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Articles tagged with: reinhold m_ karner

Economy 4.0: The Global Revolution and its Five Disruptive Forces (Part 6 of 7)

Written by Reinhold M. Karner on Sunday, 30 October 2016.


There is a significant structural shift to detect in globalisation – an impact which will overturn the old order, upscaling and changing our perception by rethinking what it means to do business globally. And this is – again – also triggered by digitisation and connections, a new era which is no longer dominated by large multinational corporations and which will even shorten their lifespan, as SMEs can instantly become micro-multinationals in their own right, and start-ups can be ‘born’ global.

Globalisation is mainly driven by the degree to which the world is more and more connected through trade, capital and finance, people and information (data and communication).

To demonstrate the immense dimensions, I quote various reports and literature dealing with global flows in a digital age and global trends of disruptions from 2014-2016 by the McKinsey Global Institute (MGI):

In the past 30 years’ world’s trade has increased tenfold;
$26 trillion flow of goods, services, and finance in 2012, equal to 36 per cent of global GDP;
up to $450 billion added to global GDP growth each year by flows – and 40 per cent more benefit for the most connected countries than the least connected;
18-fold increase in cross-border Internet traffic between 2005 and 2012;
38 per cent of total cross-border flows of goods, services, and finance from emerging economies in 2012, up from 14 per cent in 1990;
up to $85 trillion flow of goods, services, and finance by 2025, three times the value in 2012;
emerging economies now account for 40 per cent of all goods flows, and 60 per cent of those go to other emerging economies – known as south-south trade;
12 per cent of global goods trade from China in 2012 vs. two per cent in 1990;
growth in knowledge-intensive goods trade is growing 30 per cent faster than trade in labour-intensive goods;
between 1980 and 2012, the value of total goods trade grew at a seven per cent compounded annual growth rate, while the value of services traded rose at an eight per cent annual rate;
in the same period, thanks to rapidly expanding supply chains, goods flows increased nearly tenfold in value, from $1.8 trillion to $17.8 trillion, and amounted to 24 per cent of global GDP;
between 1980 and 2007, annual cross-border capital flows increased from $0.5 trillion to a peak of $12 trillion, a 23-fold increase. Such flows fell sharply in the aftermath of the 2008 financial crisis and then bounced back.
The world is more connected than ever. For the first time in history, emerging economies are counterparts on more than half of global trade flows, and South-South trade is the fastest-growing type of connection. (Refer to the shift of the world’s economic centre of gravity in part 2).

While flows of goods and finance have lost momentum, used cross-border bandwidth has grown 45 times larger since 2005. It is projected to grow by another nine times in the next five years as digital flows of commerce, information, searches, video, communication, and intracompany traffic continue to surge.

Digital platforms change the economics of doing business across borders, bringing down the cost of international interactions and transactions. They create markets and user communities with a global scale, providing businesses with a huge base of potential customers and effective ways to reach them.

Over a decade, global flows have raised world GDP by at least 10 per cent – this value totalled $7.8 trillion in 2014 alone. Data flows now account for a larger share of this impact than global trade in goods. Global flows generate economic growth primarily by raising productivity, and countries benefit from both inflows and outflows.

For decades, trade – the flow of goods, services, and finance – grew at twice the rate of the global economy. But since the financial crisis in 2008, the year 2016 is expected to be the fifth in a row in which trade has failed to grow at this historical rate.

According to the Financial Times, last year we saw the biggest collapse in the value of goods traded around the world since 2009. Major ports such as Hamburg and Singapore have also reported slowing growth and even declining volumes. A spectacular turnaround in the global economy is not on the horizon – a pattern not seen since the stagnations of the 1970s.

Much of this recent feeble performance is down to the economic slowdown in China and an ongoing weak recovery in Europe.

Others think the slowdown in global commerce could still be offset by another transition in China, which is already underway. China is reviving the historic Silk Road trade route that runs between its own borders and Europe. The idea is that two new trade corridors – one overland and the other by sea – will connect the country with its neighbours in the west: Central Asia, the Middle East and Europe. Beijing is, in many ways, emulating what Japan did following the 1980s Plaza Accord, when a dollar depreciation against the yen triggered a move by Japanese companies to send lower-value manufacturing overseas while keeping higher-value production at home. So, China still has a clear path forward – and is by 2030 expected to be the world’s largest economy once again, as China was the world’s largest economy in 1820, and is the second largest economy today.

China has already lifted more people out of poverty than any other country – it is developing middle class consumers. China is the world’s largest exporter and the second largest importer of merchandise goods. There is big transition by China’s attempt to rebalance from a manufacturing and export-led economy towards one focused on domestic consumption.

While these factors explain part of the weakness in global trade, some say there are even bigger factors at work. A growing number of economists argue that the slowdown is not simply cyclical, but a steady sign that the forces that have driven globalisation for decades are beginning to shift. They note that the plateau in worldwide trade in goods and capital has coincided with a surge in data flows — an indicator that the digital economy of the 21st century is starting to overturn the old order.

The growth of trade is a centuries-long drift that has accelerated with containerisation and higher productivity of transportation networks. But today a host of new technologies and networks are changing and shifting the trend in its characteristics.

The rise of consumers and businesses in emerging economies is remaking, intensifying, and deepening the process of globalisation. Supply chains are growing quite complex and have greater geographical reach.

Economists at the McKinsey Global Institute (MGI) point to increased automation and new manufacturing technologies, including 3D printing, to support the argument that the change is likely to accelerate – all of which bodes badly for the future of the global trade in goods.

“The image that many of us still have in our minds of globalisation is the picture of the huge cargo container ships taking boatloads of manufactured goods from factories in far-flung places and delivering them to markets around the world,” says Susan Lund, one of the authors of these McKinsey reports. “What we see in front of us is a globalisation that has morphed into a very different and more digital direction.”

Even as flows of finance, goods and services have slowed — falling from a peak of 53 per cent of global output in 2007 to 39 per cent in 2014 — the world has seen a surge in cross-border data. The flow of digital information around the world more than doubled between 2013 and 2015 alone, to an estimated 290 terabytes per second, McKinsey says. That figure will grow by a third again this year, meaning that by the end of 2016, companies and individuals around the world will send 20 times more data across borders than they did in 2008.

McKinsey argues there are already signs of the economic value of that new form of globalisation. By its calculations, cross-border flows of capital, goods, services and data added an extra $7.8tn to the global economy in 2014. The added value of data flows alone accounted for $2.8tn of that total, slightly more than the $2.7tn attributed to the global trade in goods.

The arrival of this digital economy has coincided with a shortening of global supply chains, a phenomenon that the International Monetary Fund and World Bank warned about in 2014.

McKinsey argues that those moves, replicated in the US and elsewhere, have had a global impact as carmakers and other companies have begun bringing production closer to home or concentrating it in bigger markets. This trend will, in my opinion and as mentioned in part 3, be fuelled even more with the new and next generations of robots, automation concepts like ‘Industry 4.0’ and the Internet of Things (IoT), since labour costs will play an ever-decreasingly minor role.

