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Dr. James Manyika April 2016

INVESTMENT: INFRASTRUCTURE AND DIGITAL IMPERATIVES

INVESTMENT: INFRASTRUCTURE AND

DIGITAL IMPERATIVES

McKinsey & Company | 1

Investment – a secular decline,

made worse by the crisis

McKinsey & Company | 2

Change in real GDP, 2008–15

EUR billion, chain-linked 2005, Europe-30

Investment collapsed since the crisis – example Europe

Net

exports

Real GDP

2015

Real GDP

2008

13,291

Statistical

discre-

pancy

-34

-118

Corporate

investment

12,952

Private

consump-

tion

+159

Household

investment

+179

+7

Govern-

ment

consumption

+268

Govern-

ment

investment

-109

INVESTMENT – A SECULAR DECLINE, MADE WORSE BY THE CRISIS

McKinsey & Company | 3

Developed economies

Many developed G20 economies cut public investment after the crisis

1 Value of the government's acquisitions, less disposals, of fixed assets, including dwellings, other buildings, and machinery and equipment.

SOURCE: Global Growth Model, McKinsey Global Institute

Gross Government Fixed Investment

Per cent of region GDP

Country Avg 2000-07 Avg 2010-13

Developing economies

EU 3.6% 3.4%

United States

Japan

Germany

2.8%

2.5%

1.7%

2.5%

1.8%

1.7%

France

United Kingdom

3.4%

1.5%

3.4%

2.0%

Italy 2.3% 2.0%

Canada 2.8% 4.5%

Australia 3.5% 4.8%

Korea, Rep. 3.3% 2.0%

Country Avg 2000-07 Avg 2010-13

China

Brazil

N/A

1.0%

6.5%

1.4%

India 4.4% 5.8%

Russia 2.2% 2.7%

Mexico 2.2% 4.3%

Indonesia 5.2% 3.8%

Turkey 3.8% 3.2%

Saudi Arabia 5.5% 8.3%

Argentina 0.9% 1.2%

South Africa 1.4% 2.4%

INVESTMENT – A SECULAR DECLINE, MADE WORSE BY THE CRISIS

McKinsey & Company | 4

Infrastructure – an unmet need

McKinsey & Company | 5

$3.3 trillion investment needed (3.8% of global GDP), through 2030

Average annual spend, 2016–30

$ trillion, constant 2015 dollars

0.5

0.5

1.0

3.3

0.8 0.3

Telecom Airports Water Power Ports

0.1

Rail Total

0.1

Roads

Roads

Telecom

Ports

Water

Airports

Rail

Power

xx Spend as

% of GDP

xx Aggregate

spend 2016-30,

$ trn, constant

2015 dollars

0.9 0.4 0.1 0.1 1.1 0.6 0.6 3.8

11.4 5.1 0.9 1.3 14.7 7.5 8.3 49.1

INFRASTRUCTURE – AN UNMET NEED

McKinsey & Company | 6

Actual infrastructure spend

2008-13

4.7

2.2

2.0

2.1

2.4

2.42.52.7

3.13.53.6

4.04.54.6

4.75.2

7.68.8

India

Qatar

South Africa

Australia

China

Turkey

Saudi Arabia

Brazil

United States

Mexico

Italy

Japan

Indonesia

France

United Kingdom

Canada

Russia

Germany

Wide variation of infrastructure investment gaps by geography % of GDP

Gap to estimated infrastructure needs

2016-30

0

0.4

France -0.1

UK 0.4

0.4% or USD$5.2trn

US

1.3

0.9

0.6

Canada

Australia

Turkey

S.Africa

S.Arabia

India

Qatar -0.3

0.5

Indonesia

-1.2

Russia

1.2

-3.3

-0.1

Mexico

-1.5 Japan

0.7

-0.1

China

Brazil

1.1

0.7

Germany

Italy

SOURCE: McKinsey ISS database

1.Global gap for 2016-30 calculated by adding up negative values and

multiplying up to USD total and then dividing by cumulative world GDP.

