Contact Us

Blog

What’s in store for China in 2013?

The year ahead could be a time of significant change for everything from banks, retailers, and infrastructure projects to pork prices, soccer, and “compulsory” vacation time.

How might China surprise us in 2013? Read the ten predictions of Gordon Orr, a McKinsey director based in Shanghai, and tell us what you would add.

1. Banks underperform

Mainland banks have undergone a remarkable financial recovery over the past decade, thanks to the sector’s initial recapitalization and China’s rapid economic growth. As the economy slows, however, two issues are of immediate concern: the scale of nonperforming loans left behind after the 2009 economic stimulus and the volume of wealth-management products recently snapped up by retail investors in search of decent returns. The latter may come back to haunt Chinese banks in the same way that structured products plagued Western ones in the early stages of the global financial crisis.

This year could mark the start of a more fundamental transformation that will last several years. Most banks, after all, realize they need to find a different economic and business model, given growth rates that comfortably exceed returns on equity and unsustainable rates of capital consumption. In view of current trends, banks must find 1.3 trillion renminbi ($208 billion) in additional capital over the coming five years.

The challenge, which many banks are ill-equipped to manage, will be to shift from customer-acquisition and “growth at all costs” strategies to more differentiated ones focused on profits. The winners will be institutions that serve the customer well and improve their operational capabilities—among other things, by taking a more robust approach to risk. Complying with decisions of the China Banking Regulatory Commission, for example, must become a much more strategic exercise in future.

2. Pork or chicken prices rise 100 percent

China’s domestic food supply has been strained for years. The country consumes 50 percent of all pork globally, and rising demand for protein, especially pork, is pushing the system beyond its limits. In July 2011, pork prices surged 57 percent for a number of reasons, including the steady exit of swine farmers from the market beginning in 2010 and an outbreak of disease among pigs in late 2010 and early 2011. That could easily happen again, and on a much larger scale, because of failures in farms or in the extremely rudimentary cold supply chain. Imports could not increase on a scale sufficient to fill the gap. The psychological scars from recent food-safety scandals could lead to panic hoarding of substitute products and drive up their prices, too. Although a better food chain will develop over time, this may take several years.

3. Local protests intensify—and succeed more often

In June 2007, local protesters successfully forced the authorities to withdraw plans to build a chemical plant in Xiamen. Since then, a growing number of planned incineration and chemical projects have been withdrawn, postponed, or modified following protests, whose number doubled in the second half of 2012. A “not in my backyard” mentality is becoming common. Since there is no formal process for legitimizing proposed investments in a community, people are willing to protest noisily for an extended period, harnessing the power of social media. They realize that the government has little choice but to intervene with force or to compromise or back down.

In 2013, local protests against both new construction of polluting facilities and the operation of existing ones are likely to intensify. The fear of further damage to health and the environment will increasingly trump the desire for economic growth. Local governments will back down more often.

4. China spends more on infrastructure

Beijing’s airport welcomed more than 80 million passengers last year, and China has the world’s largest network of toll roads and high-speed trains, as well as six of the ten busiest container ports. Yet the high cost of logistics is just one indicator that China needs to build a much more extensive transport infrastructure. Many in government not only recognize this reality but also believe profoundly that it is better to build sooner rather than later.

China lags furthest behind other nations in the number of airports with paved runways: the world’s most populous country has 452 airports, Brazil 713 and the United States 5,194. Forty-four Chinese cities with more than a million people still have no mass-transit system other than buses. The supply chain for agricultural products remains rudimentary.

Most significantly, much of the urban population in all but the top-tier cities lacks modern accommodations, and the rehousing of China’s existing urban residents is considerably less than half complete. The scale of the construction task is all the greater, since many of the residential buildings China put up in the 1980s were of relatively poor quality and will reach the end of their useful lives much sooner than might have been expected at the time.

Manufacturing investment will be strong this year. Capital-intensive Chinese manufacturing continues to earn good returns, and investment in technology across all sectors is boosting productivity, although this is perhaps not such good news for employment.

Infrastructure spending will continue to drive economic growth in 2013, and the vast majority of it will be put to good use. Yet the capital efficiency of many projects lags behind that of global leaders.

5. Online competition bankrupts a major main-street retailer

Online competition has yet to put major retailers in China out of business. Historically, economic growth has been sufficient to support all players, but that is about to change. In third- and fourth-tier Chinese cities, where modern retailing still isn’t well established, online retailers have the biggest edge in product range and prices. But thanks to low-cost distribution and very small markups on consumer-electronics products such as mobile phones, China’s e-retailers are increasingly penetrating “time poor” middle-income households in all cities. The appeal of these players lies not just in low prices but also in convenient home delivery, a trusted payment system, and the ability to return goods quickly and without administrative barriers. Physical retailers are moving online as fast as they can, but for most of them this is a very different business model and one that requires execution skills and a sophisticated online presence they currently lack.

The scale of the Alibaba companies—with $150 billion-plus 2012 sales, up by more than 60 percent—is overwhelming. This year will represent a tipping point for growth in the share of online sales of clothes and electronics. Many Chinese physical retailers, as owners of their own real estate and part of broader conglomerates, may be able to hide their underperformance for a while. But further exits from China by multinationals (following the path of Home Depot, Mattel, and OBI) seem likely.

6. Even the middle classes hedge their bets

It has long been common knowledge that many of the offspring of China’s leaders study outside the country. More and more upwardly mobile people are now following suit. In the past four years, the number of Chinese students applying to boarding schools in the United Kingdom and the United States appears to have tripled; many of these institutions could fill their classes entirely with students from mainland China. Parents are not motivated only by a desire to give their children an alternative to the rote learning that still characterizes much of Chinese education; they are also creating additional options for their children should there be a discontinuity in China.

Private-business owners have an opportunity to give themselves such options by making international investments and acquisitions outside China. With permanent residence on offer in countries such as Australia, Canada, and Singapore in return for an investment of up to a few million dollars, many are taking advantage. Vancouver, in particular, has had a new influx of the kind it experienced from Hong Kong in 1997. Individuals may have fewer options for diversifying their asset base outside the country, but buying real estate is one of them: by some reckonings, the Chinese are now the second-largest acquirers of luxury property in London. Like other forms of “groupthink,” this wave will probably get a lot larger before it subsides.

7. European soccer teams invest in the Chinese Super League

The government-owned Chinese Super League of soccer became a lot more glamorous last year when the star player Didier Drogba joined Nicolas Anelka at Shanghai Shenhua, an ambitious but underperforming team. Yet the Chinese Super League will never fulfill its potential until fans have confidence that the games are clean and that coaches and players are improving. In many other (generally Olympic) sports, China has imported the best coaches and operating models. But not in soccer.

A new leadership intends to privatize the Chinese Super League and welcome international investment as part of an ongoing program of reform. This will allow team owners to develop and retain the full range of revenue streams at a modern sports club’s disposal. International teams from many European countries will invest in leading Chinese teams and rotate players between Europe and China.

