I just finished reading a very interesting report by McKinsey Global Institute (MGI) – “Urban world: The shifting global business landscape“. According to MGI, “urbanization and industrialization continue to reshape the world’s economic order, creating a global consuming class that will be four billion strong by 2025.”
As per the same study, more than 45% of the Fortune Global 500 could be based in emerging regions (up from 5% in 1990 and 17% in 2010) and the total number of large companies with annual revenues of US$1bn will increase to 15,000 in 2025 from 8,000 today, and seven out of the ten new large companies are likely to be based in emerging regions.
I am not writing this to give you a complete summary of the report, but discuss some interesting points from the report and where India stands. What is interesting is that at a very nascent stage of its development, on some parameters India resembles a developed and mature economy.
This is interesting because India is still a low income country. In 1987, China’s GDP was only 1.2x that of India and by 2010, it was nearly 4x as large. In 2010, China had 10% of the world’s large companies. South Asia, home to 23% of the world’s population, has only 2% of large companies in the world. China is a relevant comparison because of sheer size of the country and the fact that till the late 1980s, the two countries were economically of very similar size.
But that is a separate story and to come back to the MGI report, some of the numbers or observations that are interesting are:
• The larger the share of the informal economy, the lower is the presence of large companies. As countries develop, the share of informal economy declines and concomitantly the share of formal economy and large companies rise. A recent report by Neelkanth Mishra of Credit Suisse (India’s better half: the informal economy) estimates that 50% of India’s GDP; also 90% of India’s employment is in the informal sector.
I believe that the informalisation of the economy results in sub-par productivity, lower wages, lower tax collections and no social security. Just consider this that the onerous labour laws and vocal trade unions protect the interests of just 9% of the working class and creates a relatively rich and privileged labour class.
• Mergers and acquisitions result in industry consolidation to a greater extent in the developed economies than the emerging economies. While in most segments this would be true for India, in a sector like passenger cars or commercial vehicles, 3-6 companies account for 90%+ of the market share. In comparison, the top ten players in USA accounted for 93% of the revenue market share in cars in 2010 and the same number for China was 62%.
But the reason for India resembling the US more than China in this respect is possibly because of the small size of the Indian market, which is dominated by a few players and does not get the same attention from a large number of global players. Further the domestic players in India have always had a pan-India market to cater to(although tax differentials between states means India is truly not a single market), whereas in China regional players have developed in different sectors because of restrictions and regulations.
• As a country’s economy grows, its mix shifts, first from agriculture to industry and then to services. According to MGI data, in countries with per capita GDP of less than US$5,000, 38% of GDP is from services, whereas in economies with per capita GDP of over US$40,000, services account for 59% of a country’s GDP. Amazingly India with per capita GDP of US$1,500 or thereabouts has 57% of it coming from services.
Thus, India is like a developed economy in its GDP composition while being low income economy. Stifling, discretionary regulations, poor governance and legacy issues have probably resulted in the poor growth of industry and the manufacturing sector.
• Emerging economies are characterised by “limited foreign revenue”, according to MGI. As per the MGI study, companies based in developed economies generate 24% of their revenues from outside their home region; the corresponding number for emerging economies is 14%. Once again Indian companies are rubbing shoulders with their developed market counterparts. 45% of Nifty sales are in US$ (courtesy Neelkanth again). Now this number includes sales that are dollar linked but are not outside the home market – like say Tata Steel’s domestic sales which are linked to global prices. Removing these the number is likely to be closer to 25% rather than the emerging markets average of 14%, although I do not have accurate estimates.
This is likely because in the last decade Indian companies have consciously looked overseas given the issues in the domestic markets. A factor that is responsible for this is that in ease of doing business India scores very poorly and this is as true for MNCs as for domestic companies. While some entrepreneurs in India are politically well connected to exploit the system (crony capitalism), many are not.
And given the changes taking place (Read The Arrival of Outsiders in New Delhi), even well connected entrepreneurs are finding the going difficult (that is good for a change). Saurabh Mukherjea at Ambit in a recent note (quoted also in The Economist) showed that politically well connected companies (P-75) have underperformed the markets by 60% since the week the 2G scam broke and two years prior to that the same P-75 outperformed the markets by a whopping 200%!
•Beijing is the highest ranked emerging markets city, at sixth position, with 116 companies having their headquarters there. But 105 of these are state owned enterprises.
Now why is all this important? First, from macro perspective, large companies have an outsized impact on their home economies for the better. Large foreign subsidiaries cluster in cities that are well connected, good places to do business in and where senior managers would like to live in. According to MGI, “The corporate giants that emerge in the years ahead will be central actors shaping the global economy.” If we look at the above then there is a reason to worry about India’s growth prospects – in spite of being one of the top ten economies in the world, not one Indian city features among the Top 25 cities with most large company global headquarters, as per the MGI study. Second, our cities fall drastically short of all metrics to measure quality of life and hence, in its ability to attract quality professionals. In a recent study done by Bangalore based Janaagraha (Annual Survey of India’s City Systems), 11 Indian cities had a score of 0.7 to 4.5 on scale of 0 to 10, whereas New York and London cored 8.1 and 9.9 on the same scale. Earlier MGIs another study – India’s urban awakening: building inclusive cities, sustaining economic growth – has reached similar conclusions.