A report from the Economist Intelligence Unitsponsored by Cisco SystemsEconomic, industry andcorporate trends © The Economist Intelligence Unit 2006 1Foresight 2020 Economic, industry and corporate trendsPreface 2Executive summary 3Chapter 1: The world economy 6Chapter 2: Industries 22Automotive 24Consumer goods and retailing 30Energy 36Financial services 43Healthcare and pharmaceuticals 50Manufacturing 57Public sector 62Telecoms 67Chapter 3: The company 74Appendix I: Survey results 86Appendix II: Methodology for long-term forecasts 95Contents 2 © The Economist Intelligence Unit 2006Foresight 2020 Economic, industry and corporate trendsIn an age of uncertainty, peering 15 years into thefuture may seem like hubris. But ignoring long-termtrends—demographic, economic, corporate—is aneven less attractive option. Understanding the long-term future is vital in ensuring that strategies aresustainable, that opportunities are identified at anearly stage and that challenges are addressed beforethey become insurmountable.This report assesses likely changes to the globaleconomy, to eight major industries and to corporatestructures between now and 2020. Our research drewon three main initiatives:● The Economist Intelligence Unit’s proprietary long-term economic forecasts for the world’s majoreconomies. ● A wide-ranging online survey of senior executivesfrom around the world in November-December2005. In total, 1,656 executives took part. ● A series of in-depth interviews with executives,analysts and policymakers around the world. We would like to thank all the executives whoparticipated in the survey and interviews for their timeand insights.Cisco Systems sponsored the report. We are gratefulto the Cisco team, and to Kenton Lewis, Douglas Frosst,David Chalmers and Kathy Burrows in particular, fortheir support during the research process.Andrew Palmer was the editor of the report. LazaKekic wrote the chapter on the world economy.Graeme Maxton, David Jacoby, Graham Richardson,Aviva Freudmann, Paul Kielstra, Ray Smyth, Bill Millarand Joanne Taaffe wrote the industry sections. TomStandage contributed to the chapter on the companyof the future.The Economist Intelligence Unit bears soleresponsibility for the content of this report. TheEconomist Intelligence Unit’s editorial team executedthe online survey, conducted the interviews and wrotethe report. The findings and views expressed in thisreport do not necessarily reflect the views of thesponsor.March 2006Preface © The Economist Intelligence Unit 2006 3Foresight 2020 Economic, industry and corporate trendsExecutive summaryA lot can happen in 15 years. At the start of the 1990s,China was largely a planned economy, and the SovietUnion still existed. Few people had heard of theInternet and e-mail seemed closer to science fictionthan reality. The next 15 years will bring further massivechanges to the shape of the world economy, to thelandscape of major industries and to the workings ofthe company. The major findings of the Foresight 2020survey are summarised overleaf, but the principaltrends identified in this report include the following:1Globalisation. It’s too early to talk of Asia’scentury, but there will be a redistribution ofeconomic power. Emerging markets, and China andIndia in particular, will take a greater slice of the worldeconomy. Non-OECD markets will account for a highershare of revenue growth between now and 2020 thanOECD economies. Labour-intensive productionprocesses will continue to shift to lower-costeconomies, which will still enjoy a massive wageadvantage over developed markets. The pace ofglobalisation will be arguably the critical determinantof the rate of world economic growth.2Demographics. Population shifts will have asignificant impact on economies, companies andcustomers. The favourable demographic profile of theUS will help to spur growth; ageing populations inEurope will inhibit it. Industries will target moreproducts and services at ageing populations, frominvestment advice to low-cost, functional cars.Workforces in more mature markets will become olderand more female. 3Atomisation. Globalisation and networkingtechnologies will enable firms to use the world astheir supply base for talent and materials. Processes,firms, customers and supply chains will fragment ascompanies expand overseas, as work flows to where itis best done and as information digitises. As a result,effective collaboration will become more important.The boundaries between different functions,organisations and even industries will blur. Dataformats and technologies will standardise.4Personalisation. Price and quality will matter asmuch as ever, but customers in developed anddeveloping markets will place more emphasis onpersonalisation. Products and services will becustomisable, leading firms to design products in amodular fashion and, in the case of manufacturers,assemble them in response to specific customerorders. Customers and suppliers will be treated indifferent ways, depending on their personalpreferences and their importance to the business. 