project blue assessing the future trends for financial ......financial services are set for...
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Financial services are set for transformation as their role, industry structure andcommercial realities are disrupted by the major trends currently reshaping the globaleconomy. Many businesses will be unrecognisable by the end of the decade and the list ofmarket leaders could be very different as smart and agile players leapfrog slower movingcompetitors. Will your business model still be relevant in the new global economy? How canyou take advantage of the shake-up ahead?
www.pwc.com/projectblue
Project BlueAssessing the future trendsfor financial services
2 PwC Project Blue
PwC Project Blue 1
02 Introduction
04 The new market realities04 Adapting to global instability
08 Planning for transformation08 The rise and interconnectivity of the emerging markets10 Demographic change11 Social and behavioural change12 Technological change13 The ‘war’ for natural resources16 The rise of state-directed capitalism
18 Taking control of your future
20 Contacts
Contents
2 PwC Project Blue
Is your business model still viable?Three years on from the onset of thefinancial crisis, financial services boardsare working around the clock to deal witha whirlwind of regulatory upheaval andeconomic instability. The urgency toadapt to this complex and uncertainenvironment is leading to reactive short-term strategic responses within manyfinancial services organisations.
There has been little space left in theexecutive agenda to consider the long-term future. Few organisations have evenbegun to establish a clear vision of howtheir business will be effected by the more
fundamental and enduring changesahead and how they can sustaincompetitive relevance in a rapidlyevolving global economy.
Yet some forward-looking organisationsare using the shake-up as an opportunityto redefine their strategies and businessmodels, and take advantage of the once-in-a-generation opportunity when thecompetitive structure of their industries isrelatively open to change. In times ofchange, the gap between high performersand low performers widens. Slowermoving competitors could soon findthemselves struggling to secure sufficientinvestment and overcome decliningdemand and profitability in many of theirkey markets.
Introduction
The financial services industry is at a watershed. While most organisationsare finding it difficult to look beyond the current market turmoil, theirsurvival and success will also depend on being able to deal with the longerterm trends that are transforming the market and competitive landscape.These include the rise and interconnectivity of the emerging markets andstate-directed approaches to economic development. Financial servicesbusinesses are also facing the impact of new technology, demographics,social change and mounting pressure on the world’s most critical naturalresources.
Figure 1: The Project Blue framework
Source: PwC Project Blue analysis
Project Blue Framework
Global instability
Regulatory environment Fiscal pressures Political and social unrestAdapt
Rise and interconnectivityof the emerging markets(SAAAME)
• Economic strength• Trade• Foreign direct investment
Demographic change • Population growthdiscrepancies
• Ageing populations
Social and behaviouralchange
• Urbanisation• Global affluence• Talent
• Capital balances• Resource allocation• Population
• Changing family structures• Belief structures
• Changing customerbehaviours – social media
• Attitudes to financialinstitutions
Technological change • Disruptive technologiesimpacting FS
• Digital and mobile
War for natural resources • Oil, gas and fossil fuels• Food and water• Key commodities
Rise of state-directedcapitalism
• State intervention• Country/city economicstrategies
• Technological andscientific R&D andinnovation
• Ecosystems• Climate change andsustainability
• Investment strategies• SWFs/development banks
Plan
Many industryparticipants(particularly in theWest) are focused onadapting to globalinstability; however,the market is changingand opportunityexists for those whosee it.
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Project Blue draws on the experience ofthe PwC global network and has beendeveloped through interaction withfinancial services leaders around theworld. It provides a framework to helpindustry executives organise theirassessment of a world in flux, debate theimplications for their business, rethinktheir strategies and, if necessary, reinventtheir organisations. Seeing the futureclearly, being first to adapt strategies andbusiness models, and breeding a culturethat shapes, rather than reacts to, thechanging business environment will bethe building blocks of sustainablecompetitive advantage in the future.
The Project Blue framework (see Figure 1opposite) considers the major trends thatare reshaping the global economy andtransforming the behaviour of consumers,businesses and governments. These arethe fundamental underlying drivers, butbusiness opportunities may be definedby a combination of these trends.
For example, infrastructure finance isbeing driven by urbanisation, but thistrend is occurring largely in emergingmarkets, raising issues around sovereignrisk and the role of the state in economicdevelopment in these countries.Such opportunities can only be fullyrealised by rethinking approaches to risk,public–private partnership models andshort-term versus long-term returns.