8. Investment in overseas agriculture is the “next big thing”

In China, a trend that starts as a trickle often becomes an overnight flood. Outbound investment in commodities and premium agricultural products, for instance, will reach a tipping point in 2013: China has shifted rapidly from a trade balance on agricultural goods to a deficit that’s currently around $40 billion and growing at 50 percent a year. This transformation reflects increased demand in China for basic cereals to feed its expanding livestock populations and a slow-to-restructure domestic industry that can’t supply the need. China is now the second-largest importer of rice and barley and a top-ten buyer of corn. Chinese companies lease hundreds of thousands of hectares from Argentina to Kazakhstan to grow soybeans.

Outbound investors also eye a growing opportunity for premium fruits and vegetables of the kind sorely lacking in China. I don’t mean only state-owned enterprises spending their spare cash. Many private Chinese entrepreneurs, who have been wildly successful in areas from real estate to technology, have identified the food chain as their next big thing. Investing outside rather than inside China is attractive not only for the reasons already mentioned but also to diversify assets geographically and to avoid the high prices paid recently for assets in the domestic food chain. In the last few months, for example, the Shanghai Zhongfu Group diversified from real estate in Shanghai by investing around $728 million in a sugar-cane project in Western Australia. And at a major conference in Beijing in December, Chinese private-equity firms met with senior executives of US food companies and representatives of US state agricultural bureaus to discuss ways of increasing China’s investment in US agriculture.

9. A third-tier city goes bankrupt

Chinese cities still depend on land sales—in many cases, for 30 percent of gross revenue and, in some, for more than 50 percent. However, the supply of attractively located land for sale to developers is not inexhaustible. Some cities, especially those located in areas where manufacturing is in decline, now find that land values are on the slide. The financing vehicles these cities have been using to build projects will no longer work. Recent cases of trust companies bailing out troubled local real-estate concerns represent warning signals that municipalities are in difficulty. Without a bailout from the central government, they will no longer be able to meet their bills. Continuing to roll over loans to state-owned enterprises just pushes the problem a short way into the future.

10. National holiday weeks are abolished (please)

Perhaps this is more a hope than an expectation. Fifteen years ago, when the current structure of mandated vacation weeks was put in place, China’s economy was very different. There was a real belief that, without mandated vacations, most workers would never get a holiday or have an opportunity to spend the income they were saving. Yes, many hundreds of millions did travel during the Chinese New Year period, but far fewer people had migrated from their home towns to new urban environments than have done so today, and far fewer could afford to travel. In this respect, China was not that different from those European countries that mandated vacation weeks in the 1970s.

Today, these compulsory holiday weeks merely serve to saturate and overload the country’s infrastructure—if anything, reducing the amount of money that people spend on travel and related services as more and more choose to stay at home. The growing middle classes can schedule their own vacations when they want to much more readily than they could in the past. Formerly, large numbers of state-owned and private-sector enterprises did not meet the legal requirements for vacations. But in the age of social media, even factory workers can now name and shame offending employers.

Mandated vacation weeks will either gradually decline into irrelevance—starting in first-tier cities—or, better still, they will be formally abolished as an idea that has outlived its purpose.

Printed with permission from McKinsey Quarterly.

Investing in growth: Europe’s next challenge

Although the decline in Europe’s level of private investment from 2007 to 2011 is rarely highlighted as a feature of the region’s financial crisis, it was unprecedented. In fact, during that period, private investment in the European Union’s 27 member states (the EU-27) plunged by a combined total of €354 billion—20 and 4 times the fall in private consumption and real GDP, respectively.

Investment in European Union

Research by the McKinsey Global Institute (MGI) finds that while private investment was the hardest-hit component of GDP, it is also vital for recovery. Even in the face of weak demand and high uncertainty, some investors would start spending again if governments took bold measures to remove barriers that now stand in the way. And companies need not rely exclusively on regulatory changes to take a more fine-grained look at their own investment approaches.

In the past, private consumption has been the driving force behind most economic recoveries. But high rates of unemployment and personal debt have made consumers cautious about spending. Governments are feeling the weight of large debts and pressure to deleverage, so they cannot fill Europe’s private-investment hole themselves by investing or consuming. And while exports have played a significant role in the recovery thus far, they now face headwinds, not least because Europe is its own biggest export market and its overall growth has been anemic.

In contrast, publicly traded European companies had excess cash holdings of €750 billion in 2011, close to their highest real level in two decades. By removing regulatory barriers, European governments could, at a relatively low cost, unlock short-term private investment that would contribute to growth—and inspire confidence in firms that have hesitated to launch their own dormant investment plans.

Skeptics might argue that governments can make a difference only at the margins of the private sector’s investment decisions. But the largest investment potential for private companies lies in capital-intensive sectors such as energy and transportation, where government policy has a significant impact. MGI’s latest research finds that closing only 10 percent of the current subsector variation between countries in capital stock per worker would involve more than €360 billion in additional investment—more than what was lost during the financial crisis.

Such government intervention has a poor track record. “Picking winners” has too often been ineffective and a drain on public money. Instead, governments should consider a new policy for investment: prioritizing sectors in which it is most likely to help renew GDP growth, identifying barriers in those sectors, executing cost–benefit analyses, and building the skills necessary to implement these new policies effectively.

Regulatory change often involves difficult, time-consuming political trade-offs, so businesses looking to invest shouldn’t rely exclusively on regulatory changes, however great the imperative and opportunity. Companies need to examine their own approaches to investment. That might mean taking a more granular perspective on market opportunities (for example, by focusing on “micromarkets,” at the city rather than country level), engineering a step change in capital productivity, or ensuring that the bitter experience of recent years does not screen out potentially attractive opportunities by creating a bias against risk.

Download the entire report.

The global gender agenda

Women continue to be underrepresented at senior-management levels in Asia, Europe, and North America. McKinsey research suggests some answers.

The progress of women toward the upper echelons of business, government, and academia continues to provoke media attention and lively debate. Look, for instance, at the coverage of Marissa Mayer’s July appointment as CEO of Yahoo! and the diverse reactions to an article (“Why women still can’t have it all”) published in the July/August issue of the Atlantic magazine.

Coincidentally, this summer also marked the moment when we released the latest phase of a global research initiative on women in senior management across Asia, Europe, and North America. This effort involved assembling fresh data on the gender composition of boards, executive committees, and talent pipelines, as well as detailed surveys of leading businesses in each region.

Encouragingly, the research shows that a growing number of women, both in senior roles and among the rank and file, are finding their voices and inspiring others to achieve progress. It also demonstrates that more companies are enjoying the benefits of gender diversity and that some have found ways to boost the representation of women at the highest levels of their organizations. From an admittedly low base, for instance, more women sit on European corporate boards (though not executive committees) than did so five years ago. Countries with a clear political commitment to change, in the form of specific quotas or targets, are achieving significant results. Several major corporations are emerging as inspirational role models.

Yet while the vast majority of organizations in developed economies are striving to unlock the potential of women in the workforce, many executives remain frustrated that they have not made more immediate and substantial progress. Firmly entrenched barriers continue to hinder the progress of high-potential women: many of those who start out with high ambitions, for instance, leave for greener pastures, settle for less demanding staff roles, or simply opt out of the workforce. In Asia, cultural attitudes toward child care and household tasks further complicate the challenges for corporate pioneers. And everywhere we look, despite numerous gender diversity initiatives, too few women reach the executive committee, and too few boards have more than a token number of women.