5Knowledge management. Running an efficientorganisation is no easy task but it is unlikely on itsown to offer lasting competitive advantage. Productsare too easily commoditised; automation of simpleprocesses is increasingly widespread. Instead, thefocus of management attention will be on the areas ofthe business, from innovation to customer service,where personal chemistry or creative insight mattermore than rules and processes. Improving theproductivity of knowledge workers throughtechnology, training and organisational change will bethe major boardroom challenge of the next 15 years. 4© The Economist Intelligence Unit 2006Foresight 2020 Economic, industry and corporate trendsAs part of the research for this report, the EconomistIntelligence Unit surveyed more than 1,650 executivesaround the world for their views on how their companies,and the environment in which they operate, would changeover the next 15 years. Executives expect the fundamentals to matter as much asever. A clear strategy, top-notch management and high-quality products and services are seen as critical sources ofcompetitive advantage now and in the future. Butrespondents also expect much to change.Low costs will matter less as a source of differentiation.Make no mistake: cost control will be crucial. Pricingpressures and low-cost competition count as two of thethree most significant risks that companies will face betweennow and 2020 (alongside poor management decisions). Buttwo-thirds of respondents do not believe that having a lowcost base will be a source of greater competitive advantagein that time-frame. What’s more, the value of pricecompetitiveness to customers is expected to decline relativeto other factors, such as personalisation of products andquality of customer service. The human touch will become more central to competitiveadvantage. A large majority of executives expect simplertasks, such as airline check-in procedures or processingexpense claims, increasingly to be handled by machines. Asproduction processes and these routine transactions becomeever more commoditised and automated, value will lie inhard-to-replicate personal relationships betweenemployees, customers and suppliers. The vast majority ofexecutives think that knowledge workers will be their mostvaluable source of competitive advantage (compared withother roles) in 2020, whether in outward-facing functionssuch as sales or inward-facing ones such as knowledgemanagement. Collaborative relationships will multiply and intensify. Amajority of executives believe that high-qualityrelationships with outside parties will become moreimportant as a source of competitive advantage betweennow and 2020. Collaborative problem-solving is expected toincrease in volume inside and outside the organisation, ascustomers and suppliers become more involved in productdevelopment, as cross-functional and crossborder teamswork together more frequently and as partnerships withother organisations proliferate. Productive knowledgeGetting these high-value interactions right will be a majorchallenge. A lack of people with the requisite interpersonalskills is seen as the biggest single barrier to improvedcollaboration with outside parties, closely followed bycultural hostility to more open relationships, data securityworries and an absence of incentives to form and developsuch relationships. Executives believe that employees’ability to communicate, to solve problems and to lead will beThe Foresight 2020 survey: The softer side of successWhich of the following areas of activity offer the greatest potential for productivity gains over the next 15 years?Select up to three activities.(% respondents)Knowledge management Customer service and support Operations and production processes Strategy and business development Marketing and sales activities Human resource management and training Corporate performance management Product development Financial management and reporting Supply-chain management Risk management and compliance Procurement 433529292823221917171410Source: Economist Intelligence Unit survey, 2005. © The Economist Intelligence Unit 2006 5Foresight 2020 Economic, industry and corporate trendsmore important to their organisations’ future success thanfunctional and technical capabilities. Initiatives to improve the quality of the workforce inthese areas will include recruitment, training andredeployment: a large majority of executives expect theproportion of employees