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Urbanization is the most significant driver of global economic growth. Today, the world is urbanizing rapidly with more than 50 percent of the world now living in towns and cities. But unearthing tangible business opportunities in those markets will not be straightforward for Korean or western corporations.
To identify where the opportunities lie, Korean business leaders first need to understand that urban growth is not just an Asian phenomena. In Africa, for instance, city markets will play an essential role in the continent’s development.
Africa’s five largest consumer markets in 2020 are Alexandria, Cairo, Cape Town, Johannesburg and Lagos, each boasting more than $25 billion a year in household spending ― equaling Mumbai and New Delhi. We estimate that by 2030, Africa’s top 18 cities could have a combined spending power of $ 1.3 trillion.
But business leaders also need to understand urban growth at a granular level. Everyone has heard of the growth in Mumbai and Delhi, Beijing and Shanghai.
But how about Johore Bharu in Malaysia, or Medan in Indonesia? The key to tapping urban wealth in Asia will be to look beyond megacities to the “middleweight cities” with populations of less than 10 million.
Moving beyond the usual suspects and discovering cities with upside potential will be an essential part of any company’s growth strategy, especially Korean businesses that need to broaden their export base.
Development in the middleweights is astounding. In India, Bangalore, Ahmedabad and Pune together will have as many households earning $20,000 a year in purchasing-power-parity terms as either Delhi of Mumbai by 2025.
In China, 14 cities, including Wuhan, Xiamen and Shantou, will have more households by 2025 in this income segment than Beijing and Shanghai do today.
So far, many Korean companies, like their Western peers have enjoyed great success mostly ignoring these smaller cities and building strategies around a combination of developed Western markets and the top tier cities in emerging markets. Indeed, the relatively accessible combination of developed economies and megacities (those cities with a population of over 10million) currently accounts for about 70 percent of global GDP.
That strategy won’t work in the future, however. Over the next 15 years, McKinsey Global Institute research suggests that developed economies and emerging megacities will account for only one-third of global GDP growth.
Middleweight cities increasingly will set the pace, collectively contributing more than a third of global growth. Around 230 middleweights that are not among the top 600 urban centers in terms of GDP today will make that list in 2025. Small- and mid-sized cities with populations of 150,000 to five million will grow fastest.
Only some Korean companies like their Western peers such as P&G, Unilever, Yum Brands, have started to understand this. Most haven’t but that’s how the winners of the future will be decided.
One way around approaching middleweight cities is geographic clustering, a mix between the scale economies of a megacity and the growth opportunities of a middleweight.
The key here is to focus on regions where several middleweights are relatively near each other, and have similar tastes. Having established operations in Shanghai or Guangzhou, it's been simple to branch into other urban areas around the Yangtze and Pearl Rivers respectively.
As urbanization proceeds and middleweights gain income, more such clusters will appear. Our colleagues have identified no fewer than 22 potential clusters in China and 14 in India. The clusters in India, for example, are likely to account for 17% of the country's population and 40% of its urban GDP by 2030.
Companies need to make cities a central part of their thinking. The depth of knowledge that corporate strategists gather about the fast-changing urban landscape will be the key to their ability to tap this urban growth opportunity.
Mr. Dobbs is a director of the McKinsey Global Institute. The McKinsey Global Institute report, Urban World, is available for free from www.mckinsey.com/MGI.
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