Rather than offering one way forward,the Project Blue framework is flexibleenough to be applicable to all the manydifferent organisations within the sector.The framework recognises that whetherthe drivers of change are threats oropportunities depends on the nature ofyour business and where in the world youoperate. The results will help you to targetinvestment, identify talent requirementsand develop the necessary operationalcapabilities needed to make the most ofyour competitive potential.
In this introductory overview we describethe main drivers of change and theresulting considerations for yourstrategies and business models.
We believe thatbusinesses whichdevelop strategies andbusiness models thatadapt and profit fromthe current globalinstability, as well asposition the businessto ride the waves ofchange in the globaleconomy, will notonly succeed, butprosper.
Adapting to globalinstabilityRegulatory changes, fiscal pressures, andpolitical and social unrest are creating anuncertain business environment. Thisinstability makes the future of financialservices difficult to predict. It alsoconsumes a significant amount ofmanagement time by necessitating afocus on short-term optimisation and insome cases survival, at the expense oflong-term strategy and execution.This unstable environment challengestraditional risk methodologies and hasthe potential to disrupt commercialmodels and organisational structures.The immediate challenge for yourbusiness is how to anticipate and adapt toglobal instability, rather than simply reactto events.
Regulatory changeRegulatory change will be a way of lifefor the foreseeable future, driven by therequirement to better manage risk in theglobal financial system, public outragefollowing the financial crisis and politicalagenda this has engendered. The changestaking place are creating greateruncertainty and complexity now, and theprospect of further industry restructuringand unintended consequences ahead.While the reforms are still in the earlystages of development, they will come toredefine the role of financial institutionsand with it, their strategies and businessmodels. It’s vital to look beyondcompliance to understand how thesedevelopments will effect product andbusiness portfolios, how they willdetermine the allowable cost structure ofyour organisation and ultimately howthey will influence the fundamentaldesign of your organisation.
The new market realities
Regulatory changewill challenge you toidentify which areasof your business offerthe greatest potentialand to identify thecore attributes onwhich to establishsustainablecompetitiveadvantage.
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Fiscal pressuresFiscal pressures are further underminingglobal financial stability by forcing someeconomies to the brink of default,threatening the solvency of weakenedbanks and making capital markets morevolatile. Governments are implementingausterity measures and new taxes, whichare likely to have a substantial impact ongrowth and profitability within thefinancial services sector.
Moreover, while emerging markets haveexperienced a credit boom, driven in partby supplies of Western credit, there areworries that instability within the global
financial system could affect or indeedundermine future lending.
Political and social unrestThe world has become increasinglyunstable in recent years. Factors rangingfrom corruption and repression to fiscalausterity, unemployment and rising foodprices are igniting ever-more frequentsocial and political unrest. A furtherspur for this upsurge in protest andinsurrection is the advent of social media,which is making it easier to communicateinformation, circumvent censorship andcoordinate action.
Figure 2: Regulation expenditure and employees in the UK and Hong Kong
500
400
300
200
100
02002 2003 2004 2005 2006 2007 2008 2009 2010
CAGRTotal 10%2002–07 8%2007–10 15%
Sources: FSA, OCC and HKMA websites; PwC analysisNotes: The FSA is the Financial Services Authority, and the HKMA is the Hong Kong Monetary Authority, which are the main financial regulatory bodies for the UK andHong Kong respectively; *The FSA’s 12-month reporting period begins in April of the year reported
United Kingdom: FSA* Hong Kong: HKMA
Total FSA regulation expenditure, £ millions, 2002–2010
FSA regulation employees, 2002–2010
Total HKMA regulation expenditure, US$ millions, 2004–2010
Financial Crisis
5,000
4,000
3,000
2,000
1,000
02002 2003 2004 2005 2006 2007 2008 2009 2010
CAGRTotal 7%2002–07 3%2007–10 14%
1000
800
600
400
200
02003
N/A
2004 2005 2006 2007 2008 2009 2010
CAGRTotal 6%2004–07 4%2007–10 6%
CAGRTotal 3%2003–07 2%2007–10 3%
Financial Crisis
750
600
450
300
150
02003 2004 2005 2006 2007 2008 2009 2010
HKMA regulation employees, 2003–2010
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The intensity of regulatory oversight has increased as a result of therecent crisis.
