Competitiveness of London - McKinsey & Company

Sustaining and Enhancing London’s Leadership PositionVenkie ShantaramPartner

McKINSEY GLOBAL INSTITUTE

March 2012

Presentation to the LSE

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

McKinsey & Company | 2

The McKinsey Global Institute (MGI) – An overview MGI location

MGI mission and aspirations

▪ Help leaders in the commercial, public, and social sectors develop a deeper understanding of the evolution of the global economy

▪ Provide a fact-base that contributes to decision-making on critical management and policy decisions

▪ Focus on long-term fundamental research and maintain very high standards of peer review and intellectual rigor in its work

Overview

▪ Founded in 1990 as McKinsey’s business and economics research arm

▪ MGI research combines the disciplines of economics and management

▪ Micro-to-macro methodology examines microeconomic industry trends to better understand the broad macroeconomic forces affecting business strategy and public policy

▪ Research is funded by the partners of McKinsey independent from any business, government, or other institution


MGI’s core research areas

Global capital markets

UrbanizationProductivity and growth

Technology and innovation

The future of work

Resources

McKinsey Global Institute


MGI’s report ‘Urban World’ highlighted the importance of 600 cities in driving future global growth

Today

▪ 1.5 billion people live in the top 600 cities – 22 percent of global population

▪ $30 trillion of GDP in 2007 – more than half of global GDP▪ 485 million households, with average per capita GDP of

$20,000▪ $21 trillion of GDP in 2007 generated by the top 100 cities

Tomorrow

▪ 2.0 billion people will live in these 600 cities in 2025 – 25 percent of the global population

▪ $64 trillion of GDP in 2025, nearly 60 percent of global GDP▪ 735 million households will live in these cities, with average per

capita GDP of $32,000▪ 235 million households in developing world cities will have

income above $20,000 per annum

SOURCE: Urban world: Mapping the economic power of cities, McKinsey Global Institute; McKinsey Global Institute Cityscope 1.0

1 The 600 are the top cities by contribution to global GDP growth from 2007 to 2025.

McKinsey & Company | 5 SOURCE: ONS, DEFRA, CLG Local Government Financial Statistics England 2010, Barker Review,

Successful cities will be the key to future economic growth in the UK

73% share of English population living in urban areas

26% local government share of public sector expenditure

78% share of English GDP growth from urban areas in last 10 years

81% of central government targets are on local spending


Key messages

London is one of the world’s great cities – An economic and cultural powerhouse

It has the potential to remain so, and generate significant economic growth over the next 20 years

However, there are potential threats to London’s pre-eminence

A clear strategy for London would increase the chances of it achieving its full potential

McKinsey & Company | 7 7

London is the third largest city in the world by GDP2007 city rankings

1 Developed regions comprise the United States and Canada, Western Europe, Australasia, Japan, and South Korea2 GDP 2007 in predicted real exchange rate3 Population below age 154 Households with annual incomes greater than $20,000 in purchasing power parity (PPP) terms5 Mexico City Metropolitan Region NOTE: For metropolitan regions, we use the first name of the region: e.g., New York for New York-Newark

SOURCE: McKinsey Global Institute Cityscope 1.3

Rank

Grey italic text Developing regions

Normal text Developed regions1

Households with annual income over $20,0004Total householdsChildren3Total populationGDP2

1 Tokyo Tokyo Mexico City Tokyo Tokyo2 New York Mumbai Mumbai Osaka Osaka3 London Mexico City Karachi New York New York4 Paris Sao Paulo Kolkata Shanghai London5 Los Angeles Osaka Tokyo London Rhein-Ruhr6 Osaka New York Sao Paulo Beijing Paris7 Chicago Shanghai Dhaka Sao Paulo Los Angeles8 Rhein-Ruhr Kolkata Delhi Rhein-Ruhr Moscow9 Nagoya Beijing New York Chongqing Chicago