Without adjusting for positive gap the value is 0.2%. This has been calculated

from a set of 49 countries where we have data available for all sectors

Global Gap

INFRASTRUCTURE – AN UNMET NEED

McKinsey & Company | 7

Likely sizable impact from closing infrastructure investment gaps

GDP impact of closing estimated infrastructure investment gaps; example countries

0.6

1.3

1.5

Global United States Brazil

Supply-side long-term incremental GDP potential after ten years of

additional investment

%

INFRASTRUCTURE – AN UNMET NEED

McKinsey & Company | 8

Digitization – an investment, innovation,

and productivity imperative

McKinsey & Company | 9

Relatively low

digitization

Relatively high

digitization

Digital leaders within relatively un-digitized sectors

1 Based on a set of metrics to assess digitization of assets (8 metrics), usage (11 metrics), and labor (8 metrics); see technical appendix for full list of metrics and explanation of methodology.

2 Compound annual growth rate.

The MGI Sector Digitization Index 2015 or latest available US data

SOURCE: BEA; BLS; US Census; IDC; Gartner; McKinsey social technology survey; McKinsey Payments Map; LiveChat customer satisfaction report;

Appbrain; US contact center decision-makers guide; eMarketer; Bluewolf; Computer Economics; industry expert interviews; McKinsey

Global Institute analysis

DIGITIZATION – AN INVESTMENT, INNOVATION AND PRODUCTIVITY IMPERATIVE

Selected sectors Overall digitization Assets Usage Labor

ICT

Media

Professional services

Finance and insurance

Wholesale trade

Advanced manufacturing

Oil and gas

Utilities

Chemicals and pharmaceuticals

Basic goods manufacturing

Real estate

Transportation and warehousing

Education

Retail trade

Personal and local services

Government

Health care

Hospitality

Construction

Digitization assessment categories

1 Knowledge-intensive sectors

that are relatively highly digitized

across most dimensions 1

2 Capital-intensive sectors with

the potential to further digitize

their physical assets

2

4 B2B sectors with the potential

to digitally engage and interact

with their customers

4 3 Service sectors with long tail of

small firms having room to

digitize customer usage

3

Quasi-public and large with

relatively low digitization across

the board and low productivity

6 6

5 Labor-intensive and large with

the potential to provide digital

tools to their workforce

5

Still very busy

McKinsey & Company | 10

Gap widening between the most digitized and the rest

Leading sectors in 1997 = 100%

Rest of US

economy,

degree of

digitization

relative to leaders 8%

1997

1.7x increase in

digitization

12%

2005

4.1x increase in

digitization

14%

2013

1997 2005

11%

1.0x 39%

4.9x

2.1x

48%

2013

1.2x

22% 14%

2.0x 1.0x

10%

Most digitized sectors

Rest of US economy

Usage

Assets

Labor

2.6x

6%

1.0x

4% 7%

7.9x

Option 2

DIGITIZATION – AN INVESTMENT, INNOVATION AND PRODUCTIVITY IMPERATIVE

McKinsey & Company | 11

Even among large corporations,

a large gap between digital leaders and the rest

SOURCE: 2014–15 McKinsey Digital Quotient company survey; “Raising your Digital Quotient,” McKinsey Quarterly,

June 2015

4

54

84

74

64

44

24

14

Low

Med

Established

Emerging

Average = 34

Emerging

leaders

Established

leaders

Digital Quotient score

SHIFT TO A MORE DIGITAL ECONOMY 5

McKinsey & Company | 12

Cross-border data flows are surging and connecting more countries,

gaining importance vis-a-vis traditional trade flows

SOURCE: TeleGeography; McKinsey Global Institute analysis

Used cross-border bandwidth

1 Estimated using public Internet bandwidth data.

20051

100% = 4.7 Terabits per second (Tbps)

Size of bubble represents

intraregional used bandwidth

NA United States and Canada

LA Latin America

AA Africa

EU Europe

ME Middle East

OC Oceania

AS Asia

Regions Bandwidth

Gigabits per second (Gbps)

<50

50–100

100–500

500–1,000

1,000–5,000

5,000–20,000

>20,000

NA

LA

ME

AF

EU

OC

AS

45x

2014

100% = 211.3 Tbps

NA

LA

ME

AA

EU

OC

AS

DIGITIZATION – AN INVESTMENT, INNOVATION AND PRODUCTIVITY IMPERATIVE

McKinsey & Company | 13

… One more thing

McKinsey & Company | 14

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RESEARCH ARE AVAILABLE AT:

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