Our research also offered some clues about the characteristics of companies that make the greatest advances in gender diversity. Much depends on the stage of the journey companies have reached. The regional and cultural context matters, too. Still, we were struck by the global applicability of some core principles. Across geographies, we find that a wholly committed senior leadership, active talent management, and more effective efforts to shift mind-sets and change behavior can transform the gender agenda (see sidebar, ‘We’re at a tipping point’).

Global challenges

Women hold 15 percent of the seats on corporate boards and 14 percent of those on executive committees in the United States; 16 percent and 3 percent, respectively, in Germany; 20 percent and 8 percent, respectively, in France; and less than 10 percent on both boards and executive committees in China, India, and Japan. In Scandinavia, the numbers are higher: Norway’s representation is currently at 35 percent and 15 percent, respectively; Sweden’s at 25 percent and 21 percent, respectively.

The representation of women in all regions, moreover, diminishes markedly at each higher management level. Some female executives, of course, leak out of the talent pipeline because they are headed for other or better jobs; others voluntarily draw back from promotions as part of conscious work–life decisions. But a significant number run into a succession of seemingly immovable barriers at key career intersections.

We have long noted the combination of structural obstacles, lifestyle choices, and institutional and individual mind-sets that hinder the advancement of women. But only recently have we started to understand how deeply entwined they are. Men and women tend to be evenly distributed across line and staff roles early in their careers, for example, but women begin a steady and disproportionate shift into staff roles by the time they reach the director level. Lacking the sorts of networks that come more easily to men, many women miss out on discussions with sponsors who might encourage them to stay in the line. Line jobs tend to involve more pressure and less flexibility—less appealing to women forming families or opting for greater control over their lives. Some male executives, with good intent, do not even ask mothers to consider line assignments that involve travel and long hours.

Natural advantages or disadvantages do characterize some sectors, but the situation varies markedly even within them, and contradictions abound. In European financial services, for instance, the rate of attrition is particularly severe by the time women reach middle management. In contrast, our research indicated that some of the top US gender diversity performers were in financial services.

Finally, Asia stands out. The relatively low overall rate of female labor force participation in many Asian countries—though not all of them, for China is a notable exception—means that it is harder to fill the pipeline at the outset. Next, the double burden of Asia’s working women, who must juggle families and jobs, is not only reinforced by cultural factors but also compounded by a lack of government support in areas such as childcare. In many markets, women wait until their children are older before returning to work or (in Taiwan, for example) drop out in their late 20s never to return. Exacerbating matters in much of Asia is an absence of urgency to change the equation. In our recent survey of the region’s senior executives, just 30 percent of respondents said that gender diversity was currently a top priority for their corporations, and only a third saw it as being one of the top ten priorities on the corporate agenda in coming years.

From good to great

These challenges persist at a time when many companies, particularly in North America and Europe, are pursuing an arsenal of measures aimed at easing women’s progress through the organization. Such measures include efforts to make appraisals objective and unbiased; the adoption of diversity targets; greater flexibility in remote working; smoother transitions before, during, and after maternity leave; and executive coaching for high-potential vice presidents. Of the 235 European companies we surveyed recently, for instance, more than 60 percent told us they have at least 20 gender diversity initiatives in place.

Motivations vary. A number of studies find a correlation between high-performing companies and those with strong female representation at the top,3 though correlation does not prove causality. Many CEOs are convinced that mixed boards and mixed executive teams perform better than those dominated by men. As one corporate leader put it, just about every company wants to “get the best brains to work on the problem.” That said, successfully transforming gender attitudes and performance requires much greater leadership attention and dedication than even committed CEOs and top teams are currently giving to it. These goals also call for integrated management and monitoring of women in the talent pipeline from early on to the point when they become eligible to join the C-suite and for intervention to shift widely held beliefs holding back talented women.

Leadership ‘obsession’

Every major cultural, operational, or strategic change in a business requires personal passion, “skin in the game,” and role modeling from senior leaders, and gender diversity is no exception. When a CEO is the chief advocate and “storyteller,” more people (including the often less committed male middle managers) believe that the story matters and begin to adopt the CEO’s mind-set and behavior. Intensely committed CEOs make their goals clear and specific, tell everyone about them, get other leaders involved, and manage talent to help make things happen. CEOs who do not see gender diversity as a top issue fold “gender” into “diversity” and “diversity” into “talent,” thereby losing focus as leadership of initiatives is delegated to others further down the line. CEOs who champion gender diversity, for example, participate in women’s events and multiday talent discussions; less committed CEOs introduce them and leave, inadvertently signaling that other priorities take precedence.

In Europe, many executives tell us that the momentum for change took hold only when the top team made its commitment visible—for example, by appointing women to senior positions or taking measures to ensure that they were considered for certain jobs. Sponsorship is (and always has been) a critical part of an executive’s path to the top. HR leaders tell us that these relationships are hard to institutionalize and that formal programs have mixed success. But we find it significant that one company did much better when the CEO and the diversity leader personally took charge of the sponsorship program, selected a group of high-potential women, and invited them to spend significant time with the top team. Women in the program really got to know the CEO and senior-team members, and vice versa, and most have since moved up the management ladder.

Managing—and cultivating—the pipeline

McKinsey’s more general work on transforming the performance of companies shows that those with a clear understanding of their starting point are more than twice as likely to succeed as those that are less well prepared.4 In a gender diversity context, this understanding means knowing the gender balance at every level of the organization; comprehending the numbers by level, function, business unit, and region; and then monitoring metrics such as pay levels, attrition rates, reasons women drop out, and the ratio between women promoted and women eligible for promotion.

Why go to this expense? Establishing the facts is the first step toward awareness, understanding, and dedication to improvement. Using a diagnostic tool, one company simulated how much hiring, promoting, and retaining of women it would require to increase the number of senior women managers. That approach helped it set an achievable and, just as important, sustainable target that would not compromise a highly meritocratic corporate culture. With an overall target—that 25 percent of managing directors and directors should be women by 2018—and a clear understanding that the bar for promotion could not be lowered, managers now look harder for high-potential women and start working with them earlier to develop that potential.

Incentives tied to managers’ bonuses can help, though some companies fear that targets may undermine the credibility of women at the top. Those in favor of such targets believe that a radical mandate is required for substantial change and worth the backlash from women who ascended “the hard way.” Where targets are rejected, other mechanisms “with teeth” are necessary—almost all the top US performers on gender diversity have goals, if not targets. In Europe, we identified a gap between the measures companies now have in place and how carefully these companies apply and monitor them. Some have targets for women in senior positions, for example, but no plans for implementation; others have targets and plans but fail to communicate them. Companies with cultures inimical to top-down diktats should consider adopting a regular report that candidly evaluates progress and prompts senior management to brainstorm for new ideas.

Shifting mind-sets and behavior

Leaders with the best of intentions may still fall short unless they can change the way they and their organizations think. So if, for example, the prevailing view is that truly committed executives work 24/7 and travel at the drop of a hat, many talented women will turn their backs on further advancement. Such prevailing attitudes are hard to shift: in our experience, that can be done only by role models who challenge them through their actions and by a learning environment that cultivates self-awareness. More women at the top should help, though of course women can be as responsible as men for promoting a culture of nonstop work.