10 Randstad Delhi Kinshasa Paris Nagoya11 Milan Chongqing Manila Mumbai Mexico City12 Washington, D.C. London Lagos Mexico City Seoul

13 Houston Dhaka Buenos Aires Los Angeles Milan

14 Dallas Buenos Aires Cairo Moscow Randstad

15 Philadelphia Los Angeles Chongqing Seoul Istanbul

16 Belgian central metro Karachi Los Angeles Buenos Aires Fukuoka

17 San Francisco Paris Istanbul Delhi Philadelphia

18 Boston Manila London Kolkata Taipei

19 Moscow Rio de Janeiro Osaka Rio de Janeiro Sao Paulo

20 Sao Paulo Rhein-Ruhr Lahore Chicago Hong Kong

21 Madrid Istanbul Rio de Janeiro Nagoya Miami

22 Mexico City Cairo Paris Milan Dallas

23 Atlanta Moscow Baghdad Tianjin Washington, D.C.

24 Miami Seoul Jakarta Istanbul Madrid

25 Rhein-Main Bangkok Lima Randstad Belgian central metro


… and the largest in Europe2007 city rankings

1 Share of population aged 65 and above.2 Households with annual incomes greater than €70,000 in PPP terms.


1 London London Trieste London London2 Paris Paris Genoa Paris Paris3 Rhein-Ruhr Rhein-Ruhr Chemnitz Rhein-Ruhr Rhein-Ruhr4 Randstad Milan Ravenna Randstad Milan5 Milan Randstad Livorno Milan Randstad6 Belgian central metro Madrid Parma Madrid Madrid7 Madrid Barcelona (ESP) Salamanca Lille Barcelona (ESP)8 Rhein-Main Belgian central metro Florence Belgian central metro Rhein-Main9 Munich Upper Silesian metro Perugia Barcelona (ESP) Athens

10 Barcelona (ESP) Lille Lubeck Naples Munich11 Rome Rhein-Main Nice Upper Silesian metro Rome12 Vienna Athens Turin Rhein-Main Lille

13 Hamburg Rome Leipzig Birmingham Vienna

14 Stuttgart Naples Rostock Rome Stuttgart

15 Lille Berlin Oviedo Athens Birmingham

16 Athens Vienna Hannover Vienna Belgian central metro

17 Stockholm Munich Toulon Munich Rhein-Neckar

18 Birmingham Warsaw Dresden Stuttgart Luxembourg

19 Oresund Stuttgart Braunschweig Manchester Venice

20 Oslo Hamburg Modena Budapest Gelderland

21 Dublin Birmingham Burgos Warsaw Manchester

22 Rhein-Neckar Budapest Limoges Hamburg Hamburg

23 Berlin Lisbon Bremen Lisbon Noord

24 Noord Rhein-Neckar Kassel Noord Stockholm

25 Venice Venice Corunna Liverpool West Yorkshire

Grey italic text Eastern Europe

Normal text Western Europe

Rank

Households with annual income over $70,000ChildrenShare of retirees1Total populationGDP


The 3 largest economies in Europe have different profiles – UK is unusually dependent on London

24

40 37

Germany

49

France

31

United Kingdom

43

2933

15

Top city

Middleweights

Small cities & Rural areas


Share of GDP%

868279

Share of population%

30

4943

GermanyFrance

18 14

33

United Kingdom

44

24

46

Per capita GDP gap to country Indexed, country = 100

106

157138

GermanyFranceUnited Kingdom

1129694

33 26 29

Number of cities


In terms of growth, while London outpaced the UK comfortably, Paris and Rhein-Ruhr were unable to outpace middleweights

