Can technology and productivity save the day? James Manyika Extracts from McKinsey Global Institute research

A brief history of economic growth and prosperity

1

Since 1750, the world has experienced an unprecedented rise in economic growth, fueled by innovation Estimated Global GDP per capita, real USD

10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 0

50

100

150

1450

200

1550 1600 1650 1700 1750 1800 1850 1900 1950 2000

1698

1769

1855 1860

Technology Advancements

1970s – 80s

TODAY Printing press

First steam engine

Efficient steam engine

Mass Internal steel combustion engine

SOURCE: Angus Maddison's "World Population, GDP and Per Capita GDP, 1-2003 AD”; Projection based on Global Insight economic data; WIPO IP Statistics

Internet & world wide web 2

And prosperity has growth faster and at greater scale that ever Years to double per capita GDP1 1700

United Kingdom United States Germany Japan South Korea China India

1800

Population at start of growth period 1900

2000

Million

154

9

53

10

65

28

33

48

10

27

12 16

1 Time to increase per capita GDP in purchasing power parity (PPP) terms from $1,300 to $2,600 SOURCE: Angus Maddison; University of Groningen; McKinsey Global Institute

1,023 840

3

Technology’s contribution has continued to grow Solow residual % contribution of technology change to world output growth 50% 44% 38% 33%

1920-1950

1940-1970

1970-2000

SOURCE: R. Solow; Hall; Wikipedia; Annals of Statistics; McKinsey estimates

1998-2012

4

More transformational technologies on the way (the next decade+)