Trade between emerging economies is likely to continue to grow as a share of global trade as incomes in these countries increase, boosting the number of consumers with a ravenous appetite for goods of all kinds. So there should also be plenty of room for economies in Africa and Latin America and even India to take up China’s mantle and feed the next round of growth in global trade. Whether as sources of rising demand for overseas goods or as new export powers, all could contribute to another burst of globalisation, let alone when the next billions of people in emerging economies are lifted out of poverty within the next few decades (as mentioned in part 2) and add to the consuming class – which will lead also into massive consequences regarding demand and costs of commodities and capital.

In an important trend break, technology is shifting trade from the formerly exclusive province of large companies to an activity that all sorts of companies – even individuals—can participate in.

Small businesses worldwide are becoming “micro-multinationals” by using digital platforms such as eBay, Amazon, Facebook, and Alibaba to connect with customers and suppliers in other countries. Even the smallest enterprises can be born global today: 86 percent of tech-based start-ups MGI surveyed report some type of cross-border activity. The ability of small businesses to reach new markets supports economic growth everywhere. More than 90 per cent of eBay commercial sellers export to other countries, compared with less than 25 per cent of traditional small businesses – a new era of globalisation for ‘the little guy’, as MGI calls it.

Individuals are participating in globalisation directly, using digital platforms to learn, find work (even on a remote basis), showcase their talent and build personal networks. Over one billion people have international connections on social media, and approximately 400 million take part in cross-border e-commerce.

Even people themselves are increasingly interconnected globally. While the number of people travelling, working, and studying globally has increased steadily for centuries, the past few decades have seen an explosion in the volume of those movements. Once people move to cities and earn higher incomes (see part 2), it becomes much easier to move or travel to other countries. Hence the labour market is becoming truly global for the first time as well.

In Silicon Valley for example, more than half of business start-ups involved a foreign-born founder, scientist or engineer, and over 25 per cent even included an Indian or Chinese immigrant.

People are not just traveling more frequently for work. World tourism has also expanded exponentially. In 1950, just 25 million people travelled abroad. But in 2013, we have already seen more than one billion international tourists travelling around. Their impact is enormous, not just because of the money they spend, but for the invaluable exchange of knowledge and culture, as well as the set-up of many new personal relationships.

Students, too, are crossing borders in large numbers. Around 800,000 international college students study in the US today – about 250,000 more than in 2006. Approximately a quarter of these students are Chinese.

Perhaps the most dramatic change in recent years however has been the speed at which information is flashing around the world. More than two-thirds of humans have a mobile phone, and the proportion is rising rapidly. Today, there are more phones than people.

This level of tele-density means that people have become interconnected at a level never seen before in history. Over 40 per cent of the planet is online. At more than 1.65 billion, the community of Facebook users is already far beyond the population of the world’s largest nation, China.

These connections have already had an enormous impact and are poised to have an even greater one, especially in developing countries. Internet-related consumption and expenditure is now bigger than either global agriculture or the worldwide energy sector.

The MGI Connectedness Index – which scores the flow of goods, services, finance, people and data over the flow of value and intensity, offers a comprehensive look at how countries participate in inflows and outflows. Singapore tops the rankings in the latest report (No. 4 in 2014), followed by the Netherlands (previous No. 6), the United States (unchanged), and Germany (previous No. 1). China has surged from No. 25 to No. 7.

This matters! MGI explains why: the rise, diversification, and power of global flows are not just fascinating; they are of significant importance to businesses all over the world for several reasons. First, the more connected you are, the better off you are. Second, global interconnections are rewriting the rules of the game and are one of the major factors changing the basis of competition. The new landscape of global flows offers more entry points to a far broader range of players. Large companies from emerging markets are increasingly formidable competitors. Traditional sector boundaries are blurring. Small businesses and start-ups can be instantly global. Whereas in the past, developed-economy multinationals competed against each other, today’s competitors can be individuals and companies in all shapes and sizes – from anywhere in the world and from unexpected sectors. Put differently, if a business today has data and a platform that engage millions of people, few attractive business opportunities in just about any sector are ‘unthinkable’ for it.

Online marketplaces for the sale of goods and services, have been at the epicentre of changes in the global competitive landscape. Today, however, as technology continually allows for the creation of entirely new platforms, incumbents may not have any familiarity with the mechanics, business models, and competencies of their new competitors.

It’s no longer sufficient to regard large firms as potential competitors; start-ups with access to digital platforms can be born global, scale up in the blink of an eye, and disrupt long-standing rules of competition.

Technology is also shifting the balance of power from large, established incumbents to small businesses, start-ups, and entrepreneurs. In global markets, size has typically not only been an advantage – it has been a necessity. In the 1990s, it was virtually impossible for small enterprises to compete in markets around the world or scale up operations to a global level immediately. In the vast commercial ocean, the sharks would easily mow down the minnows. Today, however, minnows are increasingly chasing and getting the better of sharks, thanks in large part to the rise and power of new technological platforms.

In an important trend break, technology has allowed small, nimble attackers to compete with large, established companies. Start-ups today can plug into enormously powerful global platforms with the same ease as a large corporation and can expand to millions of customers in a matter of a few years, if not months.

New competitors can buy state-of-the-art systems off the shelf and install them in a matter of weeks. 3D printing allows start-ups and small companies to ‘print’ highly complicated prototypes, moulds, and products in a variety of materials with no tooling or setup costs. Cloud computing gives small enterprises IT capabilities and back-office services that were previously available only to larger firms – and cheaply, too. Indeed, large companies in almost every field are vulnerable, as start-ups become better equipped, more competitive, and able to reach customers and users everywhere.

The instantly plugged-in phenomenon isn’t confined to the technology and digital sectors. Even traditional industries such as manufacturing are increasingly seeing small businesses with multiple-country production sites and global operations – practices once reserved for established multinationals.

Third, global flows provide companies with new ways to put their assets to productive use.

Finally, a more interconnected world leads to some surprising new outcomes. But that has, in my opinion, two sides of the coin, as this provides not just a vast range of opportunities but makes our world more and more into a village, so that any unfortunate event somewhere may impact vulnerable others without any delay, as these days, news travels not just fast but almost in real-time.

So be prepared to see and deal with this significant structural shift to make the best out of it and master the challenges well.

In the next and final part of this series, Reinhold Karner will deal with conclusions and recommendations.

Economy 4.0: The Global Revolution and its Five Disruptive Forces (Part 5 of 7)

Written by Reinhold M. Karner on Wednesday, 26 October 2016.


The fertility rate is falling, and the world’s population is greying dramatically both in developed and emerging countries. A third of the global labour workforce will retire in the next 10 years, which will change the scenery as never before, as well as challenging public budgets. A generation of older people is about to change the global economy in many aspects, and will reshape the business landscape in rich countries as they become increasingly well-funded consumers.

In the last century, the planet’s population doubled twice. But in the 21st century, it will not even double once – birth rates in much of the world have declined sharply. But the number of 65+ people, which was a steady eight per cent of the total population during the last few decades, is set to nearly double within just 25 years, to more than 1.1 billion people by 2035 – that’s 13 per cent of the population.

According to the Economist, the “old-age dependency ratio” (the ratio of old people to those of working age) will grow even faster. In 2010, the world had 16 people aged 65 and over for every 100 adults between the ages of 25 and 64 – almost the same ratio it had in 1980. By 2035, the UN expects that number to have risen to 26.