39

39

22


London

14

46

40

MiddleweightsSmall cities & Rural areas Megacities

38

33

29

Paris

Rhein-Ruhr

Middleweights (examples): BirminghamManchester

Middleweights (examples): LyonLille

Middleweights (examples): MunichStuttgart

2.3

United Kingdom France Germany

2.2

3.0

1.7

2.0

1.9

1.7

1.5

1.5

2.5 1.8 1.6

Share of country GDP growth 2000-07 by city type%

CAGR, 2000-07, %


Key messages






Top 25 hot spots in 2025 from MGI Cityscope2025 city rankings

1 Developed regions comprise the United States and Canada, Western Europe, Australasia, Japan, and South Korea. 2 GDP 2007 to 2025 in predicted real exchange rate.3 Population below age 15.4 Households with annual incomes greater than $20,000 in purchasing power parity (PPP) terms.5 Mexico City Metropolitan Region. NOTE: For metropolitan regions, we use the first name of the region: e.g., New York for New York-Newark.


1 Tokyo Shanghai Tokyo Kinshasa Tokyo Tokyo2 New York Beijing Mumbai Karachi Shanghai Osaka

3 London Shenzhen Shanghai Lagos Beijing New York

4 Los Angeles Guangzhou Beijing Mumbai Chongqing London5 Shanghai Tianjin Delhi Dhaka Osaka Beijing6 Paris Chongqing Calcutta Calcutta New York Shanghai7 Beijing Los Angeles Mexico City5 Mexico City5 Mumbai Paris8 Osaka New York São Paulo Delhi London Rhein-Ruhr

9 Rhein-Ruhr São Paulo Dhaka Manila São Paulo Los Angeles10 Chicago Wuhan Chongqing Tokyo Delhi São Paulo11 São Paulo Moscow New York New York Paris Moscow12 Shenzhen Shenyang Karachi Los Angeles Lagos Mexico City5

13 Moscow London Osaka São Paulo Rhein-Ruhr Seoul

14 Houston Hangzhou London Cairo Mexico City5 Nagoya

15 Dallas Chengdu Lagos Lahore Calcutta Chicago16 Guangzhou Singapore Manila Buenos Aires Tianjin Milan

17 Washington, D.C. Dallas Kinshasa London Shenzhen Mumbai

18 Tianjin Nanjing Los Angeles Baghdad Hangzhou Istanbul19 Randstad Tokyo Shenzhen Kabul Chengdu Hong Kong20 Mexico City5 Foshan Buenos Aires Luanda Los Angeles Dallas21 Seoul Bangkok Cairo Istanbul Moscow Randstad22 Nagoya Istanbul Istanbul Khartoum Wuhan Bangkok23 Singapore Paris Paris Paris Dhaka Shenzhen

24 Hong Kong Houston Tianjin Nairobi Buenos Aires Taipei

25 Atlanta Seoul Bangkok Dar es Salaam Seoul Houston

Grey italic text Developing regions

Normal text Developed regions1

Rank

Households with annual income over $20,0004

Total householdsChildren3

GDP growth2007-25GDP2

Total population

McKinsey & Company | 13 SOURCE: McKinsey Global Institute Cityscope 1.3

-10

0

10

20

30

40

GDP growth 2007-25USD million

1,000,000100,00010,0001,000100

GDP/Capita growth 2007-25USD ‘000

Barcelona

Milan

Madrid

Oslo

Munich

Randstad

Rhein-Ruhr

Paris

London

Median=9.5

London is expected to both grow substantially in absolute size and increase it’s GDP/Capita above the European median …

NOTE 1: Only European Cities shownNOTE 2: All figures relate to real exchange rate calculations

Megacities (>10 mn inhabitants)

Large middleweights (5-10 mn inhabitants)

Mid-sized middleweights (2-5 mn inhabitants

Small middleweights (<2 mn inhabitants)

Bubble size indicative of GDP/Cap, 2007

McKinsey & Company | 14 SOURCE: McKinsey Global Institute Cityscope 1.3

… the growth rate figures are in the mid tier of even the largest cities due to London’s high initial size

