In Part 1 of this two-part series, I discussed five of the ten mega-trends identified by KPMG analysts in report entitled “Expect the Unexpected: Building business value in a changing world.” [KPMG, 2012] The analysts believe that the interaction between these forces makes it imperative that businesses have a firm understanding of them. The five trends discussed in the previous post were: climate change; energy & fuel; material resource scarcity; water scarcity; and population growth. In this post, I’ll discuss the remaining mega-trends: wealth; urbanization; food security; ecosystem decline; and deforestation.
The report’s discussion about wealth centers on the rising global middle class. It states:
“The OECD defines the global ‘middle class’ as those with purchasing power of between US$10 and US$100 per capita per day. This section of the global population is predicted to grow 172 percent between 2010 and 2030 resulting in a rise in overall global wealth over the next 20 years. The challenge for businesses is to serve these new markets at a time when resources will become scarcer and more price-volatile. The greatest opportunity awaits those businesses that can provide products and services for a more resource-constrained world.”
A growing global middle class is essential for economic growth. Middle class individuals become consumers. The report also points out that middle class individuals have higher expectations. When those expectations are unmet, tension and conflict are the likely result. The growing middle class will also make the world much flatter, to use the term coined by Thomas Friedman. “As a result,” the report states, “the advantages that many companies have experienced from ‘cheap labor’ in developing nations are likely to be eroded.” The report also asserts that the same wealth that is creating a growing global middle class will make emerging market countries more influential. To learn more about how the middle class is affecting the global economy, read my posts entitled The Emerging Global Middle Class and Emerging Markets and the Global Middle Class.
The next mega-trend discussed in the report is urbanization. The report states, “In 2009, for the first time ever, more people lived in cities than in the countryside. By 2030 all developing regions including Asia and Africa are expected to have the majority of their citizens living in urban areas and virtually all population growth over the next 30 years is predicted to be in cities.” Although resources are used much more efficiently by populations in urban areas, urban living comes with its own set of daunting challenges. The report explains:
“For these growing cities to be habitable, they will require vast improvements in infrastructure including construction, water and sanitation, electricity, waste, transport, health, public safety and internet and cell phone connectivity. Moving people and goods safely and efficiently through larger, densely populated urban areas will become more challenging and expensive and as cities grow there will be greater demands on scarce resources such as clean water and open green space.”
Although those challenges represent opportunities for businesses, most the infrastructure improvements are going to require government participation and government money may be in rare supply. In past posts, I’ve asserted that public/private partnerships are going to be required to meet future infrastructure challenges. The report goes even further. It states, “The integrated nature of the modern city requires companies to collaborate with each other, their suppliers, their customers, local and national governments and maybe even their competitors to provide the optimum solutions.” The report concludes:
“Higher population densities in urban centers are likely to change economic and political dynamics, however, creating new challenges for businesses. Where improvements in urban infrastructure lag behind population and economic growth, slums expand and the gap between rich and poor widens. While the proportion of urban populations living in slums is slowly declining, the absolute number is predicted to rise to an estimated 889 million by 2020, an increase of 7 percent from 2010 levels. Slums breed social instability and human conflict, yet even here, business can help by providing access to improved water, sanitation, housing, healthcare, education and employment opportunities.”
The next mega-trend discussed in the report is food security. This is a topic I’ve addressed several times over the past few years (see, for example, New Push for Global Food Security and Food Security: Globalization versus Self-Sufficiency). The report states, “In the next two decades the global food system is set to come under increasing pressure from other megaforces including Population Growth, Water Scarcity and Deforestation. As a result, global food prices could to rise by 70–90 percent by 2030. When the potential effects of Climate Change are factored in, prices could rise even higher.” The report continues:
“Large agricultural producers will likely find a ready market in the growing global middle class, and the resulting increased demand for more expensive products such as meat and dairy. Modernizing agricultural techniques in the developing world, particularly Africa, may provide opportunity for producers of fertilizers and other agricultural inputs. Demand for food is expected to increase most in developing countries with their fast-growing populations and this will spur an increase in domestic production to mitigate the rising cost of food imports. Patterns of production are likely to be driven by crop yields, water availability, governance and consumer preferences. However, food security depends not only on the amount of food produced, but also on access to that food. Access will be driven by economic development, especially for the poorest people, who spend roughly half their income on food.”
The report notes that improved food security in developing countries depends on “strong economic growth, political stability, increased agricultural production and integration into the world market.” It comes as no surprise that the analysts conclude that “such conditions are by no means certain.” The next mega-trend discussed in the report is ecosystem decline. It states:
“Historically, the main business risk of declining biodiversity and ecosystem services has been to corporate reputations. In recent years, food producers and retailers in particular have been targeted over the damage to ecosystems of their sourcing of certain products or raw materials, such as fish and timber. However, as global ecosystems show increasing signs of breakdown and stress, more companies are realizing how dependent their operations are on the critical services these ecosystems provide.”
The report notes that the “agriculture, fishing, food and beverages, pharmaceuticals and tourism” sectors could be significantly impacted by ecosystem decline. It continues:
“[Ecosystem decline] would add to operational risk and, in certain locations, potentially jeopardize the long-term profitability and survival of some of the most-affected sectors such as forest products, agriculture and fisheries. Companies further up the supply chain or that operate ‘upstream’ may be more susceptible to operational and regulatory challenges, while companies down the supply chain often have a greater degree of public exposure and therefore to potential reputation risks. … Healthy ecosystems and diverse species are essential to many valuable and difficult-to-replace services ranging from fresh water and food to pollution filtration, carbon storage and pollination.”
The KPMG analysts conclude, “Exact biodiversity tipping points are uncertain. However, once this threshold is breached it is difficult, if not impossible, to return ecosystems to their former conditions. … By paying attention to biodiversity and ecosystem health, companies can recognize the risks and opportunities, anticipate new markets, mitigate their impacts, improve stakeholder engagement, and demonstrate leadership.” The final mega-trend identified in the KPMG report is deforestation. It states:
“Forests cover 31 percent of the world’s land surface and supply essential resources to local communities and the global economy, including timber, fruits and medicinal products. They also provide intangible but equally important services such as soil and water conservation, avalanche control and sand dune stabilization, as well as playing a vital role in reducing greenhouse gas emissions.”
The report asserts that the timber and agricultural sectors must operate differently than they have in the past. The timber industry will likely face pressure to prove that its practices are sustainable and the agriculture sector will have to quit clearing forests to create farmland. The report notes that maintaining forests is critical for the preservation of “a vital carbon sink” that helps “contain climate change.” The report concedes that changing “business as usual” won’t be easy because “wood products contributed US$100 billion per year to the global economy from 2003-2007.” Big money means there will be big resistance to change. The report continues:
“Reforestation with plantation forests is encouraging, but it does not support the rich biodiversity of a primary forest. Furthermore, most reforestation is happening in temperate zones. Primary boreal and tropical forests are most vulnerable to unsustainable forestry practices and land conversion.”
The report concludes:
“The world is too uncertain and too complex to rely on linear forecasts; therefore, business leaders and policy makers should prepare for the unexpected. This means learning to look at the world in a new way that takes account of globally interconnected megaforces, the causal relationships between megaforces, feedback loops, effective intervention points and complex scenarios.”
There is much more to be learned from the 180-page report (which is filled with excellent graphics). I highly recommend that those involved with supply chain risk management take the time to read it and decide for themselves whether the megaforces identified in the report are going to impact their businesses.