I am spending my Saturday at the Park Inn Hotel in Sandton, the business district of Johannesburg. The Park Inn Hotel is a comfortable but anonymous place. If I did not look out the window, where I see construction work, the signs of a booming business economy, this place could be just about anywhere in any business district in the world.
Urban decay in downtown Johannesburg caused many corporate offices to move from Johannesburg’s central business district to Sandton during the 1990s, and the area has become the new financial district of South Africa and Johannesburg’s premier business centre. The migration of businesses from the old centre is a trend all over Africa, as the crowded old colonial city centres and the inevitable traffic congestion no longer appeals to growing businesses needs, and new places such as Sandton are built across the booming continent.
Sandton is also home to the Sandton Convention Centre, one of the largest convention centres on the African continent, as well as a shopping centre with some 144,000 m2 of shopping space, making it one of the largest in the southern hemisphere.
I plan to stroll around in the shopping centre after my business meetings this evening, as one of my favourite spots in the world is located there, the Exclusive Books store on the first floor above Mandela Square. I enjoy to spend time there, having a coffee and browsing new books. The store is a sanctuary in a time when real, well sorted bookstores have become increasingly rare.
I still have some hours until my next business meeting, so I catched up on some reading after breakfast and I came across an interesting new report by the McKinsey Institute. As I read it, I decided to make this small note, based on my initial thoughts and reflections, and thus spend my Saturday morning connecting some useful dots.
According to the report, the global business landscape is shifting, as emerging markets are changing where and how the world does business.
For the last three decades, the emerging markets have been a source of low-cost but increasingly skilled labour. Now their fast-growing cities are filled with millions of new and increasingly more prosperous consumers, who provides a new growth market for global corporations at a time when much of the developed world faces slower growth as a result of aging and slowing economic development.
To think through the implications with a bit of perspective, lets step back 22 years in time. In 1991 I was studying financial economics at the Stockholm School of Economics (SSE), and I remember I found a revolutionary new book in the schools bookstore. Economic geography was a major specialisation at the SSE during the 1980s and even though I did not take that course, I bought the book.
The book was written by Saskia Sassen and the title was “The Global City”. The title refers to a city considered to be an important node in the global economic system, and the concept comes from geography and urban studies and rests on the idea that globalisation can be understood as largely created, facilitated, and enacted in strategic geographic hubs, according to the operation of the global system of finance and trade.
In the book, it was argued that large, technologically advanced urban areas define the modern world and Saskia Sassen identified Tokyo, London and New York as the three cities that propelled the world economy.
Now the new McKinsey report challenges the stability of the old world, and they do so by looking at where big businesses locate.
According to the report, there are about 8,000 huge companies with over $1 billion in annual revenue in the world, of which about 53% are publicly traded, 37% are privately owned, and 10% are state-controlled.
These huge companies generate $57 trillion in consolidated revenue, which equals 90% of the global GDP.
The big three cities are still dominant. The most popular host city is Tokyo, where the headquarters of 613 huge companies are located. New York and London have 410 between them.
However these cities now have competition. Overall in the world, the global competition of cities is estimated to host 2,7 million towns, 3 thousand large cities and 455 large metropolitan areas with a population over one million. All of them compete in the struggle for attention to attract businesses and talents.
According to McKinsey, the number of large companies from the emerging world will rise, as economic growth quickly grows also new businesses in the countries with high growth. This powerful wave of new companies could profoundly alter long-established competitive dynamics around the world. For example, Beijing, the emerging-market city with the most headquarters, has 116 huge companies.
At present, three out of four huge companies are based in developed countries, even though advanced economies account for only 14% of the world’s population and 64% of global gross domestic product. But times are changing. The emerging world’s share of the Fortune Global 500 increased from 5% in 2000 to 26% in 2013.
In 2001 only 5% of outward foreign direct investment (FDI) flows were from countries that were not members of the OECD. By 2011 their share of outward FDI increased to 21%, and these developments will continue. About one billion people in emerging-market cities will enter the global “consuming class” by 2025, according to the McKinsey report.
This competitive, dynamic environment makes it important for places, no matter their size or composition, to clearly differentiate and to convey why they are relevant and valued options. The competition between places used to be about comparative advantages, but in the age of globalisation it is about competitive advantage. Here the growing cities of the emerging markets will inevitably be winners.
As a result, there will be changes to the geography of big business. The hegemony of Tokyo, London and New York, and western economies as a whole, will inevitably decline. McKinsey expects the world to have an additional 7,000 huge companies by 2025, and most of the newcomers will be based in developing countries (see chart below).
The number of headquarters in São Paulo is expected to triple by 2025. Beijing and Istanbul will have twice as many large companies. In 12 years time 46% of large companies will be headquartered in emerging markets. About 300 cities could host large companies for the first time by 2025, and more than half, 150 of these cities, will be in the China region. In Western Europe, there will be just three newcomers.
It will be to the new global cities that the talented young people of the world will migrate and work.
In total in the world by 2025, McKinsey expect there to be 15.000 huge companies, generating $130 trillion in revenues.
The report also suggests that there will be a strong growth in the number of companies foreign subsidiaries, alongside the growth in headquarters. This is a natural trend that follows with globalisation and increased specialisation and trade.
Whereas the location of headquarters is usually pretty fixed, it would seem strange for Coca-Cola or McDonald’s to move their base to France, subsidiaries are more movable. Managers often choose the location.
This means there is room for urban policy and smart place management, as we propose our clients in Bearing, to make a big difference.
Each region, city and town will need to have a clear strategy for attracting businesses and talented people, or see their place decline in importance, and there will be a polarisation between the mega cities where the huge companies are based, and the large and medium sized cities where sub-contractors and subsidiaries are based.
Low business taxes will not be the only factor that determines whether cities are good at attracting businesses. A combined smart strategy toward visitors, investors and talents will be required. Factors like market proximity and regulation, are less important to managers than people might think. Instead what matters will be to settle in cities where talented people can be employed and retained. The McKinsey report calls this “liveable cities”.
At the moment liveable cities have a disproportionate number of foreign outposts. Sydney, famed for its high quality of life, has more than 54. More than even Tokyo. Singapore and Mexico City are other destinations of choice. For cities that hope to be big players in the world economy, attracting subsidiaries might be the most promising avenue.
In Saskia Sassen’s book, Tokyo, London and New York were the undisputed hubs. By 2025 things will look very different. In addition, the big three have been and are reasonably similar places. The role of urban institutions was sidelined.
Today cities cannot just be efficient places to do business. They also need to be good places to live and provide unique offerings to attract talented residents.
This is especially true if cities want to attract foreign subsidiaries. Liveability, not profitability, is the new vogue.
Here in the Sandton district of Johannesburg, and in other South African locations like Cape Town, the place managers have clearly got this right.