The top performers on gender diversity value and promote inclusiveness. Their leaders firmly believe that mutual respect drives better customer service and hence sales. When such beliefs take hold, they are powerful. One global cosmetics company we know, which operates in 88 countries and has a customer base that’s 90 percent female, now cites gender diversity as one of its key strengths. Another consumer-based business, headquartered in Europe, makes mostly products for men but learned through research that women usually make the buying decision. Increasingly, the company looks to female employees to refine its marketing and product-development approach.

Certain institutional biases are subtle—for example, a reluctance on the part of men to give women the tough feedback everyone needs on their way to the top. Many men, fearing that sponsoring women might seem inappropriate, find it difficult to do so. Most people feel more comfortable promoting those who behave and think as they do. A willingness to question can make a difference. When one company discovered, through an audit of its recruiting processes, that recruiters were more critical of female than male candidates, it devised a training course for the critics. One of them was asked to lead a session and has since become among the company’s most vocal supporters of diversity and inclusion.

The mind-sets—and aspirations—of women themselves are as important as those of the companies that employ them. Interviews with 200 successful middle-management and more senior women in 60 large companies across the United States highlighted some common threads: early career acceleration coupled with significant sponsorship, a willingness to change employers to gain greater opportunities, and a propensity to stay in line jobs for much of their advancement. These women remained optimistic even in the face of significant challenges.

Early-tenure women want to move to the next level as much as men do. Yet we found that only 18 percent of entry- and midlevel women have a long-term eye on the C suite, against 36 percent of men. That finding reinforces our belief that inspirational leaders should intervene with talented female middle managers to discuss their aspirations, build their confidence, embolden them to aim higher, and seek ways to make line roles more palatable for them. In particular, we would emphasize the need for women’s leadership-development programs to focus on personal mastery of thoughts, feelings, and actions and thus to make women accountable for their own future.5 In the average Fortune 500 company, a 10 percent boost in the odds that women will advance from manager to director and then to vice president would yield an additional 90 female executives, including five senior vice presidents and one member of the executive committee.

Four priorities for committed leaders

The widespread applicability of the principles above suggests a short list of actions that should be on every committed leader’s priority list:

1. Treat gender diversity like any other strategic business initiative, with a goal and a plan that your company monitors and follows up at the highest levels over many years. Build in a “report or explain” process and articulate a well-supported point of view on the value women bring to your organization and the case for or against explicit targets. If greater representation of women in the talent pipeline promises a competitive advantage, successful leaders will work hard to include them. If greater female representation better serves the company’s customers, those leaders will make that happen.

2. Ask for—and talk about—the data, sliced and diced to identify ‘pain points’ in the pipeline by business, geography, and function. Go well beyond measuring success by the number of women at the top. Discuss the percentage of talented women at each stage of the pipeline, their odds of advancement versus men’s, and the mix of women between line and staff jobs compared with that of their male counterparts. Make sure your entire top team and those who report to its members are accountable for the numbers, and brainstorm about what it will take to improve them.

3. Establish a culture of sponsorship, encouraging each top executive to sponsor two to three future leaders, including women. Instill a mind-set of “paying it forward,” so that every woman sponsored will in turn sponsor two or three others. Embed effective sponsorship of women into the profile of successful leaders at your company and raise the issue in performance dialogues with your own direct reports. Show your wider commitment by talking with top female talent when you visit regional divisions and business units or participate in external events.

4. Raise awareness of what a diverse work environment looks like, celebrating successes to reinforce the mind-set shifts you desire. Use frequent personal blogs, top-team meetings, and town hall gatherings to communicate what you are doing to drive change. To increase awareness of the new mind-sets, question your own personnel choices, and think about whom you tend to work with and why. Top executives who work hard to encourage diversity of thought across a company will increase everyone’s determination to bring the best to work—ending up not only with what they set out to achieve but with even more: an engaged community that corrects itself when things go off track.

A wide range of global companies made real advances in gender diversity over the past five years. They know that this is hard work—a journey measured in years rather than months. But they also know that improving the pipeline of female talent is possible, with rewards that include tapping the best brains, improving customer service, increasing employee engagement, and everything that comes with these benefits.

Linking jobs and education in the Arab world

The region’s future prosperity depends on its youth. Governments must ensure that young people have the right skills for the jobs being created.

The Arab world is experiencing unprecedented turmoil. Any evaluation of its root causes would include unemployment for youth between the ages of 15 and 24. More than 25 percent of youth in the Middle East are unemployed, the highest such rate in the world, while North Africa reports about 24 percent. Unemployment among young females is even higher, reaching and exceeding 30 percent across the region.

There is wide recognition that if nothing is done, unemployment levels are likely to rise further as a result of a demographic bubble: about one-third of the population is below age 15. As a result, millions of young people will enter the region’s workforce over the next ten years.

So far, the region’s governments haven’t focused sufficiently on a vital component of the employment picture: how to ensure that the region’s young people have the right skills for the jobs being created. To do so, it will be necessary to orient education directly to work opportunities—full- or part-time or even self-employment. There is even less focus on how to encourage the private sector (both employers and education providers) to play a role complementary to that of the government in addressing the region’s pressing needs. A new report based on research by McKinsey,Education for employment: Realizing Arab youth potential, highlights the dramatic gaps in education and employment across the region and provides a private sector–based road map for closing them. The report was commissioned by the International Finance Corporation and the Islamic Development Bank. We base our findings on more than 200 interviews with government officials, employers, education providers, investors, and nonprofit organizations in nine countries and on proprietary surveys of 1,500 employers and 1,500 young people in Egypt, Jordan, Morocco, Saudi Arabia, and Yemen.

Elsewhere in the world, the private sector, both education providers and employers, has played a critical role in providing opportunities for young people. Given the right conditions, it can play the same part in the Arab world as well. The report therefore highlights these messages: demand is substantial for private-sector involvement but supply is limited; vocational education and training, private universities, and work-readiness programs are the major categories of private investment opportunities; and several critical enablers of private participation are missing, such as rigorous standards to ensure that students are taught the right skills. Surveyed private employers tell us that only one third of new graduate employees are ready for the workplace when hired. Consequently, more than half of all employers provide substantial training for their new hires, to ensure work readiness. On the other side, only one-third of the surveyed young people believed that their education prepared them adequately for the job market, expressing strong doubts about the quality and relevance of their programs.

The challenge is big, significant, and urgent. Action is required now: unless all stakeholders come together and embark on ambitious plans to address the employment gaps jointly, the Arab world’s young people face potentially dire consequences.

You can download the entire report from here: http://www.e4earabyouth.com/downloads/IFCBook_A4_Online_Complete.pdf

Talent tensions ahead: A CEO briefing

Looming imbalances in global labor pools could make it harder for some companies to find enough skilled workers and for some less-skilled workers to find jobs.

Technological advances, industrialization, and liberalized trade have created a staggering 900 million nonfarm jobs in developing countries since 1980, lifting hundreds of millions of people out of poverty. As global companies have tapped (and helped fuel the growth of) low-cost labor sources, they also have created high-wage jobs for more than 50 million high-skill workers, while boosting productivity in developed and emerging markets alike.