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Figure 3: Global current account balances, US$ billions, 1990–2010
n Rest of world n Japan n China n OPEC n United States n Other OECD
Sources: The Turner Review, FSA, 2009; IMFNotes: OPEC is the Organization of the Petroleum Exporting Countries and members are listed in the appendix; OECD is the Organisation for Economic Co-operationand Development; for OECD countries see appendix; current account balance is defined by the IMF as the net transactions in all items other than the financial andcapital items; the major classifications are goods and services, income and current transfers
A current account balance (balance of payments) can be expressed as 1) the difference between the value of exports of goods and services, and the value ofimports of goods and services, or 2) the difference between national (both public and private) savings and investment
1,200
900
600
300
0
-300
-600
-900
-1,2001990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Figure 4: Eurozone current account balances, US$ billions, 1995–2010
n Other Eurozone n Netherlands n Germany n Italy n Spain n France n Greece n Portugal
Sources: The Turner Review, FSA, 2009; IMF World Economic Outlook, September 2011Notes: Current account balance is the net transactions in all items other than the financial and capital items; the major classifications are goods and services, incomeand current transfers
A current account balance (balance of payments) can be expressed as 1) the difference between the value of exports of goods and services, and the value ofimports of goods and services, or 2) the difference between national (both public and private) savings and investment
400
300
200
100
0
-100
-200
-300
-4001995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Current account surpluses in China, Japan and the Middle East alongsidedeficits in the United States and Eurozone led to macro-imbalances in theglobal economy.
Across the Eurozone, the gap between surplus countries (Germany and theNetherlands) and deficit countries (including Italy, Spain, France andGreece) grew.
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Figure 5: A more unstable world – Political instability index,*by country,2007 and 2009–10
10
9
8
7
6
5
4
3
2
1
00 20 40
Proportion of countries, globally
60 80 100
2009–2010 2007
Sources: Economist Intelligence Unit ViewsWire; PwC analysisNote: Index measured for 164 countries; *The political instability index represents the level of political instabilityin a country, with a greater value indicating that the country has greater instability. The chart shows the globalchange in political instability between 2007 and 2009/10. It plots the index against the proportion of countrieswith that score. For example, in 2007, around 45% of countries had a score greater than 5 while in 2009/10,around 75% did, indicating greater levels of political instability in 2009/10
Less politically unstable
More politically unstable
Increase in politicalinstability
Over the past three years the world has becomeincreasingly unstable.
Your business willneed to consider howheightened politicalinstability could effectyour risk profile,especially investmentsand operations incountries andcommercial sectorsthat are potentiallyvulnerable to protestand unrest.
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The rise andinterconnectivity of theemerging marketsThe focus of global growth has shifted.Western economic dominance is arelatively recent phenomenon and thedevelopments we see are essentially arebalancing of the global economies.
While many commentators are focusingtheir attention on what are considered to
be the largest and fastest growing BRICmarkets (Brazil, Russia, India and China),the commercial potential is far greaterthan these countries alone.
Along with the growth and size of theemerging markets, it’s important toappreciate the interconnectivity of thetrade and investment flows betweenthem, which are growing much fasterthan the traditional routes fromdeveloped-to-emerging and developed-to-developed countries (see Figure 6).Indeed, South America, Africa, Asia andthe Middle East (SAAAME) are emergingas an increasingly interconnected tradingzone, which, in physical terms at leasteffectively bypasses the West.
Planning for transformation
Figure 6: World trade flows, SAAAME and non-SAAAME, US$ trillions, 2010
Trade value: $6.92trCAGR 2002–10: 8.0%
Non-SAAAME
SAAAME
Trade value: $2.82trCAGR 2002–10: 19.4%
Trade value: $2.67trCAGR 2002–10: 13.6%
Trade value: $2.16trCAGR 2002–10: 12.9%
Sources: WTO; PwC analysisNote: Russia and the Commonwealth of Independent States (CIS) have not been included in SAAAME definition because trade is largely international and/or withEurope. Mexico is excluded as it trades mainly within the North American free trade zone and less with SAAAME. Both areas remain very important growth markets andshould be considered in relation to the SAAAME region.
South America, Africa, Asia and the Middle East (SAAAME) are emerging asan increasingly important network for international trade.
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The SAAAME region covers a significantproportion of the world’s land surfaceand has access to many of its naturalresources. It also has substantialmanufacturing capabilities and accessto the labour to support this, large andgrowing consumer markets, and asizeable pool of both educationalestablishments and well-educatedprofessionals. Its significant liquidinvestable capital includes a growing(albeit slowly) proportion of globalassets under management (AUM) andnearly 80% of overall sovereign wealthfund AUM.1
To make the most of the opportunitiesfor growth, your business will need tocontend with rising consumerexpectations in these markets, a morecomplex risk environment and thegrowing battle for talent. As an increasingamount of emerging-to-emerging marketcommerce misses out the West altogether.Western institutions also need to findways to tap into business flows they maynever physically see.