The interesting thing about this, in my opinion, is that people used to be ‘quite old’ at 65 years of age some decades ago, but today – thanks to so many positive developments – this perception and description is probably true only rarely.

But, on the other side of the coin, global experience shows that as nations grow wealthier, their inhabitants become less fertile. 30 years ago, just a small share of the global population in a few countries had fertility rates that were significantly below the replacement rate (2.1 birth per woman in developed, 2.5 in emerging countries).

Based on broadly rising prosperity by 2014, however, already 60 per cent of the world’s population lived in countries with fertility rates far below the replacement rates. This includes the majority of the developed world like Germany (1.4), UK (1.96) plus some large emerging countries such as China (1.5), Russia (1.6), Brazil (1.8) and Vietnam (1.8), while it is still over an outstanding six in countries like Mali, Niger and Somalia.

While aging has been obvious in developed economies for quite some time, (Japan and Russia have seen their populations declining over the past few years), the demographic shortfall is now spreading to China and will soon be seen in Latin America too.

Thanks to improvements in medical science, health care and vaccinations, a declining infant mortality rate as well as the predominant peaceful times and fortunate absence of massively devastating world wars, an upright circle has been created. According to MGI, for the first time in human history, aging could mean that the planet’s population could plateau in most of the world in a few decades.

If we take a look at the EU, in nearly every of its member countries, the fertility rate is below the replacement rate – at the moment, the population is expected to increase by five per cent until 2040 for various reasons, but will then begin to shrink. In Germany, which is known for its weak population growth, the European Commission believes the population could shrink by 19 per cent by 2060. The country’s working-age population is expected to fall from 54 million in 2010 to 36 million in 2060. This may also partly explain the recent welcome message from Chancellor Merkel to refugees.

The exemption to this trend is the UK, which may – according to MGI and without considering the impact of the recent Brexit vote – overtake Germany as Europe’s most populous country by 2060 – thanks to the high birth rate among families whose ancestors were immigrants, especially from their colonies, to a relatively high immigration today.

But all in all, this is not just a European phenomenon. The peak days of global population growth are very likely behind every continent except Africa.

At the same time, life expectancy is rising. Around the world, life expectancy at birth rose from 47 years in in the mid-fifties to 69 today. A few decades from now, in 2045/2050, the average person may expect to live to an impressive 76 years.

The demographic tables have just turned upside down. In the beginning of the fifties, developed countries had twice as many children (aged 15 years and under) as older persons (aged 60+ years). But since 2013, older persons outstripped children by a margin of 21 per cent to 16 per cent of the populations in these countries. Based on current trends, by 2050, developed economies could have twice as many older persons as children.

Credit-rating agency Moody’s projected in 2014 that the number of “super-aged” countries, defined countries in which more than 20 per cent of the population is 65+, which are today just Germany, Italy and Japan, would rise from to 13 in 2020 to 34 in 2030 (including China)! By 2040, as just one of many consequences, China could have more dementia patients than the rest of the whole developed world.

Beyond pure demographics, technology is massively contributing to the trend of aging. It’s commonly expected to see significant increases in life expectancy over the next decades as new technologies – such as next-generation genomics (see part 4) and others that are able to modify organisms – help evermore people across the globe to live healthier and longer lives.

Falling fertility rates, slowing population growth and aging populations will all likely have a massive impact on the labour force of the future. New workers will enter at a slower rate, and older citizens may work for much longer than they do today. Indeed, the definition of the labour force itself may change from 20 to 64 year olds today, extending by 5, 7 or even 10 years to include older age groups.

As the Economist states, Warren Buffett, the icon of American capitalism, at over 80 epitomises a striking demographic trend: for highly skilled people to go on working well into what was once thought to be old age. Across the rich world, well-educated people increasingly work longer than the less-skilled. This gap is part of a deepening divide between the well-educated well-off and the unskilled poor that is slicing through all age groups. Rapid innovation has raised the incomes of the highly-skilled while squeezing those of the unskilled. Those at the top are working longer hours each year than those at the bottom. The consequences, for both individuals and society, are expected to be profound.

There is also the unpleasant aspect that longer life expectancy and lower investment returns will mean that many elderly people will be less able to afford to retire. And because of these adverse demographics with fewer people working and more people receiving benefits, we will see quite a challenge as this could put an immense burden on state budgets, forcing governments to boost retirement ages. This shows once more, in my opinion, that the idea of a basic income for everyone due to the rise of robots will just not be financially feasible, making little sense at all to create a ‘useless class’ of people.

Rich countries with lots of well-educated older people may find the burden of ageing easier to bear than places like China, where half of all 50-to-64-year-olds did not complete primary-school education.

Worldwide, the share of older workers (55+ years) in the workforce is expected (as per MGI) to increase from 14 per cent in 2010 to 22 per cent by 2030. The greying of the workforce will be felt most severely in advanced economies as well as in China – where the share of older workers will increase to 27 and 31 per cent of the workforce respectively, as well as being the biggest market for robots in the world.

The aging and shrinking of the workforce is a major disruption that will affect us all!

The number of likely retirees will grow more than twice as fast as the labour pool, leaving fewer workers to pay for the elderly. In addition to creating pressure on global pension funds and state budgets, these trends will force a lot of pressure against the world’s pool of savings and create an array of new fiscal stresses.

As an entrepreneur, leader or chief executive, you can’t afford to wait and watch as employees and customers age. Embracing this new reality will offer a lot of new business opportunities but will also require quite a few essential changes in the way most enterprises operate and manage customers, employees, and stakeholders over their life spans.

While older and experienced employees are often more expensive, they are frequently the first to be laid off, bought out or let go during restructurings. But in an evermore greying world, employers should think twice and far ahead and adapt their strategies. MGI is spot-on on this point and I quote: rather than seeing older employees as legacy costs, you must view them as assets and resources.

Companies have to become more comfortable dealing with shades of grey. There are already many positive examples like Toyota, who changed their employment policy completely, rehiring about half of its retiring employees and allowing the company to maintain their skills and experience in flexible part-time scenarios. But there are many more best-practice examples around in this regard, such as Axa in France, British Gas, the US drugstore giant CVS and many more.

This is also the point where reverse mentoring should play its role, as Gartner Inc. is recommending. First pioneered by GE and since adopted at scale by companies such as P&G, Johnson & Johnson and GM, it focuses on pairing mature senior employees with individuals entering the workplace for mutual benefit.

Millennials possessing the dexterity and knowledge required for digital business become great resources for educating more tenured staff members on new technologies. In return, younger staff benefit from knowledge and capabilities imparted by senior staff, such as business acumen, protocol and decision-making skills that often come with time and experience.

And we will see another welcoming trend growing in the future: many vital elderly people are not happy in the long run to not be ‘needed’ anymore. After enjoying the fifth world cruise and 10th wellness holiday and spending a lot of money, they will realise that working wasn’t and isn’t that bad. So a growing part of them will be looking for a flexible part-time job, mentorship or some form of charitable work.

Volunteer work will become a growing bearing financial factor that saves the state and the economy a lot of money. This will also be a concept that young people and families will happily embrace – to invite such vital grey people for support in and around their households. This will even lead to voluntary grandparent ships and elective affinities – without any cumbersome state involvement. This is, all in all, a very bright outlook and a win-win situation for every generation!