This virtuous cycle appears to be reaching its limits, however, and there is a growing sense that something has gone wrong with the machinery that, for decades, delivered GDP growth, higher productivity, rising wages, and better standards of living. Indeed, new research from the McKinsey Global Institute (MGI) suggests that by 2020, the world could have 40 million too few college-educated workers and that developing economies may face a shortfall of 45 million workers with secondary-school educations and vocational training. In advanced economies, up to 95 million workers could lack the skills needed for employment.

The projected gaps we identified are notional, and global labor markets will adjust in response to them. But their consequences would be serious: higher levels of unemployment (even as companies struggle to fill select vacancies), rising income inequality, and heightened social tensions testing political stability in countries around the world.

Senior executives and policy makers should study these imbalances closely because together they outline where dangers and opportunities will arise, and they provide a framework that business leaders and policy makers can use to guide their decisions. In this article, we’ll look at the most significant labor imbalances by geography and then discuss the moves companies can begin making now to prepare for the talent tensions to come.

A new world for work

To better understand the evolving global labor market, we analyzed 70 countries, representing 87 percent of global population and 96 percent of GDP. Segmenting these countries by educational achievement (a rough proxy for skill), median age, and GDP per capita highlighted clusters of countries sharing similar attributes (Exhibit 1). Using these clusters as a starting-off point, we modeled a “momentum” base case that combines current trajectories in demographics, GDP, educational attainment, and the supply of and demand for labor by skill level, all with the intention of highlighting potential labor imbalances that companies around the world might soon face. Four areas deserve close scrutiny from senior executives.

China’s high-skill gap

In recent decades, China’s industrialization has moved hundreds of millions of workers from farms into urban manufacturing and services. These changes boosted the country’s GDP per capita and productivity, while providing the developed world with a massive source of low-cost labor. More recently, China has expanded beyond its role as “workshop to the world” and become a vital growth market for global companies operating there.

Yet a confluence of factors—including China’s aging population, the rapid growth of the country’s service sectors, and the move into more skill-intensive manufacturing—means that by 2020 the economy will probably need 23 million more college-educated workers than it can supply (Exhibit 2). This gap, equivalent to 16 percent of estimated labor demand, will probably emerge despite massive investments, already made or planned, in education. (China, for example, is already on track to add more than 50 million workers with a college education by 2020.) The implications of the gap are huge, as an adequate supply of highly educated workers will be critical to securing the growth of higher-value-added industries and the productivity gains needed to sustain China’s GDP trajectory, not to mention realizing the growth aspirations of companies around the world.

Boosting the share of college graduates in the labor force would help—it currently stands at 11 percent—but that will be tough. Getting to 17 percent by 2020 would require more than 85 percent of China’s secondary-school graduates to complete a college education, compared with about 50 percent at present.

What’s more, the country already has one of the world’s highest female labor-participation rates, at 82 percent; increasing that level won’t be easy.

India’s missing middle

India is a much younger country than China, and its shift out of agriculture and up the value curve is proceeding more slowly. From 2000 to 2010, India created just enough nonfarm jobs (about 67 million) to keep pace with the growth of its labor force, but not enough to move workers out of agriculture in substantial numbers. Consequently, India faces a unique set of labor market imbalances. In fact, it could be among the few countries with a surplus of highly skilled workers: in our momentum case, 36 million college graduates will join its labor force in the coming decade, about 6 million more than its domestic industries can employ.

Nonetheless, the share of India’s working-age population with a secondary education is less than half that of China and many other developing economies. Further, India’s relatively low secondary-school graduation rate could mean a shortage of medium-skill workers, such as plumbers and welders, to fill the jobs created by the country’s burgeoning construction, manufacturing, retail- and wholesale-trade, and service sectors. All told, we project a gap in medium-skill workers of 13 million, or about 10 percent of demand in 2020 (Exhibit 3). India already faces a shortage of medium-skill workers, a fact reflected in high wage growth for vocationally trained people in sectors such as construction and mining.

Finally, if current population and education trends persist, India could have 27 million too many low-skill workers by 2020. This growing surplus of low-skill workers implies adverse social outcomes: millions of people trapped in low-productivity, low-income jobs. India would need an unprecedented increase in job creation and education levels (including vocational education) to address these labor market challenges.

From surplus to shortage

As China’s labor force growth slows in coming decades, the young developing countries we studied, a group that includes Bangladesh, Kenya, Morocco, and Nigeria,3 will contribute about one-third of the growth in the global labor force. Today, these countries have ample numbers of college-educated workers—often more than their industries are ready to employ. In North African countries, for example, unemployment among highly educated workers is 20 percent, which is worse than the 8 percent rate for workers with only a primary education. (This difference reflects the fact that lower-skill workers engage in subsistence activities to survive in the absence of social safety nets.)

The labor surplus many of these countries have won’t last forever, because their economies are growing much faster than those of the developed world and represent important markets for multinational companies. African countries, in particular, have garnered significant attention in recent years as destinations for investment, and new research from MGI finds the continent has large untapped job potential in agriculture, manufacturing, and the retail and hospitality industries.4

Nonetheless, if current growth, population, and education trends persist, we conservatively project that the countries of sub-Saharan Africa and South Asia (excluding India) could have a shortage of 31 million workers with a secondary education by 2030 (Exhibit 4). Furthermore, young developing countries will need to find work for about 30 million low-skill workers with no education or only primary schooling. By 2020, the surpluses will represent 14 percent of the supply of such workers in these countries.

Addressing such imbalances will require young developing economies to more than double the growth of educational attainment and to raise their secondary-enrollment and -completion rates.

High-skill shortage, low-skill surplus

Advanced economies, including those in Europe and North America, face daunting challenges, too. Trends in educational attainment and projected employment needs indicate that employers there will require 16 million to 18 million more college-educated workers than will be available in 2020, a gap representing 11 percent of demand.

The skill gap will be widest in Southern Europe, where educational attainment is lowest and populations are relatively old. These countries could have 3.5 million too few college graduates in 2020. Other advanced economies with high median ages—such as Germany—could face a shortage of college-educated workers equivalent to 10 to 11 percent of demand, despite relatively high college completion rates. In the United States, a demographically younger economy, the gaps will be less severe: perhaps 1.5 million too few workers with college or graduate degrees by 2020.

Meanwhile, the advanced economies are likely to face an excess supply of low- and medium-skill workers. Our analysis of demand patterns indicates that in 2020, there could be 32 million to 35 million more workers without post secondary education than employers will need—a surplus equivalent to 10 percent of the supply of these workers. That surplus implies a range of adverse social and economic outcomes: higher unemployment rates (even during periods of economic expansion), rising numbers of discouraged workers who opt out of the labor force permanently, and more workers forced to accept marginal jobs, resulting in downward pressure on wages.

The oversupply of low-skill labor will be most acute where educational attainment is lowest. Current demand trends suggest that in 2020, as many as 16 percent of Southern Europe’s roughly 50 million workers without a post secondary education could be unable to find employment.

Bridging the high-skill-worker gap would require raising young people’s rate of college completion by 2.5 times the historical rate of increase, and simultaneously raising participation rates of college-educated women and older workers at over twice the historical rate of increase. Even this won’t suffice to deal with the surplus of low-skill workers: the rate of job creation for them would need to be at least five times higher than it was in the past to create enough job opportunities.