in complex knowledge-based rolesto increase over the next 15 years. But simply employingmore knowledge workers, who tend to command highersalaries, can quickly become a short cut to lower margins—unless they also become more productive. Executives clearly believe there are gains to be made inthis regard. There are striking overlaps between the areas inwhich complex interpersonal relationships are thought tomatter most—customer support, business development,corporate performance management, marketing and salesand knowledge management—and those thought to havethe greatest scope for productivity growth. Although increased automation of processes remains aprominent focus for productivity growth, particularly in non-services industries, the scope for driving greater efficienciesout of production processes and simple transactions isdiminishing. Instead, respondents expect to focus moreenergy on improving organisational structures andcommunication as sources of enhanced productivity. ● Technology spending will shift to enabling knowledgeworkers to do their job better. Asked how theirorganisations will improve their performance in knowledge-based roles, use of information technology (IT) wasidentified as the single most likely approach. A major shift inIT investment is anticipated over the next 15 years. Today,such investment is focused mainly on general ITinfrastructure and on financial management and reporting.By 2020, executives expect the emphasis on infrastructurespending to have fallen away dramatically and for knowledgemanagement and customer service to be the principal areasof IT focus.● Organisational structures will change. In order toincrease the efficiency of interactions with others,executives expect organisations to become flatter and foremployees to have more autonomy to make substantivedecisions. More than two-thirds of respondents also say thatthey will incentivise employees to collaborate moreeffectively with other parties. Differences between industries and market segments shouldnot be papered over, of course. Manufacturers are far likelierthan service industries to look to increased automation ofprocesses as a route to higher productivity. Low costs will becritical for companies operating in discount segments. Andsome industries, such as retailers, are already moresophisticated in their relationship management than others.But the survey points to two broad trends that will affectcompanies across sectors. First, competitive advantage willincreasingly depend not on routine, easy-to-automateprocesses but on unpredictable, hard-to-automateknowledge workers. Second, companies will shift their ITspending, human resources (HR) strategies andorganisational structures to make these workers moreproductive. Managing both these trends—in essence,marrying soft skills with hard targets—will be the definingboardroom challenge of the coming years. Who took the survey?1,656 executives from 100 countries around the worldparticipated in the Foresight 2020 survey, which wasconducted in late 2005. Respondents were spread evenlybetween the three main centres of economic activity—30% from Asia-Pacific, 34% from western and easternEurope and 27% from North America. As well as being highly cosmopolitan, the surveygroup was very senior. Almost one-third of respondentswere CEOs, and half of the sample were C-level executivesor board members.Participants were drawn from a wide range ofindustries and business segments, as well as from aspread of company sizes, with more than one-thirdreporting annual revenue of over US$1bn. 6© The Economist Intelligence Unit 2006Foresight 2020 Economic, industry and corporate trendsChapter1The world economy © The Economist Intelligence Unit 2006 7Foresight 2020 Economic, industry and corporate trendsChapter 1: The world economyForesight 2020: The world economy at a glanceThe world economy will be two-thirds bigger in 2020 than in 2005. GlobalGDP will grow at an average annual rate of 3.5% in 2006-20 (similar tothe past 25 years). The US will outpace other major developedeconomies, with growth of almost 3% a year, compared with 2.1% for theEU25 and less than 1% for Japan, whose population will be shrinking. The share of the EU and the US in world income will stay about the samein 2020 as it was in 2005. The US will maintain one of the fastest growthrates in the industrialised world, thanks in part to a favourabledemographic profile. The EU will make up for slower growth throughterritorial expansion, growing to a club of more than 30 countries.Propelled by fast growth in China and India, Asia will increase its slice ofworld GDP from 35% in 2005 to 43% in 2020. But it is too soon to talk ofAsia’s century. On a per-capita basis, China and India will remain farpoorer