Paris

London 300

Belgian central metro 91

Randstad 128

Vienna 65

Berlin 47

Rhein-Main 96

Stuttgart 68

Rhein-Ruhr 215

Rhein-Neckar 59

Hamburg 87

Munich 115

Upper Silesian metro 52

Budapest 66

Warsaw 112

Birmingham 27

Barcelona (ESP) 42

Lille 37

Manchester

4

17

Venice 12

Athens 12

Rome

Naples

Milan 43

Lisbon 14

Madrid 44

25

233

NOTE 1: Only European Megacities, large- and midsized middleweights shownNOTE 2: All figures relate to real exchange rate calculations

2.0%

2.1%

2.2%

2.4%

2.5%

3.7%

3.9%

5.2%

0.2%

0.5%

0.5%

0.6%

0.6%

0.9%

0.9%

1.0%

1.1%

1.2%

1.2%

1.5%

1.6%

1.6%

1.7%

1.8%

1.9%

2.0%

GDP 2007USD billion

GDP growth rate, 2007-25Percent CAGR

42

38

47

46

22

42

33

30

42

42

64

64

53

34

51

54

35

51

62

46

53

43

49

23

12

23

Madrid

Barcelona (ESP)

Milan

Rome

Naples

Venice

Athens

Lisbon

Birmingham

Manchester

London

Paris

Belgian central metro

Lille

Vienna

Randstad

Berlin

Hamburg

Munich

Rhein-Neckar

Rhein-Main

Rhein-Ruhr

Stuttgart

Budapest

Upper Silesian metro

Warsaw

0.1%

0.1%

0.2%

0.2%

0.2%

0.2%

0.2%

0.5%

0.6%

0.7%

0.9%

0.9%

1.0%

1.2%

1.2%

1.3%

1.6%

1.7%

1.8%

1.9%

2.0%

2.2%

2.2%

3.5%

4.0%

5.1%

GDP/Cap 2007USD ‘000

GDP/Cap growth rate, 2007-25Percent CAGR


Key messages






Potential threats to London’s pre-eminence

Reduced open-ness to skilled immigrants and international students

Loss of competitiveness in global financial services due to ‘super-equivalent’ regulation

Restrictions on London’s physical expansion

Reduced attractiveness as a HQ location due to poor infrastructure, uncompetitive tax regimes and restrictions on skilled immigration

Under-investment in London’s cultural and artistic heritage – a major driver of quality of life and essential to under-pin its attractiveness to global talent

Under-investment in primary, secondary and tertiary education in London


Despite the crisis, London remains the leading international financial centre

SOURCE: ONS Balance of Payments – Pink Book, IMF, The CityUK research

Contribution of Banks to financial services net exports EUR billions

Financial services net exportsEUR billions

CAGR1 %

24 8

-10 52

-7 -11

20 38

6 3

05-09

Financial services contribute 3-6X more to the overall balance of payments in the UK than they do in other countriesEUR billions

29,893

05

24,283

04

26,692

03

24,914

02

22,195

01

19,307

2000

15,784

1999

15,881

2009

41,849

08

50,557

07

40,426

06

16 14

9 15

1 Compounded Annual Growth Rate 2 FISIM stands for Financial Intermediation Services Indirectly Measured

-5-5

4

-1

023399

30

-5-5

5

-1

03531111

40

-6-6-1-1

3541213

51

Ireland US Japan Hong KongFranceGermanyUK Luxembourg Switzerland Mexico China

00-05

Other financial servicesInsurance

Baltic ExchangeFund Managers

Securities dealersBanks

CAGR1 %

18 19

4 12

12 -15

05-09

18,265

05

14,929

04

13,148

03

12,150

02

9,559

01

8,754

2000

6,958

1999

6,841

2009

25,336

08

31,049

07

24,431

06

28 16

16 14

00-05

Other exportsFISIM2

Fee incomeSpread earnings

2008

2007

2006


Multiple factors drive London’s competitive success

Source: Clusters and the New Economics of Competition (Michael Porter)