What business can do

As we’ve said, labor markets are dynamic: wages will adjust in the face of imbalances; workers will relocate; and the nature of work itself will continue to evolve. Technology has a critical role to play—both helping workers perform higher-skill jobs than they otherwise could and serving as a powerful aggregator of skills. (Consider how 20,000 low-skill workers in southern India are using smartcards, mobile phones, and kiosks to disburse microloans or how Amazon’s Internet marketplace, Mechanical Turk, enables businesses to outsource simple tasks, such as writing product descriptions.)

The uneven distribution of skills and needs means that business leaders must develop a finer-grained view of shifting labor dynamics. By anticipating trends in education, aging, and incomes, executives can better tune their recruitment, offshoring, and investment strategies. In addition to sizing pools of appropriately skilled workers, companies will need to assess the quality of educational systems and the market forces that determine—often at the level of individual cities—the wage differentials among employees.

And then companies will need to take action. For those competing at the high end of the labor market, a deficit of high-skill workers implies an intensifying global war for talent. Companies worried about losing the skills and institutional knowledge of older employees as they retire may need to provide them with more flexible options. In Japan, for example, Toyota Motor aggressively recruits among its retiring employees to bring workers back in half-time roles at the company or its affiliates.

Of course, business leaders will be establishing their labor strategies in an environment set by policy makers, who should focus on raising the output of educational systems and eliminating barriers to creating jobs for less-skilled workers. Looming labor market tensions suggest it would be unwise to take that context for granted. Particularly in high-demand STEM (science, technology, engineering, and math) disciplines, companies can play a larger role in shaping the educational content of colleges. The Great Minds in STEM initiative, for example, is committed to increasing attainment in these subjects among Hispanic students through an extensive community and school outreach program facilitated by corporate partners such as Boeing, Lockheed Martin, and Northrup Grumman. Some companies may even want to participate directly in the large and fast-growing market for education and training.

Companies also can influence the context by focusing their corporate-social-responsibility efforts on youth unemployment and helping to bring the long-term unemployed back into the workforce. Beverage-maker Diageo, for instance, set up Tomorrow’s People, a UK-based charity that has helped more than 400,000 of the long-term unemployed find jobs, education, or training. Three-quarters of the people it helps to place remain employed after a year. Diageo supported the charity, now an independent entity, with operational and financial help, as well as access to jobs in businesses it owns.

By taking decisive action now, companies and policy makers can help ensure that over the next two decades a growing global labor market continues to provide the opportunities and benefits it did over the past 30 years. Companies would continue to access the talent they need to sustain growth and create opportunities. Workers, in advanced and developing economies alike, would enjoy clearer paths out of poverty, along with improved—and improving—living standards.

Printed with permission from McKinsey Global Institute

A CEO’s guide to innovation in China

Dynamic domestic players and focused multinationals are helping China churn out a growing number of innovative products and services. Intensifying competition lies ahead; here’s a road map for navigating it.

China is innovating. Some of its achievements are visible: a doubling of the global percentage of patents granted to Chinese inventors since 2005, for example, and the growing role of Chinese companies in the wind- and solar-power industries. Other developments—such as advances by local companies in domestically oriented consumer electronics, instant messaging, and online gaming—may well be escaping the notice of executives who aren’t on the ground in China.

As innovation gains steam there, the stakes are rising for domestic and multinational companies alike. Prowess in innovation will not only become an increasingly important differentiator inside China but should also yield ideas and products that become serious competitors on the international stage.

Chinese companies and multinationals bring different strengths and weaknesses to this competition. The Chinese have traditionally had a bias toward innovation through commercialization—they are more comfortable than many Western companies are with putting a new product or service into the market quickly and improving its performance through subsequent generations. It is common for products to launch in a fraction of the time that it would take in more developed markets. While the quality of these early versions may be variable, subsequent ones improve rapidly.1

Chinese companies also benefit from their government’s emphasis on indigenous innovation, underlined in the latest five-year plan. Chinese authorities view innovation as critical both to the domestic economy’s long-term health and to the global competitiveness of Chinese companies. China has already created the seeds of 22 Silicon Valley–like innovation hubs within the life sciences and biotech industries. In semiconductors, the government has been consolidating innovation clusters to create centers of manufacturing excellence.

But progress isn’t uniform across industries, and innovation capabilities vary significantly: several basic skills are at best nascent within a typical Chinese enterprise. Pain points include an absence of advanced techniques for understanding—analytically, not just intuitively—what customers really want, corporate cultures that don’t support risk taking, and a scarcity of the sort of internal collaboration that’s essential for developing new ideas.

Multinationals are far stronger in these areas but face other challenges, such as high attrition among talented Chinese nationals that can slow efforts to create local innovation centers. Indeed, the contrasting capabilities of domestic and multinational players, along with the still-unsettled state of intellectual-property protection (see sidebar, “Improving the patent process”), create the potential for topsy-turvy competition, creative partnerships, and rapid change. This article seeks to lay out the current landscape for would-be innovators and to describe some of the priorities for domestic and multinational companies that hope to thrive in it.

China’s innovation landscape

Considerable innovation is occurring in China in both the business-to-consumer and business-to-business sectors. Although breakthroughs in either space generally go unrecognized by the broader global public, many multinational B2B competitors are acutely aware of the innovative strides the Chinese are making in sectors such as communications equipment and alternative energy. Interestingly, even as multinationals struggle to cope with Chinese innovation in some areas, they seem to be holding their own in others.

The business-to-consumer visibility gap

When European and US consumers think about what China makes, they reflexively turn to basic items such as textiles and toys, not necessarily the most innovative products and rarely associated with brand names.

In fact, though, much product innovation in China stays there. A visit to a shop of the Suning Appliance chain, the large Chinese consumer electronics retailer, is telling. There, you might find an Android-enabled television complete with an integrated Internet-browsing capability and preloaded apps that take users straight to some of the most popular Chinese Web sites and digital movie-streaming services. Even the picture quality and industrial design are comparable to those of high-end televisions from South Korean competitors.

We observe the same home-grown innovation in business models. Look, for example, at the online sector, especially Tencent’s QQ instant-messaging service and the Sina Corporation’s microblog, Weibo. These models, unique to China, are generating revenue and growing in ways that have not been duplicated anywhere in the world. QQ’s low, flat-rate pricing and active marketplace for online games generate tremendous value from hundreds of millions of Chinese users.

What’s keeping innovative products and business models confined to China? In general, its market is so large that domestic companies have little incentive to adapt successful products for sale abroad. In many cases, the skills and capabilities of these companies are oriented toward the domestic market, so even if they want to expand globally, they face high hurdles. Many senior executives, for example, are uncomfortable doing business outside their own geography and language. Furthermore, the success of many Chinese models depends on local resources—for example, lower-cost labor, inexpensive land, and access to capital or intellectual property—that are difficult to replicate elsewhere. Take the case of mobile handsets: most Chinese manufacturers would be subject to significant intellectual property–driven licensing fees if they sold their products outside China.

Successes in business to business

Several Chinese B2B sectors are establishing a track record of innovation domestically and globally. The Chinese communications equipment industry, for instance, is a peer of developed-world companies in quality. Market acceptance has expanded well beyond the historical presence in emerging markets to include Europe’s most demanding customers, such as France Télécom and Vodafone.