However, from a business opportunity point of view, the vast majority of companies have been relatively slow and have even failed, so far, to focus on this expanding, substantial and fast growing grey market. The majority of consumer-facing companies are still too obsessed with the 25 to 54 demographic.

But in a changing world, older consumers will make up a bigger share of the market and will also likely be active consumers for a longer time. If more grey people intend to be working longer, they are more likely to be able and willing to spend more of their income.

Older consumers are also the richest thanks to house-price inflation and generous pensions. The 60+ spend currently some $4 trillion p. a. and that number will only grow. At the other end of the social scale, however, manual work gets harder as people get older, and public pensions look rather attractive to those with low wages and the unemployed.

The Boston Consulting Group (BCG) calculated that less than 15 per cent of firms have developed a business strategy focused on the elderly. The Economist Intelligence Unit, a sister organisation to The Economist, found that only 31 per cent of firms it polled did take into account increased longevity when making plans for sales and marketing.

A key reason for this tentativeness could very likely be that more and more young people dominate the marketing departments, also because of a growing digital focus, and still think that the best place for the ‘old’ is out of sight and mind. Youth must be served, the saying goes. But so, increasingly, must the elderly.

On the other hand, the innovation driven by start-ups as well as global consumer players such as Nestlé, P&G and electronics makers has given birth to an explosive range of new products and business models for the grey market. In the private sector, retail, health-care, tech, financial, and leisure companies are among the forerunners and first movers in developing tailored services and products for the greying market.

According to MGI, elderly consumers face trade-offs that force a change in purchasing tactics. While non-retirees are more inclined to “shop smarter,” looking for bargains on brand-name products online, retirees prefer to seek value, by, for example, buying supermarkets’ private-label goods.

There is a second important trend in consuming patterns. Seniors typically reduce their spending on housing, food away from home, and apparel as they move to retirement, while they increase spending on food at home, medical services, and, surprisingly, electronics. Of particular importance is also their focus on health and wellness, addressing the need to remain mobile and independent, which is usually not on the radar of young marketers and business developers. Products and services that address these needs will have a fast-growing market to capture.

Companies gradually seem to be mastering the art of discretion – addressing older people subtly, given the fact that certain projects have failed because everyone wants to become old but not to be categorised as old. For example, some retailers are surreptitiously lowering shelves and putting in carpets to make it harder to slip, package-goods firms are printing larger typefaces, and Kimberley-Clark, for example, has overhauled its brand of adult nappies to make them more like regular underwear.

So it’s key that even advertising tactics to build product awareness will be adapted to new requirements!

Japan – with the highest share of grey people – is leading the way and one should learn from them. Just one impressive example: malls are mostly designed as attractions for the younger generations, but in Japan, Aeon, a retail-focused conglomerate, opened a mainly senior-focused chain of malls. There you’ll find escalators that move at a slower-than-usual speed and price tags in large type as well as medical check-up units. And for those who just want to meet new people, the mall even offers a highly adopted senior dating service.

In Singapore, projects such as City for All Ages and their future-oriented mass transit and housing policies are increasingly transforming communities to become more accommodating to the elderly. And even in India, real estate developers such as the Max India Group or Tata are working to build residential communities specifically for seniors.

In the next two parts of this series, Reinhold Karner will tackle the remaining last disruptive force, and conclusions and recommendations will follow.

Economy 4.0: The Global Revolution and its 5 Disruptive Forces (Part 4 of 7)

Written by Reinhold M. Karner on Tuesday, 11 October 2016.

The major disruptive force of new and refined material -, gene-, bio-, renewable energy- and nano technologies. 

Many new and arising disruptive technologies and developments are very welcome, but while a few are questionable, one type in particular may cause serious problems unless it is dealt with and strictly. 

According to the World Economic Forum (WEF), we are in a new seasons in every industry, in very country in the world. And of course - as mentioned in the previous parts - most of it is based on technology which is directly or indirectly linked to Moore's exponential Kaw. Having altered our vision of what is possible and embarked on a process that is both gratifying and terrifying as the period between historic breakthroughs decreases, the list of potential 'upcoming big things' grows longer every day. 

It is anticipated that these technology categories will be spurring a fast-groing annual multi-trillion euro business within a decade. 

While these technologies affect so many poducts and services comprehensively, I would like to focus on three by way of example: namely clean energy/solar power, next generation genomics; and advanced materials science.

 I’ll start with an overview of the energy sector in general and then focus on solar power in particular. According to BP’s Energy Outlook 2016, as the world economy expands, more energy will be needed to fuel the higher levels of activity and living standards. Population and income are the key drivers behind the growing demand for energy – the world’s population is projected to increase by around 1.5 billion to reach nearly 8.8 billion people by 2035, while rapid improvements in energy intensity (i.e. the amount of energy used per unit of GDP) mean that energy demand grows far less quickly than global GDP: 34 per cent versus 107 per cent.

Quite interesting to note is that the growth in the global consumption of liquid fuels is driven by transport and industry, with transport accounting for almost two-thirds of the increase. The global vehicle fleet (commercial vehicles and passenger cars) will more than double by 2035, from around 1.2 billion today to 2.4 billion. But while the fuel mix continues to shift, unfortunately, fossil fuels are likely to remain the dominant source of energy powering the world economy by 2035.

Renewables are set to grow rapidly, as their costs continue to fall and the pledges made in Paris regarding climate change support their widespread adoption. The EU continues to lead the way in the use of renewable power, however, in terms of volume growth up to 2035, the EU is surpassed by the US, and China adds more than the EU and US combined.

Today, the global oil and natural gas industry is big money, about a $4 trillion business. This is about to change. The sun delivers around 7,000 times more energy to the earth than we consume today, and the cost of harnessing solar energy is on a Moore’s Law curve, halving every 16-18 months. With the current technology, it would take less than half a percent of the Earth's land area to meet all energy needs.

Imagine the impact on this world when we have energy which is clean and practically free everywhere – it changes all industries.

According to the latest REN21 global status report, 2015 saw a record worldwide investment and implementation of clean energy such as wind, solar and hydropower ($286bn, approx. 150 Gigawatts, with solar energy accounting for 56 per cent of the total and wind power for 38 per cent) – that’s the largest annual increase ever, and equivalent to Africa’s entire power generating capacity.

For the first time, emerging economies outspent richer nations in the green energy race, with China accounting for a third of the global total. Jamaica, Honduras, Uruguay and Mauritania were among the highest investors, relative to their GDP. In the next 20 years, over 50 percent – theoretically up to 100 percent – of the world's energy production could be solar. We are coming up to the peak of the solar revolution where the cost of solar cells will plummet, efficiency will rise dramatically, and the incentives for widespread adoption will become predominant. There may also be exciting new alternatives to solar cells made of silicon (for example perovskite –a light-sensitive crystal that has the potential to be more efficient, inexpensive, and versatile than all other existing solar solutions to date.)

Although solar energy currently only accounts for approximately 0.5 per cent of electricity generated, solar energy production is projected to grow globally at 30 per cent per annum. For those who want to do the simple calculations; at a 30 per cent annual growth rate, it looks, theoretically, like this: In five years, we go from 0.5 per cent to 1.9 per cent, in 10 years, we’re at 5.3 percent, in 15 years, we’re at 20 per cent, and in 21 years, we're at 95 per cent.