5

Technology trend “lists” everywhere Top 25 Technology Predictions

▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪

The top twenty business trends in 2020

The top 10 emerging

By 2029, 11 petabytes of storage will be available for $100 technologies for 2013 In the next 10 years, we will see a 20-time increase in home networking speeds. technologies that will By10 2013, wireless network traffic will reach 400 petabytes a month. 10 Disruptive Technologies By the end of 2010, there will be a billion transistors per human—each costing one ten-millionth of aInformation cent. Vehicles (OLEV) change the world in the ▪ Robots taking our jobs ▪ The DIY economy continues for Business ▪ OnLine Electric The Internet will evolve to perform instantaneous communication, regardless of distance. next 10 years Management to rise The first commercial quantum computer will be available by mid-2020. ▪ The Internet of that machines ▪ 3D printing and remote manufacturing greatbrain. technologies Innovations willcomputer will have the raw processing power Eight The Things By▪ 2020, aInternet $1,000 of personal of a human ▪ Media tablets and beyond ▪ A new education revolution change By 2030, it will tomorrow take a village of human brains to match a $1,000 computer. ▪By▪ 2050 Flatter organisations ▪ equal Self-healing materials a global of 9 billion), $1,000 worth of computing power will the processing powerand of all human Not (assuming just Big Data, but population a zettaflood ▪ Mobile-centric applications ▪ Reskilling the workforce The five most disruptive brains on9earth. interfaces and energy-efficient computing Bold clothes Predictions ▪ inBig revolution ▪ printing Electric ▪ ▪ 3D ▪95Energy-efficient water purification Today, we know 5the percent of what we will know in 50 years. In other words, 50data years, percent of what we will know will have technologies of 2012 Wisdom of cloud for the Digital World ▪ Older workers re-entering the been discovered in the past 50 years. ▪ Contextual and social user experience of 2020 cruise control ▪ breakthrough Satellites commercial applications of spaceand use ▪ Adaptive The world’s data will increase sixfold in each of the next two years, while10 corporate dataand willCarbon grow fiftyfold. ▪ ▪ Nano-technology workforce ▪ dioxide (CO2) conversion The next ‘Net’ technologies 2013 ▪ Gesture based interfaces: Controlling By 2015, Google will index approximately 775 billion pages of content. ▪weVirtual Avatars ▪ Internet of Things The Five MostDisruptive ▪ and autonomous systems By 2015, will create the equivalent of 92.5 million Libraries of Congress in one year. computers without touching them ▪ Better bikes ▪ ▪ Mobile apps redefining service ▪ Dealing with a society at Robotics ▪ Enhanced nutrition to drive health at the The world gets smaller ▪ Intelligence in Anything Technologies at CES 2013 By 2020 worldwide, the average person will maintain 130 terabytes of personal data (today it is ~128 gigabytes). industries retirement age molecular level learning ▪ equivalent App stores marketplaces By 2015, and peer-to-peer file sharing will explode to ▪100 exabytes, toand 5Fusing million Libraries of Congress. ▪movie Thedownloads Cloud to Become the Norm ▪ Deep sciences, genomics and synthetic biology ▪LifeAugmented reality: the real and ▪ Predictive medical analysis in cars The video power of power By▪ 2015, calling will be pervasive, generating 400 exabytes of data—the equivalent of 20 million Libraries of Congress. Temporary social mediasensing 12 reasons 2020 will awesome yearup the ▪value ▪forFighting thethe Power the virtual ▪ Connecting Cloud Withbe thean ▪ The fight control of mobile ▪Crowd China moving ▪ ofRemote By 2015, the phone, web, email, photos, and music will explode to generate 50 exabytes data. ▪ Next-generation ▪ Regenerative medicine analytics ▪ two Planes made of carbon fiber to Bio- chain system Virtual Hospitals Thanks Prenatal DNA screening Within years, information on the Internet will double every 11 hours. ▪ payments Tea.▪Earl Grey. Hot (3D printing) ▪ Robotic moon base ▪▪ Commercial space travel to The the moon ▪ The Intelligent Home Compressed air batteries: world’s ▪ on Precise drug delivery through nanoscale By 2010, 35 Connectivity billion devices will be connected to the Internet (nearly six devices per person the planet). ▪ Additive manufacturing ▪ Big data and asteroids ▪ Agri-science ▪ High speed rail link connecting China and Europe most cost-effective energy storage ▪ Subway entertainment ▪ ▪ 2020, Reinventing entertainment ▪ and Rising engineering By will betree more(Advanced devices than people online. incomes in South Asia ▪there Ultra-Intelligent Electronic Agents Another family robotics ▪ Baxter: Thecomputer Blue Collared Robot ▪ The Interface of You ▪ $1,000 with the processing and Africa ▪ Autonomous and flying cars With virtual IPv6,▪ there will be enough addresses for every star in the known universe to have 4.8 trillion addresses. ‘avatars’) New Image and Video Analysis ▪ In-memory computing ▪ Advanced materials and nano-technology power of the human brain ▪ Autonomous electric vehicles: The photovoltaics end ▪ Better ▪ Memory Implants ▪ 2020, The fall andlooking of movies social media willwith ▪ Organic electronics and By universal language translation be commonplace ▪rise Biofuels competitive fossil fuels in every device. Algorithms and Tools ▪ years, You’reany thesurface Doctorwill become▪ a The of Watches cars as we knowuniversal them translation In the next five display. great deleveraging ▪ Ubiquitous, mobile ▪ controlled by microchips implanted in ▪ ▪ Smart ▪ Yes,▪ there's a Devices cure forSound that (Medical ▪ Extreme low-energy servers Improved Call Quality Energy and its storage By teleportation at to theexist particle level will begin to occur. ▪ Teeth with sensors ▪ 2025, Newspapers cease ▪ Fourth-generation reactors and nuclear▪ Augmented reality ▪ Ultra-Efficient Solar Power humans technologies) By 2030, implants forthat the Knows brain willYou take place. ▪ Technology Better than ▪ Ultra-cheap web devices: Five billion ▪artificial Digital Jewelry, e.g. Augmented Reality ▪ Taming the Big Data tsunami waste recycling

