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Think Cities, Not Countries When Looking for Growth

Companies looking to ride a new wave of growth in the emerging markets should shift their focus from countries to cities, says a recent report from McKinsey Global Institute.

Pedestrians and rickshaws move along a street in the Old Market of Dhaka, Bangladesh.
Tomohiro Ohsumi | Bloomberg | Getty Images
Pedestrians and rickshaws move along a street in the Old Market of Dhaka, Bangladesh.

According to the report entitled “Urban World: Cities and the Rise of the Consuming Class”, almost half of global economic growth by 2025 is expected to come from just 440 cities across emerging markets. In fact, these cities will generate 60 percent of new urban consumers who are projected to inject some $23 trillion into the world economy.

“Incomes are rising in developing economies faster, and at a greater scale, than at any previous point in history”, says the report. “The growth of some urban markets can exceed that of entire nations.”

There are 20 megacities among the so-called Emerging 440 group, like Shanghai in China, Sao Paulo in Brazil and Lagos in Nigeria. However, to reap the benefits of the urbanization boom it is important for companies to look beyond high-profile places, notes the report.

A large share of growth in the emerging economies will come from mid-sized cities that are not well-known outside their own countries. Among them: Belo Horizonte in Brazil, Pune in India, Angola’s capital Luanda and Kumasi in Ghana, to name just a few.

“We expect these middleweights to grow at an 8 percent annual compound rate, contributing $17.7 trillion in GDP growth by 2025,” says the report.

Out of 440 cities in the group, 242 are located in China. Latin America has 57 cities in the group; South Asia, including India, has 36 cities, while Africa and Middle East together have 39 cities.

Presently, most companies are not looking at cities as they calibrate strategy.

McKinsey says fewer than one in five executives is making location and resource decisions at the city, rather than at the country, level. Of those surveyed, 61 percent say their executives do not plan at the city level because "cities are perceived as irrelevant unit of strategic planning".

But the report argues it is important to have a detailed understanding of an individual urban area. Growth patterns for products and services will depend in part on income trends, as well as cultural and demographic characteristics.

For instance, manufacturers and suppliers of medical devices may want to focus on cities with a large increase in elderly higher-income consumers, suggests the report. The top three cities that are expected to see the most growth in this segment by 2025 are Shanghai, Beijing and Tokyo.

The report also examined developed markets, like Japan, Europe and the U.S., but most of the growth was expected to be from the cities of the emerging markets.

Producers or distributors of laundry-care products will like Sao Paulo, Brazil. Over the next 10 years, a larger volume of these products will be sold in this single city than in either France or Malaysia.

Top 5 Hot Spots for Growth by 2025

Rank
Elderly, higher-income consumers
Young entry-level consumers
Laundry care Products
1 Shanghai Lagos Sao Paulo
2 Beijing Dar es Salaam Beijing
3 Tokyo Dhaka Rio de Janeiro
4 Tianjin Ouagadougou Shanghai
5 Mumbai Khartoum Mexico City
Source: McKinsey Global Institute

To cater to the needs of new urban consumers, cities will have to invest heavily in infrastructure. Thus, companies providing project management or construction services for water infrastructure may want to look at cities with high expected growth in municipal water demand — like Mumbai and Delhi.

Questions? Comments? Email us at marketinsider@cnbc.com and follow me on twitter @kfrayter

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