Uncover the Industries Transforming the Global Economy

Looking Back to Look Forward

Quick, right now, go to McKinsey.com and search “McKinsey Quarterly.” There’s a special edition out now, a collection of articles from the 1960s to the early aughts all about technology. A lot of what was written back then about adapting to new technologies still holds true today. Although deciding which tools to invest in and where to find the right talent is now more complicated. One 1968 article even predicted that managers’ main interface with computers would be the old-fashioned telephone. Well, we still have the phone part! And now let’s hear from McKinsey senior partner Chris Bradley about the industries that McKinsey believes will reshape the global economy.

These industries represent a significant shift in the business world and are set to drive future growth and innovation.

Step into the Arenas

In 2005, the top ten companies were in traditional industries like oil and gas, retail, industrials, and pharmaceuticals. The average company was worth about $250 billion. But by 2020, nine in ten of those companies had been replaced, and the new companies were eight times bigger. These new companies come from a set of industries representing about 10 percent of revenue that play by very different rules. We call them "arenas of competition."

These wizard-ish industries seem to have a different set of economic rules and get very different results. While the rest of the "muggles" run the world, finance it, and energize it, they play by more traditional economic rules. Value is flowing and moving in these arenas at a much higher rate, with a shuffle rate that is much higher than in traditional industries. This is where growth and dynamism are different, almost like a different world.

How Arenas Conjure Outsize Success

The wizards in these arenas are defined by growth and dynamism. We looked at where value is flowing and moving and came up with two axes. One is value flowing, and this set of industries represents about 10 percent of industries but is 45 percent of the growth in market cap. The other is dynamism, measured by a new metric called the "shuffle rate." Just imagine a deck of cards; in these wizard-ish industries, the top moves to the bottom and the bottom moves to the top much more frequently.

In terms of economic profit, these are the places where all the economic profit in the world is. They are two times more R&D intensive and are the locus of new businesses. Half the value in an arena industry is held by companies worth $200 billion or more. These characteristics make these industries stand out and show that it’s not just about growth and dynamism; it’s almost a different world.

Geographically Focused Arenas

These arenas of competition tend to be focused geographically on the Pacific Rim, particularly the US, which accounts for about two-thirds, and Greater China. Europe, on the other hand, represents less than 10 percent of the value of the arenas. The world of business has moved from the Atlantic to the Pacific.

This geographical focus shows the changing dynamics of the global economy and where the growth is likely to come from.

The Arena-Creating Potion

There is a special formula that these industries run by. First, a step change creates a new platform for the industry, unlocking a new type of competition. For example, in EVs, Tesla and BYD were born on that platform. Second, dynamic escalation is necessary, similar to an arms race, where competition is not just about price or advertising but about overall capability level. And third, a massive market is required. These three things make digitally oriented business models like e-commerce, EVs, semiconductors, etc. successful.

These ingredients are what make these industries unique and set them apart from traditional industries.

Back to the Future

We used this framework to look forward and found that a lot of the things we see today were already there in 2005, like the first EVs, Amazon, and the growth of TSMC. While we can’t predict the future with 100 percent accuracy, we can say that the arenas that will be important by 2040 are already important today.

This shows the importance of staying attuned to these emerging industries and being prepared for the changes they will bring.

Areas of Future Growth

There are some arenas that are continuations of the game, like e-commerce and video streaming, where there is still a lot of potential for growth. And there are some nascent arenas like shared autonomous vehicles, batteries, robotics, and space that are going to be really defining in the future.

These emerging areas offer exciting opportunities for businesses to innovate and grow.

Obesity Drugs and New Medicine Pathways

Obesity drugs are a total game changer, as seen with companies like Novo [Nordisk]. We can see similar opportunities in other chronic conditions with new medicine platforms. This shows the potential for these industries to not only drive economic growth but also address important societal issues.

The economic value of solving these problems is significant, and businesses need to be aware of these opportunities.

Industries that Were Once Arenas

There are some industries that were once arenas but have now reached a more mature stage, like the payments sector and information-enabled business services. While these industries have done incredible things, the action in the industrial landscape is now in the arenas.

This shows the cyclical nature of industries and the importance of staying ahead of the curve.

Regional Growth and Scale

In the US, six big tech companies collectively spend over $400 billion a year in capex and R&D. These companies invest radically and straddle the globe. But in Europe, it’s much harder for companies to scale beyond their borders. The incentives for radical investment are lower, and they end up in a regional game rather than a global one.

This highlights the challenges and opportunities for businesses in different regions.

Swing Factors and the Future

When it comes to predicting the future of these arenas, there are several swing factors that could change the way they evolve. Geopolitics, the pace of the energy transition, and the rate of technology development are the big ones. For example, the promise of AI could radically change the capabilities and costs of these industries.

Understanding these swing factors is crucial for businesses to adapt and thrive in the changing landscape.

Implications for Leaders

Even though arenas are special, every company touches an arena. Banks touch payments, and consumer companies touch hyperscalers on the consumer internet. These arenas blur the lines between industries, making it important for business leaders to understand where they fit and how to compete effectively.

Competing in the input markets for talent and capital is also crucial. Leaders need to be on the front foot about where to play and change their competitive game if necessary.

Hiding in Plain Sight

Going back to our time machine experiment, it’s surprising how many of these emerging industries were hidden in plain sight. We need to be more observant and look for the remarkable and different things that are already happening today to create industries that change the world.

This emphasizes the importance of staying vigilant and proactive in identifying emerging trends.