New Brunswick

OntarioQuébec

Saskat-chewan

Nunavut

Nova Scotia

Prince Edward Island

39

46

19 17

16 1216

Most Canadians do not consider our country to be part of the Asia Pacific

SOURCE: Asia Pacific Foundation of Canada National Opinion Poll: Canadian Views of Asia, 2012

I consider Canada to be part of the Asia Pacific regionPercent in agreement

17


Exports from Atlantic Canada remain heavily US-focused

2

12

75USA

5China

5Rest of Asia

1EuropeAfrica LatAm

SOURCE: Industry Canada, 2012


Australia’s curriculum reflects the imperative for the next generationto succeed in Asia

Asia is a cross-subject priority from kindergarten to grade 10 – English, Asian languages, history, science, and math

Every Australian child will have opportunity to study an Asian language (Mandarin, Hindi, Indonesian, or Japanese)

Goal is to enable Australians to live, work, and learn in Asia

Australian business leaders visit secondary schools to build awareness of the importance of Asia

Australia-Asia BRIDGE connects schools in both regions –400 teacher exchange, 250+ virtual classrooms


Ideas for increasing Asian awareness in Atlantic Canada

Establish an “Atlantic Canada EDB” to increase focus on Asian FDI and enable one stop access to investment opportunities in Atlantic Canada

Establish Asian advisory group for Atlantic Canada (comprised of 10-20 Asian CEOs, meet annually for two day summit) to develop engagement strategy and provide direct linkage

Launch annual roadshow for Asian investors (e.g., Victor Chu, Far Eastern Finance) to engage with opportunities in Atlantic Canada (led by ‘EDB’)

Cluster SMEs with larger companies on Asian investment trips (e.g., similar to Siemens approach)

Establish city pairings (top 10 Atlantic Canada cities with 10 rapidly developing cities in Asia) to increase awareness, enable student exchanges etc.

Increase two-way awareness through targeted education initiatives▪ Boost foreign student intake (tertiary, vocational, language) by 50% (9,000)▪ Expand student exchange programs for both secondary and tertiary students

(consider making mandatory in select tertiary disciplines)▪ Develop “Canadian boot camp” for Asian CEOs

Develop Asia-specific tourism initiatives for Chinese, Japanese and Korean markets (e.g., Atlantic Canada 2015 campaigns)

11

22

33

77

44

55

66

McKinsey & Company | 46SOURCE: Press search

Collaboration

Universities Local companies

Silicon Valley

Boston

Zhongguancun

Tel Aviv


A through-cycle, dedicated, tri-sector approach is neededto capture the opportunity in Asia

Coordinated relationship building

▪ Identify key decision-makers (business, government, regulatory, etc.) in target markets

▪ Recruit domestic leaders to build relationships in a coordinated fashion

Support strategic objectives

▪ Counsel policymakers on goals and strategic initiatives related to foreign partnerships

▪ Secure the right participants for events and trade missions

▪ Proactively cultivate FDI and support companies in finding suitable business partners

▪ Federal Minister for Asia– Cabinet rank– Responsible for whole

of Asia agenda– Cuts across ministries

▪ Provincial leaders

▪ Educational institutions– Universities– Schools

▪ Cultural– Cirque du Soleil– Music– Sports

▪ NGOs

R&D – from 1.8% to 2.5% of GDP

Business

Government Socialsector


Foreign companies have benefited from long-term, dependable support from their governments in making deals with China

SOURCE: Press search

Hollande is returning to Paris with no less than 18 business deals with Beijing, including contracts for 60 Airbuses and a nuclear project

China buys 50 Airbus jets worth up to $4 billionduring Merkel visit

Obama attends Boeing signing ceremony in Indonesia for deal worth up to $35 billion

McKinsey & Company | 49SOURCE: “International Education: A Key Driver of Canada’s Future Prosperity,” Advisory Panel onCanada’s International Education Strategy, August 2012; Government of Quebec 49

UnitedKingdom

UnitedStates

Canada

Australia

International student market share (est.)Percent

10

18

5

13

International studentsNumber

428,000

723,000

240,000

557,000

3 out of 5university/college international studentsin Australia began their studies in an Australian language, technical or other school

There is great opportunity to grow education as a major export to Asia


Canada has an opportunity to capture a much higher shareof Chinese travellers

Mongolia 0.3

Canada

0.3

0.3Germany0.40.4

Indonesia 0.6United Kingdom

1.1Cambodia

Thailand

Australia

Singapore

1.5

1.2

1.0

USA

Russia0.7

0.8

Vietnam

1.4

France

South Korea

1.6

2.41.8

1.7Taiwan

JapanMalaysia

SOURCE: CEIC, China tourism yearbook, Euromonitor (2011)

China international travellers by destination Millions, 2011


1. Thailand2. Hong Kong (Macau)3. Europe4. South Korea5. Taiwan6. Malaysia7. Singapore8. Australia9. Bali10. Japan

SOURCE: Ctrip survey 2/2013; China Tourism Academy “China outbound travel satisfaction survey”

Singapore 79.5

Germany 80.0

South Africa 80.2

Brazil 80.3

Agentina 81.0

France 82.3

New Zealand 82.5

Spain 82.6

Italy 82.7

Canada 84.5

Canada is not a high priority destination for Chinese travelers –but those who do visit Canada enjoy it

Chinese tourist satisfaction rateTop 10 most requested destinations for Chinese outbound travelers

Although an government-approved destination for Chinese tour operators, Canada is not in the top 20 destinations


Years to break even Years to break even

11

7

8

4

10

8

Successful companies adopt a long-term investment mindsetto build a sizeable, profitable business

SOURCE: Press search; company reports

7

7

9

8

7

4


Leadership in a new era

Ready for“trend breaks”

Tri-sectorathlete

Receptor and connector

Strong sense of purpose

Calm in the eye of thehurricane

Always on

Telescope andmicroscope

Marathon and a sprint

Role

Personal attributes

Canada in the Asian Century

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