But we have to consider the fact that because the sun doesn’t shine for 24 hours straight, as well as the fact that there will be some areas with an overabundance of solar power, it is technically and commercially quite challenging to handle. Unless there are cost-effective ways to store such renewable power and a new infrastructure is implemented to help balance supply and demand across the grid, this will not change much.

Ramez Naam, energy analyst and science fiction author, says, “we are now hitting a crossover point where solar, without subsidies, is starting to beat out all other sources of energy.” According to Naam, progress in technology has caused solar prices to drop two hundred times since the 1970s and five times in the last five years alone.

Outside of the city of Los Angeles, a new solar plant will be built at 3.6 cents per kilowatt-hour, and in Dubai, the lowest bid for a new, unsubsidized solar plant came in at less than 3 cents per kilowatt-hour. “That is a price that five years ago people would have told you is simply impossible to reach. Think about the cost of energy — it fluctuates. But the cost of technology, like the cellphone in your pocket? Those costs only go down. So now we have a technology that produces energy. It just gets cheaper and cheaper and will disrupt everything in its path,” he says.

My next example is next-generation genomics – changing the building blocks of everything. As Jim Snabe from WEF expressed lately, “today we are obsessed with fixing disease with generic therapy. Imagine if we don’t get sick. Imagine we prevent disease because we do DNA analysis. We may even do modifications. We certainly will have sensors, so that we see things and predict things before it’s too late. If we do have to fix a disease, we do it individually because we understand the individual patient’s individual situation. Imagine what that does to healthcare spending, and to quality of life. That is the opportunity that’s right ahead of us.”

In the 1990s, sequencing the human genome was a project equivalent to constructing the Panama Canal – a multi-year endeavour that required an army of workers and steam-powered diggers. A consortium of international scientists spent 13 years and $3 billion to unlock the mysteries of the human blueprint. Since 2014, supercomputer technology is available that can sequence 20,000 genomes a year at a cost of $1,000 each and less, in just a few hours. Interestingly in this case, rapid advances in technology were even able to exceed Moore’s law regarding the speed improvements of gene sequencing.

The rapidly declining cost of gene sequencing is encouraging studies in how genes determine traits or mutate to cause disease. Increasingly affordable genetic sequencing combined with big data analytics will allow interesting and fast diagnosis of medical conditions, pinpointing of targeted cures, and perhaps in the near future even the creation of ‘customised’ organisms, with applications in agriculture, food or medicine.

If you’d like to learn more about this, I’d recommend you read the publications on about the Encyclopaedia of DNA Elements – a project called ENCODE, launched in 2003, published in 2012, intended as a follow-up to the Human Genome Project, which aims to identify all functional elements in the human genome.

ENCODE is a giant endeavour to catalogue the entire genome and annotate all its components. All genomes, including ours, are strings of code. The code is written in an alphabet of just four letters and it contains the information needed to make the proteins that build our bodies. But just like the letters in a sentence, the individual bits of the code are meaningless on their own. It is just a set of boring letters. But ENCODE gives the letters meaning, bringing them to life to try and to find some understanding. Genome is a great big place and to understand its wide range of biological questions and implications, experiments need to be run on a mega scale for this complexity, using large computer farms and a worldwide consortium of scientists and data analysts.

In each of our cells, the genome is read slightly differently. Different types of cells use different parts of the genome. So, in the beginning, what it is that switches things on and off was a bit of a mystery. What ENCODE does is try and understand some hundred different cell types to begin with, and why it is that, for example, your liver cells are different from your kidney cells. The complexity is enormous. In the very beginning when it became clear that just over one per cent of our genomes count for the actual proteins, some scientists wondered whether the rest is just junk. Not so – it has since been found that every part of the genome is being used.

This leads us to CRISPR, an acronym for gene editing, and an abbreviation for Clustered Regularly Interspaced Short Palindromic Repeats – a technique discovered in 2012 by molecular biologist Professor Jennifer Doudna, whose team at Berkeley, University of California was studying how bacteria defend themselves against viral infection. The natural system they discovered can be used by biologists to make precise changes to any DNA. This technology has the potential to change the lives of everyone and everything on the planet.

Whether in plant, animal or human cells, CRISPR allows one to insert, delete or amend/repair the DNA specifically – very similar to the copy-paste function of a word processor. The use of CRISPR for genome editing was the AAAS's choice for breakthrough of the year in 2015, and it’s quite likely that this will be one of the 21st century’s breakthrough technologies.

BBC’s Medical correspondent Fergus Walsh’s remarks on how it works may help for a better understanding: “When a bacterium comes under attack it produces a piece of genetic material that matches the genetic sequence of the invading virus. This piece of material in tandem with a key protein called Cas9 can then lock on to the DNA of the virus, break it and disable it. It is so sensitive that scientists can use it to explore the billions of chemical combinations that make up code of the DNA in a cell, and to make a single key change.”

Crucially, it is fast and cheap, and so is accelerating all kinds of research – from the creation of genetically-modified animal models of human disease to the search for DNA mutations that trigger illness or confer protection. In theory, it might be possible to correct the DNA of embryos but it might also be used to add in genetic enhancements, leading to designer babies. No scientist is suggesting – yet – that genetically edited human embryos should be born, but several teams in China have done some basic research, and the UK is the first country to formally approve gene editing in human embryos, for research only.

While in China there is no national religion, Confucian thinking is still dominant. The belief is therefore that you become a person at birth and not before, which is clearly different from the Christian conception. The taboo when it comes researching with embryos in China will therefore be likely to be less problematic than with us.

As a third and last example, let’s have a look at advances in materials science as another disruptive innovation. Materials science is rapidly transforming the way everything from cars to light bulbs is made. The ability to understand the properties of materials at the tiniest scales not only lets people do old things better; it lets them do new things. This is what some scientists describe as a ‘golden age’ for materials.

The process of manipulating materials at a molecular level has made nanomaterials possible. Advocates of nanotechnology talk of building things atom by atom. The result is a flood of new substances and ideas for ways of using them. Such breakthroughs have already transformed ordinary materials such as carbon and ceramics to take on surprising new properties – greater reactivity, unusual electrical properties and greater strength.

For example, carbon-fibre is not only used to engineer lighter aircrafts, but also by BMW for its electric car i-series. The resulting structure, although stronger than steel, is at least 50 per cent lighter, and also about 30 per cent lighter than aluminium. Nor does it corrode. Since the carbon-fibre body provides the vehicle with its strength, the outer panels are mainly decorative and made from plastic. These are simple to spray in a small paint booth, whereas metal requires elaborate anti-corrosion treatment in a costly paint shop. In all, the BMW i3 factory uses 50 per cent less energy and 70 per cent less water than a conventional facility.

Having ever better tools and instruments, the researchers are also benefiting from a massive increase in available computing power. This allows them to explore the properties of virtual materials in detail before deciding whether to make something out of them.

Nanomaterials have already been used in products ranging from pharmaceuticals to sunscreens and even bicycle frames. Now, as MGI explains, new materials are being created that have attributes such as enormous strength and elasticity and remarkable capabilities such as self-healing and self-cleaning. Smart materials and memory metals (which can revert to their original shapes) are finding applications in a range of industries such as aerospace, pharmaceuticals, and electronics.