than Western markets and the region faces a host of downsiderisks. Asia will narrow the gap in wealth, power and influence, but willnot close it. The US will remain the most important single country across all thedimensions of power as result of the size of its GDP, its military might,internal cohesion and persistent technological lead. The US dollar willremain the key international reserve currency. Europe will lack thecohesion to achieve superpower status. The transatlantic economicrelationship will remain the most important globally, even if its relativeimportance—in terms of trade, investment and share of global GDP—falls as Asia’s rises.The pace and extent of globalisation will be the single most importantdeterminant of world economic growth. Our baseline scenario is forgradual trade and investment liberalisation, but if protectionism wereto take greater hold, the consequences for world growth would besubstantial and adverse. The prospects for faster liberalisation areconstrained by the fact that the US now stands to benefit less thanothers from increased globalisation.Key economic dataContribution to global growth(2006-20, %)ChinaUnited StatesIndiaBrazilRussiaIndonesiaSouth KoreaUKGermanyFranceMexicoCanadaTurkeyJapan26.715.912.22.42.32.32.11.91.91.51.41.31.31.1Increase in a country’s real GDP, at constant 2005 PPP, as a share of increase in global GDP over the same period. Source: Economist Intelligence Unit.Global real GDP growth(annual average, %)1971-80 1981-90 1991-2000 2001-05 2006-20 4.23.43.33.83.5Source: IMF and Economist Intelligence Unit for 1970-2005; Economist Intelligence Unit forecasts for 2006-20. The world economy will be two-thirds bigger in2020 than in 2005. Global GDP will grow at anaverage annual rate of 3.5% in 2006-20 (similarto the past 25 years). The US will outpace other majordeveloped economies, with growth of almost 3% ayear, compared with 2.1% for the EU25 and less than1% for Japan, whose population will be shrinking. Theworld’s two most populous states, China and India,will be among the fastest-growing economies. Butboth China and India will remain poor countries.China’s GDP per head will in 2020 roughly equal theaverage income in today’s Poland.Other emerging markets, although outpacing thedeveloped world, will underperform—relative to theirpotential and compared with fast-growing Asia, whoseshare of global GDP will rise from 35% in 2005 to 43%in 2020. Russia, Brazil and Mexico will grow at a hardlythrilling 3% a year; the Middle East and North Africa at4%; and Sub-Saharan Africa’s growth of under 3% ayear will be especially disappointing, held back in partby the impact of the AIDS epidemic. In Latin America,growth in GDP per head will merely be sufficient toprevent the current gulf with the developed world fromwidening. Sub-Saharan Africa will fall further behind.World consumer spending, measured in US dollarsat market exchange rates, will expand at an annualaverage rate of 5.6%—to some US$62trn in 2020,compared with US$27trn today. In terms of US dollarspending power, the US will remain by far the biggestconsumer market in the world, with roughly one-thirdof the global pie. But much of the increase inconsumer spending will occur in the leading emergingmarkets. China is set to become the world’s second-biggest consumer market, and India will be rivallingthe bigger European markets by 2020. These shifts look starker when the world’seconomies are measured not at market exchange ratesbut at purchasing power parity/PPP (see box): on thatbasis, China will have closed the gap in economic sizewith the US by 2020. By then it will easily have thelargest technology sector in the world. It will displaceGermany as the main country of origin forinternational tourists early in the next decade. And by2020 China will almost certainly have a larger fleet ofpassenger cars than the US. Yet even in 2020 it will be too soon to talk of an“Asian century”. The US and EU shares in world incomein 2020 will be about the same as they are now—justunder 20% each at PPP weights. True, the share ofChina and India in global GDP will increase and inChina’s case will in 2020 be roughly equal to that ofthe US and of the EU. But a chunk of that gain willcome at the expense of another Asian country, Japan. The EU will make up for slower growth throughterritorial expansion. The EU will by 2020 encompassall the Balkan countries and Turkey. Bulgaria andRomania are set to join in 2007 or 2008, and Croatiaabout two years later. By 2020 the rest of the westernBalkans (Albania, Bosnia and Hercegovina, Macedoniaand Serbia and Montenegro) and Turkey will bemembers. Today’s EU of 25 will by 2020 have become aUnion of more than 30 countries.The US will produce the same economic output asthe