Navigating Asia’s new urban landscape,New growth areas – By: McKinsey Global Institute

“ Understanding the region’s myriad fast-growing cities will be crucial for developing effective business strategies “.

Everyone agrees that Asia is urbanizing rapidly and that this trend will have a dramatic impact on economic development in the region. But unearthing tangible business opportunities in those markets will not be straightforward. Making money in and from Asia’s cities is about to become a lot more complicated.

There are more Asian cities than outsiders tend to realize. Everyone has heard of Mumbai and Delhi, Beijing and Shanghai. But what about Johor Bahru, in Malaysia, or Medan, in Indonesia? The key to tapping urban wealth in Asia will be to look beyond first-tier mega-cities to the second tier: “middleweights,” with populations of less than ten million.

So far, many Western companies have enjoyed success by mostly ignoring these second-tier cities and building strategies around a combination of developed Western markets and only the mega-cities in Emerging-Markets. This relatively accessible combination currently accounts for about 70 percent of global GDP.

Over the next 15 years, however, developed economies and emerging-market mega-cities will account for only one-third of global GDP growth, according to a new McKinsey Global Institute report. Second-tier cities increasingly will set the pace. Around 230 of these middleweight cities that are not among the top 600 urban centers by GDP today will make that list in 2025.

Middleweights will pose challenges even for companies that think they’ve mastered the business requirements of developing economies by operating in mega-cities. Unlike high-profile mega-cities, not all middleweights are fully diversified urban economies. That means multinationals need a strategy for each individual second-tier city or region, instead of an overall second-tier-city strategy.

Middleweights vary widely in their growth opportunities, consumption profiles, consumer attitudes, brand loyalty, and market dynamics. This is not a new issue for many Western businesses, since such geographic diversification happens everywhere. America’s Sunbelt, for instance, can be a profit center for companies serving retirees, while Europe’s language and cultural fragmentation can lead to quite different approaches to different economies.

But figuring out where opportunities lie in Asian middleweights will be an order of magnitude harder. Emerging Asia lacks much of the infrastructure (transportation, communications, financial) that makes geographic fine-tuning easy in the West. Getting a product to Aksu, in Xinjiang—even over China’s much-vaunted roads—is harder than getting a shipment to Topeka, Kansas.

One way our colleagues in China and India have worked around this problem involves geographic clustering, a mix between the scale economies of a mega-city and the growth opportunities of a middleweight. The key here is to focus on regions where several middleweights are relatively near each other and have similar tastes.

As urbanization proceeds and middleweights gain income, more such clusters will appear. Our McKinsey colleagues have identified no fewer than 22 potential clusters in China and 14 in India. The clusters in India, for example, are likely to account for 17 percent of the country’s population and 40 percent of its urban GDP by 2030.

These clusters, although still a challenge for businesses to understand, are at least more comprehensible than individual cities because the clusters demonstrate some common traits among their constituent middleweights. For instance, the density of hypermarkets is eight times greater in Shanghai than in the urban cluster in the middle to lower reaches of the Yangtze River. Consumers in the central–south region of the Liao River have three times the price sensitivity of their counterparts in the middle to lower Yangtze region, and the impact of word of mouth on their buying behaviour is five times greater.

All of these trends begin to suggest a way forward for companies looking to enter middle-tier cities. First, understand that just any city won’t do. Managers need to find the right city or urban cluster for their company. Second, understand that what you think you know about a country from your operations in its largest city may not apply in the second tier. Business planners will often have to start relatively fresh, learning about new marketplaces and consumers.

 

 

 

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