As reported in the Economist, Gerbrand Ceder from the University of California, Berkeley, together with Kristin Persson, of the Lawrence Berkeley National Laboratory, founded the Materials Project – an open-access venture using a cluster of supercomputers to compile the properties of all known and predicted compounds. The idea is that, instead of setting out to find a substance with the desired properties for a particular job, researchers will soon be able to define the properties they require and their computers will provide them with a list of suitable candidates. This will provide what the people working on the project call the ‘materials genome’: a list of the basic properties – conductivity, hardness, elasticity, ability to absorb other chemicals and so on – of all the compounds anyone might think of.

“In ten years, someone doing materials design will have all these numbers available to them, and information about how materials will interact,” says Mr Ceder. “Before, none of this really existed. It was all trial and error.”

Engineering at the molecular level improves old materials as well as creating new ones, meaning completely new classes of materials. What interests materials scientists is that with modern processing techniques, it is possible to turn many bulk materials into nanoparticles – measured as 100 nanometres (billionth of a metre) or less. The reason for doing so is that nanoparticles can take on new or greatly enhanced properties because of quantum mechanics and other effects. This includes unique physical, chemical, mechanical and optical characteristics which are related to the particles’ size. Engineers can capture some of those properties by incorporating nanoparticles into their materials.

Manufacturers are coming under growing pressure to take responsibility for the life cycle of their products. This involves an obligation to consider all the energy, environmental and health effects of every stage, from materials extraction to production, distribution and, eventually, recycling or disposal. As materials become more complex, this is becoming trickier.

The traditional way of gauging what effects a new material will have on the wider world is to go by the elements. If something has lead in it, for instance, it is probably not good for you. If it has a bit of manganese, it is probably safe. “That is so old-fashioned,” says Mr Ceder. “Very often what these things do to your body depends on the form, not the chemistry.”

That makes nanoparticles particularly difficult. A lot of research is being done on their environmental and health implications, but much of it is inconclusive.

And here is my concern in raising the red flag for nano-materials! We shouldn’t just look at the first tempting effects of a use-case but far beyond as here lies a huge risk – even danger – because there are still no (secure) filtering or collecting techniques for disposal available. If nano-materials and their artificially engineered structure of atoms enter the cycle of whatever kind of ‘disposal’ after their first use, they could end up in the environment and our bodies, creating hazards to our cells and cell membranes, with very likely disastrous consequences in 30-40 years.

So here we surely need the strictest responsibilities, rules, liabilities and control over any kind of disposal or guaranteed implementation of a ‘self-destruction-mechanism’ within these nano-materials after a certain amount of time.

In the next parts of this series, Reinhold Karner will tackle the remaining two disruptive forces, and conclusions and recommendations will follow.

Economy 4.0: The Global Revolution and its 5 Disruptive Forces (part 3 of 7)

Written by Reinhold M. Karner on Wednesday, 05 October 2016.


Today, even the pace of innovation seems to be on its edge, with technology and society evolving at a faster pace than businesses can adjust to. This is challenging any leadership to ‘adapt or die.’

Smart phones, apps, digital media, photos and maps, social web, video games, the cloud, drones and robotics, accurate weather forecasts: these are just a few examples of life-changing things made possible by the exponential growth in the power of computer chips over the past five decades – Moore’s Law, named after Intel co-founder Gordon Moore.

In 1965, Gordon Moore observed that transistors were shrinking so fast that every year, twice as many could fit onto a chip without increasing costs, and in 1975, adjusted the pace to a doubling every two years. Although it was originally not expected to remain valid till today, no one really knows when the theory will no longer apply. This constant doubling for nearly all digital electronics is strongly linked to Moore's law: quality-adjusted microprocessor prices, memory capacity, sensors and even the number and size of pixels in digital cameras, the speed of data transmission and its result into an avalanche of data generation. Eron Kelly from Microsoft predicted: "In the next five years, we’ll generate more data as humankind than we generated in the previous 5,000 years."

Referring to part 1 in this series, in which I spoke about the progress and results of constant doubling (where 30 exponential footsteps take you not just 30 meters but 26 trips around the world), we are – according to MIT’s professor Andrew McAfee, using 1958 as starting point where information technology was first noted by the U.S. BEA – at exponential footstep number 39. That would take us 13,750 times around the world – just to illustrate the staggering and exponential speed of development of this major disruptive force. We have certainly arrived at the digital age and its digital economy, with a vast and exponentially growing number of use-cases.

What we can learn from anthropologist Ian Morris’s research is that nothing has bent the curve of human history more than the first industrial revolution. For thousands of years, humanity experienced an incremental upward trajectory. It was steam power in the 18th century that started it all, followed by other technological innovations including mechanical engineering, chemistry, metallurgy, electricity and the combustion engine. Within 200 years, it had bent the curve of human history — of population and social development — nearly vertically. According to Morris, the ability to generate massive amounts of mechanical power was so important that it “made mockery of all the drama of the world’s earlier history.”

Prof. McAfee’s lesson is clear: computers and other digital advances are doing for mental power (the ability to use our brains to understand and shape our environments) what the steam engine and its descendants did for muscle power.

2015 was the year where digital business found its way into the enterprise. The digital transformation is disrupting industries, economies, jobs and lives faster than most people realise. This is not just about digital start-ups, it’s everyone in every industry! Global digital commerce now amounts to over a trillion euro annually, and in the private sector, nearly 25 per cent of revenue comes from digital – in five years it should be 40-45 per cent! As most analogue revenues flatten or even decline in many industries, businesses are shifting to a new source of growth: digital revenue from digital business, including the digitalisation of things.

Digital business is the creation of new business designs by blurring the digital and physical worlds, making it possible for a variety of industries to participate seamlessly within the same value stream process composed of people, businesses and things.

There is another speciality, a unique economic property of digital information: such information is non-rival, and it has close to zero marginal cost of reproduction. That means that digital information is not ‘used up’ when it gets used, and is often extremely cheap to create another copy of a digitised resource (such as ebooks and music), while only one person or thing can consume rival goods at a time.

Digital business will break down traditional barriers between industry segments, creating completely new value chains and new business opportunities that may not be filled by incumbent players. It will also challenge existing industry boundaries and the dominance of leading players, causing them to rethink their business. As the famous Canadian author and influential management thinker Don Tapscott states, “Digital Business is a new paradigm. Paradigm shifts involve dislocation, conflict, confusion and uncertainty. New paradigms are nearly always received with coolness, even mockery or hostility. Those with vested interests fight the change. The shift demands such a different view of things that established leaders are often last to be won over, if at all.”

To compete in a digital world, enterprises must digitalise their models, in which products, services, markets, channels and processes are transformed through digital technologies. Gartner Inc., the world's leading information technology research and advisory company, believes, “digital business is the essence of digitalisation as it disrupts existing business models — even those that were born of the Internet and e-business eras. Why? As the presence of the IoT (Internet of Things) grows, the things’ ability to generate new types of real-time information and to actively participate in an industry’s value stream will also grow.”

Practically everything (device/object) that can be instrumented (digitised/connected) will be. Every piece of equipment, anything of any value will have embedded sensors and be connected to the Internet. The Internet of Things (IoT) will happen without human users!

