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When the McKinsey consultant Chris Bradley tries to explain the changing nature of corporate competition, he turns to the fictional universe of Harry Potter. A few exceptional “wizard” companies have emerged this century, which seemingly operate in a different dimension to their non-magical “muggle” counterparts, he says.
Mostly US and Chinese technology giants, such as Amazon, Xiaomi and Nvidia, these magical companies are characterised by extraordinary dynamism, intense investment levels and global impact. They can reshape — or, in some cases, conjure up entirely new — markets. In so doing, they drive a disproportionate share of the world’s economic growth, which has been captured in their profits and soaring stock market valuations. Duller corporate muggles, on the other hand, huddle in older, lower growth industries, such as finance, consumer goods, construction and transport, largely unloved by investors.
“Something strange is afoot in the industrial landscape whereby a small set of firms in a few arenas have really driven all the dynamism and value creation in the world in a way that is historically unusual,” Bradley tells me, snapping back into more traditional McKinseyese.
His views reflect the findings of a new 213-page McKinsey Global Institute study he co-authored on the next big “arenas” of competition, trying to identify the most promising industries of the future. McKinsey defines arenas as categories of dynamic, high-growth industries that transform the business landscape and generate outsized profits.
The report starts by analysing the 12 arenas that have driven the most growth between 2005 and 2020. Including the consumer internet, biopharma, semiconductors, cloud computing and industrial electronics, they grew much faster than more traditional industries off the back of surging investment. Over this period, the 12 recorded a compound annual growth rate of 10 per cent in revenues, trebling their share of global GDP to 9 per cent.
To date, US businesses have dominated these arenas, according to the study, accounting for 65 per cent of their global stock market capitalisation in 2020. Greater China, with a strong presence in the semiconductor, ecommerce and consumer electronics arenas, accounted for 17 per cent, while Europe represented just 9 per cent.
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McKinsey reckons some of these high-growth sectors, such as ecommerce, artificial intelligence software and semiconductors, will further evolve or mutate and become far bigger as new technologies are deployed, the global economy moves further online and the green energy transition unfolds. Other industries, including modular construction, shared autonomous vehicles, industrial biotech and small-scale nuclear fission power plants, may also emerge strongly over the next 15 years. In total, the report highlights 18 future arenas of competition. It forecasts they could generate anywhere between $2tn and $6tn of profit by 2040.
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That range is so wide because of the uncertainties that still infest the world, not least the US presidential elections on November 5. Geopolitical tensions could further fragment the global economy. The pace of the green transition may accelerate or falter. The evolution of enabling technologies, such as AI, is also impossible to guess.
Readers of the report might find echoes of the work of the finance professor Hendrik Bessembinder, who has long argued that a disproportionate share of stock market returns is driven by a few “outlier” companies. But they may also question how far market cap equates with an economy’s overall dynamism, especially given US equity markets are currently inflated by a tech bubble, a fiscal sugar rush and a strong dollar.
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Indeed, Michael Power, a consultant at the investment firm Ninety One, argues that high stock market valuations can sometimes result from excessive market concentration that stifles competition. “There is a high degree of monopoly power in the US that translates into high levels of market cap. But in China, they let competition rip. Every man and his dog wants to start an EV company,” he tells me.
Power argues that many analysts tend to underestimate the competitiveness of China, and increasingly India, in leading technologies. He points to a recent study by the Australian Strategic Policy Institute that found China had strengthened its global research, and now leads in 57 out of 64 critical technologies, including quantum sensors, electric batteries and advanced robotics. China will dominate the fast-growing renewable energy economy this century, he predicts, just as the US was powered by the oil economy in the 20th century.
As for Europeans, if they were depressed by Mario Draghi’s report on the region’s lack of competitiveness, they will bury their heads in their hands after reading McKinsey’s analysis — or be inspired to act. Europe boasts few corporate wizards and is over-represented in the muggle economy.
Still, predicting the industries of the future is an impossible game. It is easy to extrapolate current trends, harder to anticipate disruptive breakthroughs. The day before the first precarious flight of the Kitty Hawk in 1903, who could have predicted that aviation and space would become two of the defining industries of the 20th century? Then again, where are our flying cars, let alone our flying broomsticks?
john.thornhill@ft.com