EU with a much smaller population. The averageincome gap widens with each enlargement, as the EUabsorbs ever poorer new members. Average GDP perhead of the EU15 was 70% of the US level in 2000. Thisfell to 65% for the EU25 in 2005, mainly because of the2004 enlargement that took in much poorer statesthan the EU15, but also because of the EU’s weaker8© The Economist Intelligence Unit 2006Foresight 2020 Economic, industry and corporate trendsChapter 1: The world economyWhat is purchasing power parity?Comparisons at market exchange rates systematically overestimate theincomes of rich relative to poor countries because non-tradeable services aremuch cheaper in poor countries. Also, exchange rates fluctuate for reasonsthat have little to do with the purchasing power of a currency. Purchasingpower parity (PPP) weights are conversion factors that eliminate thedifference in price levels between countries. GDP at PPP thus measures thevolume of goods and services produced at a common set of prices. © The Economist Intelligence Unit 2006 9Foresight 2020 Economic, industry and corporate trendsChapter 1: The world economyperformance in the first half of the decade. Theaverage income of the EU33 will be only 56% of the USaverage in 2020.In 2020 the US will remain the world’s largesttrading nation, although its share of world exportsand imports of goods and services will slip slightly,from 14% in 2005 to 12%. China will displace Germanyin second place and by 2020 will not be far behind theUS. India will record the biggest jump in world rank—from 24th to 10th—but will still account for only 3% ofworld trade in 2020.These are some of the headline forecasts in our“baseline” scenario. But alternative futures are ofcourse possible. Crucially, the continued globalisationthat we envisage in our baseline scenario could fail tohappen. Global economic development over the next15 years is unlikely to take the form of a smoothupward trajectory. At the end of this chapter we lookat a range of alternative scenarios.American exceptionalismThe long-term GDP growth potential of the US will beclose to 3% a year. This will be one of the highestgrowth rates in the industrialised world, comparingfavourably with the 2% estimated for the developed EUand less than 1% for Japan. It is slightly slower thanthe 3.3% the US achieved during the 1980s and 1990s,but still very respectable for a developed economy.This is particularly true given that the US is the world’stechnological leader and hence has little opportunityfor growth by importing technological know-how. US growth will be driven principally by productivitygrowth, itself largely a function of the country’sinvestment in and use of information andcommunications technology (ICT). Previous researchby the Economist Intelligence Unit has shown that ICTis the main factor behind the transatlantic productivitygap, accounting for about 80% of the 0.52-percentage-point difference between GDP per headgrowth rates in the US and the euro zone big three(Germany, France, Italy) since 1995.1The US is forecastto maintain its lead in the use and application of ICTover the next 15 years (see box on page 18).Growth will also be driven by labour forceexpansion. Almost alone among developed nations,the population of the US will continue to grow at arelatively high rate—a phenomenon that has beendubbed American “demographic exceptionalism”. Overthe next 15 years high immigration and fertility ratesin the US will fuel continued working-age populationgrowth. By contrast, in the EU, even after allowing forimmigration, the growth in the population of workingage is expected to slow and turn negative over thenext 15 years. The annual average rate of growth inShare in world GDP (at PPP)(%)US 20.8EU 21.0Asia 35.7 of which China 13.7 India 6.2 Japan 6.7 South Korea 1.8Russia 2.6Latin America 7.7Middle East and North Africa 4.1Sub-Saharan Africa 1.9Other 6.22005US 20.3EU 20.2Asia 39.5 of which China 16.6 India 7.2 Japan 6.0 South Korea 1.8Russia 2.7Latin America 7.7Middle East and North Africa 4.2Sub-Saharan Africa 2.0Other 3.32010US 19.0EU 19.1Asia 43.2 of which China 19.4 India 8.8 Japan 4.5 South Korea 1.9Russia 2.5Latin America 7.6Middle East and North Africa 4.5Sub-Saharan Africa 1.6Other 2.52020Note. The EU is expected to have 28 states in 2010 and 33 in 2020.Source: Economist Intelligence Unit.1. Reaping the benefits ofICT, EconomistIntelligence Unit, 2004. . Unitsponsored by Cisco SystemsEconomic, industry andcorporate trends © The Economist Intelligence Unit 2006 1Foresight 2020 Economic, industry and corporate trendsPreface. 2006Foresight 2020 Economic, industry and corporate trendsChapter1The world economy © The Economist Intelligence Unit 2006 7Foresight 2020 Economic, industry and