Cisco’s executive chairman and former CEO John Chambers said that 500 billion devices will be connected to the Internet by 2025. He sees a global $19-trillion ‘Internet of Everything (IoE)’ opportunity (that's the entire US economy plus some) – the networked connection of people, process, data and things — which is opening up new opportunities in both public and private sectors. Chambers is picking the next 10 years to be a period of ‘explosive growth’ not seen since the '90s glory days of the Internet. “This new digital age will have five to ten times the impact of the Internet today,” he says.

In 2016, investments in IoT hardware will exceed 2.3 million euros per minute. Within five years, one million new devices will come online every hour, leading to approximately 50 billion connected things in 2020.

Samsung’s Co-CEO BK Yoon made a strong statement: “the IoT is a huge game changer. The most important topic for our industry right now, something that will revolutionise our lives and unlock infinite possibilities. By 2020 every single piece of Samsung hardware will be an IoT device, whether it is an air purifier or an oven.”

And it isn’t just their competitors that will follow suit. The manufacturing industry is where the future of Industry 4.0 facilitates the vision and execution of a Smart Factory, where modular, structured, cyber-physical systems will monitor IoT physical processes, creating a virtual copy of the physical world and making decentralised decisions.

3D-printing as new additive manufacturing and Industry 4.0 will widely change the way production and logistics are carried out. 3D-printers which create high-value innovation opportunities using advanced materials will soon be able to simultaneously print multiple materials such as plastics, calcium phosphate, graphene, conductive ink, glass, advance nickel alloys, electronics, food, bio-inks, pharmaceuticals, carbon fibre, kevlar and fiberglass. This will offer you a personal factory at your office or home, and a wide new era of inventions.

But we should also consider – although this might sound like science fiction to many – that as ‘things’ become more intelligent, they will become independent and autonomous businesses that buy and sell as people — with rights and responsibilities — just as corporate entities are today. Things that can receive information, negotiate, buy and request service represent new customer opportunities for all industries. When things become ‘people’ and customers, they’d have the greatest impact on supply chain, distribution networks and existing sales models.

That’s a lot of interconnections – creating billions of new relationships not driven solely by data but by algorithms. The Algorithmic Business is already here: interconnections, relationships and algorithms are defining the future of business. The Internet of Things will be the catalyst for a new age of algorithms. The arising algorithmic economy will include businesses that are key for creating highly beneficial data products.

But it’s vital to understand that the real value is not in big data, as Peter Sondergaard, Senior VP and head of research at Gartner Inc. puts it: “Data is inherently dumb, it doesn't actually do anything unless you know how to use it, and how to act with it. The real value is not in big data but in algorithms, as they define action.”

Dynamic algorithms are at the core of new customer interactions. In the future, algorithms – all encoded in software – will define the way most of our world will work. Using a set of rules to follow in making ‘computations’ is how today's leading websites and services work their magic. Agents and virtual personal assistants are becoming real: Apple’s Siri, Microsoft’s Cortana, Amazon’s Alexa and Google’s new virtual assistant tool Google Assistant are just the early prototypes. So, the post-app era is coming!

Agents enabled by algorithms define the post-app era. A market for algorithms will soon emerge. By 2020, smart agents will facilitate 40 per cent of interactions, so many users will even have forgotten about apps. Instead, they will rely on virtual assistants – algorithms in the cloud – that they trust.

The furious pace of technological adoption and innovation is shortening the life cycle of companies and forcing executives to make decisions and commit resources much more quickly. Leaders in business, politics and society should adjust to this new reality.

But there is another interesting ‘thing’ one should have on their radar in this infinite array of new technologies and innovations: Blockchains. It’s the outstanding technology most likely to change the next decade of business. Today, Blockchain is the technology underpinning the cryptocurrency Bitcoin.

The Blockchain technology is itself complex, and another example of the unexpected fruits of cryptography, but based on a simple idea. At its most basic, Blockchain is a gigantic, worldwide distributed ledger or database running on millions of devices and open to anyone, where not just information but – and that is its new nature – anything of value, like money, titles, deeds, music, art, scientific discoveries, intellectual property, and even votes, can be moved and stored privately and securely. That means Blockchain is a trust machine, a trust protocol – the second wave of the Internet!

Blockchain is at its core powerful for one reason: it solves the problem of proving that when someone sends you a digital ‘something’, they didn’t keep a copy for themselves, or send it to 20 other people. Their respective computers regularly agree on how to update the database using a consensus mechanism, after which the modifications they have settled on are rendered unchangeable with the help of complex cryptography. Once information has been immortalised in this way, it can be used as proof of ownership. Maintaining this type of ledger of goods and services is a remarkably important aspect of global economics.

Blockchain could for instance even help to cut electricity bills, research suggests. A Blockchain-based smart plug that can adjust power consumption minute-by-minute has been created by technologists at Accenture. In the future, ownerless companies could be based and run on the Blockchain.

On the Blockchain, trust is established not by powerful intermediaries like banks, corporations or governments, but through mass collaboration and a clever code. Blockchains ensure integrity and trust between strangers. The Blockchain can also serve as the underpinning for ‘smart contracts’ – algorithms that, for example, automatically execute the promises embedded in a bond.

As Harvard Business Review quotes, “it’s the first native digital medium for value, just as the Internet was the first native digital medium for information. And this has big implications for business and the corporation.”

It is easy to see why bankers get excited about distributed ledgers. Instead of having to keep track of their assets in separate databases, as financial firms do now, they can share one. Trades can be settled almost instantly, without the need for lots of intermediaries. As a result, less capital is tied up during a transaction, the risk will be reduced immensely and the cost of transactions will become negligible. More than 40 leading banks already have a stake in R3 CEV, a start-up meant to come up with shared standards. Similarly, firms including IBM and Digital Asset Holdings have started the Open Ledger Project to develop open-source Blockchain software.

Like the Internet democratised the exchange of information, transforming entire industries in the process, the Blockchain could democratise the exchange of value – a concept with staggering possibilities.

However, one can keep writing about this major disruptive force, going into the implications of autonomous cars, digital healthcare, and the next phase of mobility whereby most of us will use a mesh of mobile devices and wearables on our bodies and so on. So I’d like to refer to one last – but important – topic, from an unusual or perhaps unpopular perspective: robots, drones, smart machines and artificial intelligence.

As long as these technologies are supporting us in a fruitful way, we should be fine. But as we enter into a ‘conflict of interest’ zone between humans and machines, we should think twice, decide and regulate it in a wise way. We need to get this right, it’s unlikely that we’ll get a second chance without massive collateral damage – if any at all – if we get it wrong.

A worrying development is that by 2025, computers could do the work of 140 million knowledge workers, and robots could do the work of another 75 million people. There will still be high demand for skilled positions and many totally new professions will be created, yet we’ll eradicate much more jobs than create new ones.

And the aim can’t be to either expect or everybody to acquire an IQ of over 120, to make up nations of poets, thinkers and Einsteins, or for everyone to be a manager or top-qualified scientist, or to create a ‘useless class of humans’ who are paid a basic income and are allowed to ‘enjoy’ fun and leisure. This would be dead wrong and off track. We all have countless talents, and not everyone will, should or could become an academic. But to have a decent and rewarding job, the freedom and opportunity to enjoy an interesting career and be respected regardless of talent or position is key for us all, for our personal development and a peaceful coexistence – now and for many generations and centuries to come!