▪ Ultra-thin OLED screens You Know devices ▪ Smart disinfectants ▪ ▪ Data rights become anYourself issue Humans or Borg? (Augmented homo ▪ Gourmet frozen food sapiens)

▪ Synthetic brain ▪from Cloud computing ▪ Big Data Cheap Phones people with internet access ▪ Supergrids

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Twelve potentially economically disruptive technologies (selected for step-change economics, scope and profit pools/economics at stake) Mobile Internet Increasingly inexpensive and capable mobile computing devices and Internet connectivity

Cloud technology Use of computer hardware and software resources delivered over a network or the Internet, often as a service

The Internet of Things Networks of low-cost sensors and actuators for data collection, monitoring, decision making, and process optimization

Automation of knowledge work Intelligent software systems that can perform knowledge work tasks involving unstructured commands and subtle judgments

Advanced robotics Increasingly capable robots with enhanced senses, dexterity, and intelligence used to automate tasks or augment humans

Autonomous and near-autonomous vehicles Vehicles that can navigate and operate with reduced or no human intervention SOURCE: McKinsey Global Institute analysis

Next-generation genomics Fast, low-cost gene sequencing, advanced big data analytics, and synthetic biology (“writing” DNA)

Energy storage Devices or systems that store energy for later use, including batteries

3D printing Additive manufacturing techniques to create objects by printing layers of material based on digital models

Advanced materials Materials designed to have superior characteristics (e.g., strength, weight, conductivity) or functionality

Advanced oil & gas exploration and recovery Exploration and recovery techniques that make extraction of unconventional oil and gas economical

Renewable energy and use management Generation of electricity from renewable sources with reduced climate impact 7

Example: Impact of automation of knowledge work could be > $5 trillion per year in 2025 Sized knowledge worker occupations Clerical Common business functions

Customer service and sales Education

Public sector services

Technical professions

Potential economic impact of sized applications in 2025 $ trillion, annually 1.1– 1.3

IT Managers Finance Professional services Legal

Estimated scope in 2025

Estimated potential reach in 2025 FTEs of work potentially automatable

Potential productivity or value gains in 2025 Value per FTE of additional productivity

$4.4 trillion in knowledge

50–65 million full-time equivalents

$35,000

worker costs

(FTEs) of work potentially automatable

$2.8 trillion in knowledge

20–30 million FTEs of work

worker costs

potentially automatable

$50,000

55 million knowledge

0.3– 0.4

workers

0.6– 0.7

$2.2 trillion in knowledge

15 million FTEs of work potentially

worker costs

automatable

$60,000

35 million knowledge

0.4– 0.5

workers 0.8– 1.1 0.4– 0.5 0.2– 0.3

$2.9 trillion in knowledge

15–20 million FTEs of work

worker costs

potentially automatable

$60,000

50 million knowledge workers

$1.5 trillion in knowledge

10 million FTEs of work potentially

worker costs

automatable

$65,000

25 million knowledge

Other potential applications (not sized ) Sum of sized potential economic impacts

Other

workers

0.8– 1.0

Science and engineering

High

125 million knowledge

0.6– 0.9

Health care

Low

workers 5.2– 6.7

NOTE: Estimates of potential economic impact are for some applications only and are not comprehensive estimates of total potential impact. Estimates include consumer surplus and cannot be related to potential company revenue, market size, or GDP impact. We do not size possible surplus shifts among companies and industries, or between companies and consumers. These estimates are not risk- or probability-adjusted. Numbers may not sum due to rounding.