Pharmaceuticals are another area where China has made big strides. In the 1980s and 1990s, the country was a bit player in the discovery of new chemical entities. By the next decade, however, China’s sophistication had grown dramatically. More than 20 chemical compounds discovered and developed in China are currently undergoing clinical trials.

China’s solar- and wind-power industries are also taking center stage. The country will become the world’s largest market for renewable-energy technology, and it already has some of the sector’s biggest companies, providing critical components for the industry globally. Chinese companies not only enjoy scale advantages but also, in the case of solar, use new manufacturing techniques to improve the efficiency of solar panels.

Success in B2B innovation has benefited greatly from friendly government policies, such as establishing market access barriers; influencing the nature of cross-border collaborations by setting intellectual-property requirements in electric vehicles, high-speed trains, and other segments; and creating domestic-purchasing policies that favor Chinese-made goods and services. Many view these policies as loading the dice in favor of Chinese companies, but multinationals should be prepared for their continued enforcement.

Despite recent setbacks, an interesting example of how the Chinese government has moved to build an industry comes from high-speed rail. Before 2004, China’s efforts to develop it had limited success. Since then, a mix of two policies—encouraging technology transfer from multinationals (in return for market access) and a coordinated R&D-investment effort—has helped China Railways’ high-speed trains to dominate the local industry. The multinationals’ revenue in this sector has remained largely unchanged since the early 2000s.

But it is too simplistic to claim that government support is the only reason China has had some B2B success. The strength of the country’s scientific and technical talent is growing, and local companies increasingly bring real capabilities to the table. What’s more, a number of government-supported innovation efforts have not been successful. Some notable examples include attempts to develop an indigenous 3G telecommunications protocol called TDS-CDMA and to replace the global Wi-Fi standard with a China-only Internet security protocol, WAPI.

Advantage, multinationals?

Simultaneously, multinationals have been shaping China’s innovation landscape by leveraging global assets. Consider, for example, the joint venture between General Motors and the Shanghai Automotive Industry Corporation, which adapted a US minivan (Buick’s GL8) for use in the Chinese market and more recently introduced a version developed in China, for China. The model has proved hugely popular among executives.

In fact, the market for vehicles powered by internal-combustion engines remains dominated by multinationals, despite significant incentives and encouragement from the Chinese government, which had hoped that some domestic automakers would emerge as leaders by now. The continued strength of multinationals indicates how hard it is to break through in industries with 40 or 50 years of intellectual capital. Transferring the skills needed to design and manufacture complex engineering systems has proved a significant challenge requiring mentorship, the right culture, and time.

We are seeing the emergence of similar challenges in electric vehicles, where early indications suggest that the balance is swinging toward the multinationals because of superior product quality. By relying less on purely indigenous innovation, China is trying to make sure the electric-vehicle story has an ending different from that of its telecommunications protocol efforts. The government’s stated aspiration of having more than five million plug-in hybrid and battery electric vehicles on the road by 2020 is heavily supported by a mix of extensive subsidies and tax incentives for local companies, combined with strict market access rules for foreign companies and the creation of new revenue pools through government and public fleet-purchase programs. But the subsidies and incentives may not be enough to overcome the technical challenges of learning to build these vehicles, particularly if multinationals decline to invest with local companies.

Four priorities for innovators in China

There’s no magic formula for innovation—and that goes doubly for China, where the challenges and opportunities facing domestic and multinational players are so different. Some of the priorities we describe here, such as instilling a culture of risk taking and learning, are more pressing for Chinese companies. Others, such as retaining local talent, may be harder for multinationals. Collectively, these priorities include some of the critical variables that will influence which companies lead China’s innovation revolution and how far it goes.

Deeply understanding Chinese customers

Alibaba’s Web-based trading platform, Taobao, is a great example of a product that emerged from deep insights into how customers were underserved and their inability to connect with suppliers, as well as a sophisticated understanding of the Chinese banking system. This dominant marketplace enables thousands of Chinese manufacturers to find and transact with potential customers directly. What looks like a straightforward eBay-like trading platform actually embeds numerous significant innovations to support these transactions, such as an ability to facilitate electronic fund transfers and to account for idiosyncrasies in the national banking system. Taobao wouldn’t have happened without Alibaba’s deep, analytically driven understanding of customers.

Few Chinese companies have the systematic ability to develop a deep understanding of customers’ problems. Domestic players have traditionally had a manufacturing-led focus on reapplying existing business models to deliver products for fast-growing markets. These “push” models will find it increasingly hard to unlock pockets of profitable growth. Shifting from delivery to creation requires more local research and development, as well as the nurturing of more market-driven organizations that can combine insights into detailed Chinese customer preferences with a clear sense of how the local business environment is evolving. Requirements include both research techniques relevant to China and people with the experience to draw out actionable customer insights.

Many multinationals have these capabilities, but unless they have been operating in China for some years, they may well lack the domestic-market knowledge or relationships needed to apply them effectively. The solution—building a true domestic Chinese presence rather than an outpost—sounds obvious, but it’s difficult to carry out without commitment from the top. Too many companies fail by using “fly over” management. But some multinationals appear to be investing the necessary resources; for example, we recently met (separately) with top executives of two big industrial companies who were being transferred from the West to run global R&D organizations from Shanghai. The idea is to be closer to Chinese customers and the network of institutions and universities from which multinationals source talent.

Retaining local talent

China’s universities graduate more than 10,000 science PhDs each year, and increasing numbers of Chinese scientists working overseas are returning home. Multinationals in particular are struggling to tap this inflow of researchers and managers. A recent survey by the executive-recruiting firm Heidrick & Struggles found that 77 percent of the senior executives from multinational companies responding say they have difficulty attracting managers in China, while 91 percent regard employee turnover as their top talent challenge.

Retention is more of an issue for multinationals than for domestic companies, but as big foreign players raise their game, so must local ones. Chinese companies, for example, excel at creating a community-like environment to build loyalty to the institution. That helps keep some employees in place when competing offers arise, but it may not always be enough.

Talented Chinese employees increasingly recognize the benefits of being associated with a well-known foreign brand and like the mentorship and training that foreign companies can provide. So multinationals that commit themselves to developing meaningful career paths for Chinese employees should have a chance in the growing fight with their Chinese competitors for R&D talent. Initiatives might include in-house training courses or apprenticeship programs, perhaps with local universities. General Motors sponsors projects in which professors and engineering departments at leading universities research issues of interest to the automaker. That helps it to develop closer relations with the institutions from which it recruits and to train students before they graduate.

Some multinationals energize Chinese engineers by shifting their roles from serving as capacity in a support of existing global programs to contributing significantly to new innovation thrusts, often aimed at the local market. This approach, increasingly common in the pharma industry, may hold lessons for other kinds of multinationals that have established R&D or innovation centers in China in recent years. The keys to success include a clear objective— for instance, will activity support global programs or develop China-for-China innovations?—and a clear plan for attracting and retaining the talent needed to staff such centers. Too often, we visit impressive R&D facilities, stocked with the latest equipment, that are almost empty because staffing them has proved difficult.