In the next parts of this series, Reinhold Karner will tackle the other three disruptive forces, and conclusions and recommendations will follow. 

Economy 4.0: The Global Revolution and its Five Disruptive Forces (Part 2 of 7)

Written by Reinhold M. Karner on Friday, 29 July 2016.


At the beginning of the 20th century, the world’s urban population was only 220 million, mainly across the west. In 1900, two out of every ten people lived in an urban area. Today, more than half of our global population is living in cities – 55 per cent, according to the UN. By 2050, it is expected that seven out of every ten people will live in an urban area. That’s an almost upside down change in just 150 years – not even a blink of an eye in human history!

While Europe and the US became urbanised in the 18th and 19th centuries, with Latin America following suit throughout the second half of the 20th century, within the last 20+ years, we’ve seen the fastest pace of urbanisation ever, both in emerging countries like China and India, as well as some regions of Africa.

China’s government expects another 100 million people to move to urban areas within the next five years alone, which bears an on-going challenge. So, in 2014, China’s government introduced the HSR plan, linking every city with more than 200,000 people by rail and expressway, and connecting every city with more than half a million inhabitants to its fast expanding high-speed rail network (HSR). But it’s not just China who is taking these measures – the same is the case in Asia and other members of the developing world. By 2025-2030, nearly 2.5 billion people throughout Asia will live in cities. In fact, UN projections show that up to 90 per cent of the increase in relation to the trend of urbanisation by 2050 will be concentrated in Asia and Africa.

We are in the middle of the vastest and most rapid migration-shift from the hinterland to cities in history. Leaders in the west haven’t even heard of most of the names of these upcoming cities yet: China’s Zhengzhou, Kunming and Foshan for example, Taiwan’s Hsinchu, India’s Surat and Brazil’s Porto Alegre to name just a few. China’s mega-city Chongqing is also not very well known in the west, and it is categorised as the largest city on the globe with approximately 33 million inhabitants, and a thousand new migrants arriving from the countryside every day. China’s Tianjin, which has a population of roughly 15 million, became known worldwide only in 2015 through the devastating series of explosions at the port. And it is predicted that these cities’ GDP in 2025 will reach over $600 billion – similar in size to the entire economy of Sweden or Switzerland!

What are the main reasons for this urban century? People, especially parents and young couples in emerging countries, take on a lot of risks and challenges for this move, but do so expecting a much better life, at least in the long run for their children – a better education and infrastructure, a higher income and more opportunities. Since people have moved out of jobs in farming to those in cities, their output has doubled, and their living standards have improved compared to those of their country relatives.

Latest research indicates that the density of urban areas drives super-linear productivity gains because of increased opportunities (for example greater social and economic collaboration). Cities also attract more talent and businesses, creating more services. As a result, each metropolitan becomes on average 15 per cent wealthier, more innovative and productive with every doubling of the number of its city’s inhabitants. Additionally, the investment in cities’ infrastructures pays off more efficiently, as it is 30-50 per cent less expensive to deliver basic services compared to less densely populated rural regions.

Despite not being well known in the west, it shouldn’t be surprising that half of the global GDP growth between 2010 and 2030 is predicted to be generated in nearly 500 cities in emerging markets, and by 2025-2030, a quarter of the global top 200 cities will be located in China.

According to MGI, the number of Fortune Global 500 companies headquartered in emerging markets rose 50 per cent by 2005, doubled by 2010, and doubled again by 2013, reaching 130. MGI’s projections suggest that emerging economies will be home to half of the Fortune Global 500 by 2025. Hence, driven by this underlying fundamental disruptive force, it’s important to realise and consider the immensely fast pace in relation to the shift of the world’s economic centre of gravity back to Asia.

And finally, there is very good news: this huge wave of rapid urbanisation has already increased the per capita income for 700 million people in emerging markets and lifted them out of poverty. According to Sanjeev Sanyal, an Indian economist and former Deutsche Bank Global Strategist, “the real story for the next two decades will be these countries’ shift to middle-class status. Although other emerging regions will undergo a similar shift, Asia will dominate this transformation.”

There is big hope if this trend keeps on going that by 2030-2035 we might see a further 2-3 billion people tapping into the power of the new consuming class, adding another army of consumers to spend an accumulated $30 trillion a year just in emerging markets. That is, by then, nearly half of the world’s consumption. These are fantastic opportunities that should not be missed!

In the next parts of this series, Reinhold Karner will tackle the other four disruptive forces, and conclusions and recommendations will follow.

Economy 4.0: The Global Revolution and its Five Disruptive Forces (Part 1 of 7)

Written by Reinhold M. Karner on Tuesday, 19 July 2016.

The world economy is changing at a pace never witnessed before in history. Is it all for the worse? No, most is the opposite!

It is driven by not just the much-debated digital transformation, but a further four major disruptive forces, making five in total. Each on its own is breath-taking and would rank among the greatest changes the global economy has ever seen – and each feeds upon the other.

These five major disruptive forces are:

1. Rapid urbanisation
2. The digital transformation and the Digital Economy
3. New and refined Material-, Gene-, Bio-, Renewable Energy- and Nano-Technologies
4. Demographics (in developed and emerging countries)
5. Globalisation (economic networks, the flow of goods, services, finance, people etc…)

In the first Industrial Revolution in the 18th century, which began with the invention of the steam engine in Great Britain, it took the UK (with a population of nine million people) 154 years to double their per capita economic output. India and China recently managed this in just 16 and 12 years respectively, each with approximately 100 times as many people. When the telephone was introduced, it needed 75 years to reach 50 million users. The app Angry Birds, managed to reach the same number of users in 35 days. The pace and scale of forces at work are staggering!

The present change (Economy 4.0) is happening – according to MGI (McKinsey Global Institute) – 10 times faster and at 300 times the scale, or roughly 3,000 times the impact.

These monumental forces, their impact and transition occur in quite a few areas on a sheer exponential scale, but we are not trained and used to thinking of constant doubling. Just a simple example: if your stride is one metre long, 30 linear steps will take you 30 meters from where you start, but 30 exponential steps would take you 26 trips around the world! Honestly, would you have guessed this?

Hence, future predictions are failing more often, which is why we should swiftly adjust to a new reality and update our thinking, awareness and decision patterns.

Just within the last 30 years, world trade has increased tenfold. Between 1980 and 2007, global financial flows have multiplied by 25. In the 90s, the US was the world’s leading manufacturer, but China has since long taken on this role. With a savings rate of over 50 per cent of their GDP, the Chinese are nowadays world-champion savers, whereas that of US citizens is below six per cent.

Another example is that in recent decades, the world’s economic centre of gravity has moved halfway around the world. Researchers took each country's geographic centre and weighted its distance from the centre of the earth according to GDP. From the year 1 until many hundred years later, the starting position was between China and India, until it shifted, from 1820 – triggered by the 1st Industrial Revolution – successively towards the west, nearly in the US in 1950 and since 1960, slowly at first, now moving rapidly back towards the east. In around the year 2025, it is expected that it will once again be located close to the starting point of year 1 – in China. Therefore, we should orient ourselves to the east!

In the next parts of this series, Reinhold Karner will look a little closer at the five major disruptive forces, and finally, some conclusions and recommendations.

The article was first published here.