Overall context

Benign corporate tax rates Historically

predictable tax regime

Favourable personal tax rates

Noninvasive approach of

tax authorities

Regulatory system

and reputation

Commercially minded

employment laws

Openness to foreign ownership

Open migration

Stable legal

framework

Customer cluster

Welcometo foreigners

Strong ties to US

Global client baseTime

zone bridging

US and Asia

Cutting edge sophisticated

complex client needs

Proximity to eurozone

Must visit road-show destination

Global centre for research

Distinctive professional services

Primary international

transport hub

Robust technology

infrastructure/future

capacity

Extensive transport network

Leading, but unsupportive

financial media

System and

services

London retains top position in the Global Financial Center Index for 2010

People and

culture English speaking

Deep local talent pool

Cost of living

Strong arts and culture

Low crime rate

Magnet for global talent

Culture of innovation


However, the outlook is worrying on several factors

Source: Clusters and the New Economics of Competition (Michael Porter)

Competitiveness increasing

Competitiveness flat

Competitiveness decreasing

London retains top position in the Global Financial Center Index for 2010

Overall context

Benign corporate tax rates Historically

predictable tax regime

Favourable personal tax rates

Non-invasive approach of

tax authorities

Regulatory system

and reputation

Commercially minded

employment laws

Openness to foreign ownership

Open migration

Stable legal

framework

Customer cluster

Welcometo foreigners

Strong ties to US

Global client baseTime

zone bridging

US and Asia

Cutting edge sophisticated

complex client needs

Proximity to eurozone

Must visit road-show destination

Global centre for research

Distinctive professional services

Primary international

transport hub

Extensive transport network

Robust technology

infrastructure/future

capacity

Leading, but unsupportive

financial media

System and

services

People and

culture English speaking

Deep local talent pool

Cost of living

Strong arts and culture

Low crime rate

Magnet for global talent

Culture of innovation


Key messages






5 levers provide a common architecture to identify opportunities for economic growth

Enablers

1

Economic sectors/ clusters

2

Human capital

3

Innovation and entre-

preneurship

4 Physical and virtual infrastructure

5 Public and civic institutions

Source: Team economic development plans; Brookings Metropolitan Policy Program, Chicago Plan for Growth

Concentrations of industries, functions, and occupations

Talent production, attraction, retention, and matching to jobs

▪ Government efficiency and efficacy

▪ Business environment

▪ Tax value proposition

▪ Innovation performance

▪ Entrepreneurial ecosystem

Linkages and movement of goods, people, and information


Priorities for London’s economic development

4 Physical and virtual infrastructure

5 Public and civic institutions

1

Economic sectors

and clusters

2

Human capital

3

Innovation and entrepre-

neurship

▪ Allowing London to expand – rethink ‘green belt’ policy

▪ Building more airport capacity▪ Investing in public transport

infrastructure▪ Eliminating road bottlenecks

through road-pricing and usage taxes

▪ Stronger decision rights for London, as part of de-centralisation of power in the UK to cities

▪ Investment in arts and culture, and public spaces

▪ Equitable distribution of planning gains to encourage development and reduce local taxes

Continued leadershi

p

▪ Openness to global talent ▪ Priorities

– Creative industries– Tourism – Bioscience– High tech– Prof & Business Services– Financial services

▪ Preserving London’s role as the leading international financial centre

▪ Expanding leadership in professional and business services

▪ Maintaining leadership in creative industries▪ Building on early success in High Tech and

bio science

▪ Remaining open to skilled immigration▪ Building on London’s great universities –

as knowledge factories and magnet for international talent

▪ Expanding affordable housing ▪ Providing more rented accommodation

for young citizens

Sustaining and Enhancing London’s Leadership PositionVenkie ShantaramPartner

McKINSEY GLOBAL INSTITUTE

March 2012

Presentation to the LSE

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

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Competitiveness of London - McKinsey & Company