Instilling a culture of risk taking

Failure is a required element of innovation, but it isn’t the norm in China, where a culture of obedience and adherence to rules prevails in most companies. Breaking or even bending them is not expected and rarely tolerated. To combat these attitudes, companies must find ways to make initiative taking more acceptable and better rewarded.

One approach we found, in a leading solar company, was to transfer risk from individual innovators to teams. Shared accountability and community support made increased risk taking and experimentation safer. The company has used these “innovation work groups” to develop everything from more efficient battery technology to new manufacturing processes. Team-based approaches also have proved effective for some multinationals trying to stimulate initiative taking.

How fast a culture of innovation takes off varies by industry. We see a much more rapid evolution toward the approach of Western companies in the way Chinese high-tech enterprises learn from their customers and how they apply that learning to create new products made for China. That approach is much less common at state-owned enterprises, since they are held back by hierarchical, benchmark-driven cultures.

Promoting collaboration

One area where multinationals currently have an edge is promoting collaboration and the internal collision of ideas, which can yield surprising new insights and business opportunities. In many Chinese companies, traditional organizational and cultural barriers inhibit such exchanges.

Although a lot of these companies have become more professional and adept at delivering products in large volumes, their ability to scale up an organization that can work collaboratively has not kept pace. Their rigorous, linear processes for bringing new products to market ensure rapid commercialization but create too many hand-offs where insights are lost and trade-offs for efficiency are promoted.

One Chinese consumer electronics company has repeatedly tried to improve the way it innovates. Senior management has called for new ideas and sponsored efforts to create new best-in-class processes, while junior engineers have designed high-quality prototypes. Yet the end result continues to be largely undifferentiated, incremental improvements. The biggest reason appears to be a lack of cross-company collaboration and a reliance on processes designed to build and reinforce scale in manufacturing. In effect, the technical and commercial sides of the business don’t cooperate in a way that would allow some potentially winning ideas to reach the market. As Chinese organizations mature, stories like this one may become rarer.

China hasn’t yet experienced a true innovation revolution. It will need time to evolve from a country of incremental innovation based on technology transfers to one where breakthrough innovation is common. The government will play a powerful role in that process, but ultimately it will be the actions of domestic companies and multinationals that dictate the pace of change—and determine who leads it.

Printed with permission from McKinsey Global Institute

The archipelago economy: Unleashing Indonesia’s potential

Most international businesses and investors know that modern Indonesia boasts a substantial population and a wealth of natural resources. But far fewer understand how rapidly the nation is growing. Home to the world’s 16th-largest economy, Indonesia is booming thanks largely to a combination of domestic consumption and productivity growth. By 2030, the country could have the world’s 7th-largest economy, overtaking Germany and the United Kingdom. But to meet its ambitious growth targets and attract international investment, it must do more.

Indonesia has an attractive value proposition. Over the past 20 years, labor productivity improvements, largely from specific sectors rather than a general shift out of agriculture, have accounted for more than 60 percent of the country’s economic growth. Productivity and employment have risen in tandem in 35 of the past 51 years. And unlike typical Asian “tiger” economies, Indonesia’s has grown as a result of consumption, not exports and manufacturing. The archipelago nation is also urbanizing rapidly, boosting incomes. By 2030, Indonesia will have added 90 million people to its consuming class—more than any other country except China and India.

Nevertheless, to meet the government’s goal of 7 percent a year growth by 2030, the economy must grow faster. Given current trends, the McKinsey Global Institute estimates that Indonesia has to boost productivity growth to 4.6 percent a year—60 percent higher than it has been during the past decade. Amid rising concern about inequality, the country must also ensure that growth is inclusive and manage the strains that the rapidly expanding consumer classes will place on its infrastructure and resources.

Of course, Indonesia should tackle well-known problems such as excessive bureaucracy and corruption, access to capital, and infrastructure bottlenecks. But in addition it must address its impending skills gap; the country could, for example, develop a private-education market that might quadruple, to $40 billion, by 2030. If at the same time Indonesia took action in the three key sectors below, it could create a $1.8 trillion private-sector business opportunity by 2030:

  • Consumer services. Indonesia faces a range of challenges to productivity growth—including complex regulation of financial services, poor transportation infrastructure, and barriers to entry for new retail players and expansion limits for existing ones. If Indonesia overcame these problems, consumer spending could rise by 7.7 percent a year, to $1.1 trillion, by 2030.
  • Agriculture and fisheries. Indonesia needs to raise productivity per farmer by 60 percent just to meet domestic demand. If the country can boost yields, reduce postharvest waste, and shift to higher-value crops, it could become a net exporter of agricultural products, supplying more than 130 million tons to the international market. Revenue from these sectors, together with the related upstream and downstream revenues, could increase by 6 percent a year, to $450 billion, by 2030.
  • Energy. Demand not only for energy but also for other key resources, such as materials and water, is likely to increase rapidly through 2030. Indonesia could meet up to 20 percent of its energy needs by turning to unconventional sources, such as coal-bed methane, next-generation biofuels, geothermal power, and biomass. This approach could also help boost resource productivity—for example, improving the country’s energy efficiency could reduce energy demand by as much as 15 percent. By 2030, Indonesia’s energy market could be worth $210 billion.

Download executive summary

Download full report

Printed  from McKinsey Global Institute

 

Africa: 2008 vs 2020

Africa at work: Job creation and inclusive growth

African economies are on the move. The continent has been the second-fastest-growing region in the world over the past decade. GDP is on course to expand by 4.8% in 2012. The acceleration in Africa’s growth over the past ten years reflects fundamental improvements in the macroeconomic landscape, political stability, and the business environment. MGI’s 2010 report Lions on the move: T he progress and potential of African economies found that Africa is harnessing its natural wealth, and that sectors across the economy are growing rapidly. These sectors include agriculture, manufacturing, and local services such as retail, banking, and transportation and communications, in addition to the  natural resources sector, which was the largest single contributor to growth.

Africa today …..

  • 382 million in Africa’s workforce
  • 42% of workforce employed outside agriculture
  • 28% of workers earn a wage vs 24% in 2000
  • Retail and hospitality accounted for 18% of new wage-paying jobs since 2002 vs 11% from manufacturing
  • 32% of African businesses surveyed cite access to finance as a major constraint on growth

….. and in 2020

  • 122 million more workers, more than any other region
  • 72 million new wage-paying jobs could be created by 2020
  • 36% of workforce in wage-paying jobs if this potential is realized
  • 128  million consumer households, up from 90 million in 2011
  • 48% of Africans with secondary of tertiary education

Read the full report at https://www.epictranslations.com/download/MGI_Africa_at_work_August_2012_Full_Report.pdf

Corporate Espionage

Foreign spies stealing U.S. economic secrets in cyberspace

Executive Summary:
Foreign economic collection and industrial espionage against the United States represent significant and growing
threats to the nation’s prosperity and security. Cyberspace—where most business activity and development of
new ideas now takes place—amplifies these threats by making it possible for malicious actors, whether they are
corrupted insiders or foreign intelligence services (FIS), to quickly steal and transfer massive quantities of data
while remaining anonymous and hard to detect.

Read the entire report at http://www.ncix.gov/publications/reports/fecie_all/Foreign_Economic_Collection_2011.pdf

Page 20 of 33« First...10...1819202122...30...Last »