SOURCE: McKinsey Global Institute analysis

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By 2025 overall impact could be in the trillions $ trillion, annual

High

Partial economic impacts of sized applications in each category Low

Impact from other potential applications

High

Mobile Internet

MACHINES & US

Low

3.7–10.8

Cloud technology

5.2–6.2

Internet of Things

2.7–6.2

Automation of knowledge work

1.7–6.7

Advanced robotics

1.7–4.5

Autonomous and nearautonomous vehicles

0.2–1.9

Next-generation genomics

0.7–1.6

Energy storage

0.1–0.6

3D printing

0.2–0.6

Advanced materials

0.2–0.5

Advanced oil and gas exploration and recovery

0.1–0.5

Renewable energy SOURCE: McKinsey Global Institute analysis

0.2–0.3

Notes on sizing ▪ Estimates of economic impact are not comprehensive and include potential direct impact of sized applications only. ▪ These estimates do not represent GDP or market size (revenue), but rather economic potential, including consumer surplus. ▪ We do not quantify transfer of surplus among or across companies or consumers. ▪ These estimates are not directly additive due to partially overlapping applications and/or value drivers across technologies. 9

Some business and economic implications

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What business are we in again?

11

The digital economy? Big 3 – Detroit, 1990

Big 3 – Silicon Valley, 2014

Revenues

$250 billion

1x

$247 billion

Employees

1.2 million

0.1x

137,000

Market cap

$36 billion

30x

$1,087 billion

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Surplus anyone?

Consumer surplus

?

?

Surplus shifts between sectors and companies (from everywhere)

? Net new revenue capture 13

Prospects for economic growth and prosperity

14

Exceptional growth of the last 50 years G19 and Nigeria

Productivity growth

GDP growth

Employment growth

Employment per capita growth

Per capita GDP growth

3.6

1.8 2.1

-19%

-40%

1.8 1.7

0.3 Historical growth Sustain historical (past 50 years) productivity growth

NOTE: Numbers may not sum due to rounding. SOURCE: McKinsey Global Institute analysis

Historical growth Sustain historical (past 50 years) productivity growth

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The global supply of employees is likely to peak around 2050 Employees in G19 and Nigeria, 1990 – 2064E (Billion, at best of 2007 or 2012 activity and unemployment rates) Historical

Forecast

Peak employment

2.5

Total

2.0

Emerging

1.5

1.0

0.5

Developed

2011

24

41

45 48

55 57

61 2064

China, South Korea

Brazil

Saudi Arabia

Turkey

Mexico Argentina

India

Japan

2000 03

Germany

1990

Italy, Russia

0

SOURCE: The Total Economy database of the Conference Board; UN Population Division statistics; World Bank; International Labour Organisation; McKinsey Global Institute analysis

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By sustaining productivity growth of the last 50 years, GDP growth over the next 50 years would slow down by about 40 % G19 and Nigeria

Productivity growth

GDP growth at past productivity growth

Employment growth

Employment per capita growth

Per capita GDP growth at past productivity growth

3.6

-40%

1.8 2.1

-19%

2.1 1.7

1.8

1.8 1.8

1.7 0.3

0.3 -0.2

Historical growth Sustain historical (past 50 years) productivity growth

NOTE: Numbers may not sum due to rounding. SOURCE: McKinsey Global Institute analysis

Historical growth Sustain historical (past 50 years) productivity growth

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Of the productivity growth needed, as much as 3/4 can come from catching up, and the rest from pushing the frontier Potential per annum productivity growth rate, percent Catching up

Pushing the frontier

G19

Developed

75

55

25 4

45 2

Emerging

82

18 6

Pushing the Frontier will likely come from the application of transformational and technologies offering step-changes in productivity SOURCE: McKinsey Global Institute analysis

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What does this all mean? Good news for Consumers and Entrepreneurs No industry safe from disruption and transformational innovation (new competitors, value chains, economics, assets & capabilities)

Surplus shifts will be more widespread – good for consumers, challenging for incumbents, challenge what we measure The nature of work will change (jobs vs. incomes, work as a portfolio etc) “The Great decoupling” will likely require old and new solutions

More complex societal challenges to manage (privacy, security, health safety, inequality, safety nets…) Policies and rules will have a hard time keeping up (but must) Critical to address key enablers needed to sustain economic growth (10 identified) Technology, innovation and productivity may still save the day

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