SAAAME financial institutionsSuccess will depend on being able todevelop your organisational skills to keeppace with the growth of SAAAMEmarkets, to build the customer-centricmodel needed to keep pace withconsumer expectations, and to constructbusiness models and partnerships that arerelevant to the markets you serve. Youalso need to work out how to attract andretain scarce talent when competitors andcompanies from other sectors are lookingto lure your best people away.
Western financial institutionsThe opportunities are evident, butregulation and local competition aremaking it increasingly difficult topenetrate SAAAME markets. Successwill depend on being able to deliverproducts and capabilities that domesticplayers cannot do and being sensitiveto the realities of doing business inthese countries.
Our latest researchanticipates thatdomestic credit inChina could overtakethe US by 2023 andIndia will become thethird largest domesticbanking sector afterChina and the USby 2050.2
1 Sovereign Wealth Fund Institute, 2010 andPwC analysis
2 ‘PwC, Banking in 2050’, 2011 update
Demographic change Your customers and their demands arechanging. Population growth and declinein different countries, combined with anageing population around the world, willcreate a markedly different consumermarket by 2050.
In some European countries, the workingpopulation will decline by more than10%3 and this gap will need to be filledby immigration, later retirements andproductivity gains, which could beaccelerated by growth of the digital‘machine-to-machine’ economy.
While much has been made of the impactof ageing in the Western world, the mostdramatic changes will be seen inemerging markets as birth rates and lifeexpectancy around the world begin toconverge (see Figure 7).
Your business will need to anticipatedemographic developments and bringproducts and services into line with thechanging customer base in the marketsyou serve.
As people live longer and state supportdeclines, the competitive frontlinewill likely shift from lending towardshelping people to fund and manage theirretirements. Reputation and trust willbe crucial in sustaining market share inan increasingly empowered andknowledgeable retirement market.
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Figure 7: Asia, total population against mortality and fertility rates, 2000–2050
6,000 24
20
16
12
8
4
0
5,000
4,000
3,000
2,000
1,000
0
n Population Fertility rate Mortality rate
Sources: United Nations Population DivisionNotes: Mortality and fertility rates are the number of births and deaths per 1,000 population; population sizebased on UN population figures for 2000–10 and medium variant projections for 2015–50; five-year populationfigures calculated using average across the five years; population forecast by UN using estimated populationat 1 July 2010 and assumptions for mortality, fertility and net migration rates
Population size,five-year average,millions Forecast
Rate,per 1,000
2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
Population CAGR 2010–2050: 0.53%Population CAGR2000–2010: 1.14%
In Asia, population growth is forecast to slow asmortality and fertility rates converge.
The number of peopleaged over 65 in Japan,Italy and Spain isforecast to be 60% ofthe total working agepopulation (15–64)by 2050.4
3 United Nations Department of Economicand Social Affairs, August 2011
4 World Population Prospects The 2010Revision, Volume I: ComprehensiveTables’, United Nations, 2011; PwCanalysis
Social and behaviouralchangeSocial and behavioural change isoccurring at a faster pace than at anytime in history.
Consumers are more informed andempowered than ever before, and oldnotions of value and loyalty are breakingdown as digital technology allowsthem to both compare value and expandtheir choices. Continuing digitaltransformation is also changing the waypeople interact, share ideas and accessproducts and services, with socialnetworking now making up one in sixminutes of time spent online.5
In emerging markets, increasing affluenceand urbanisation are creating new andexpanding markets for financialinstitutions. City dwellers’ average wealthand demand for financial products andservices are generally much higher thantheir rural counterparts. Indeed, someobservers now see the real distinction inthe financial services sector as notemerging and developed markets, butrather city and rural areas.
How your company responds to thesesocial and behavioural changes coulddefine your market position for decadesto come, providing a once-in-a-generationopportunity to put clear distance betweenyou and your rivals if you judge theimplications correctly and a mortal threatif you don’t. The key differentiator will bethe ability to anticipate where the marketis going on the back of these changesand get in ahead of your competitors.Experience in the travel and musicindustries suggests that companies thatare slow to grasp the implications ofchange could be quickly marginalised.
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The global middle class is forecast to grow byaround 180% between 2010 and 2040. Asia isexpected to replace Europe as the region withthe highest proportion of the global middle classby 2015.
Figure 8: Forecast size of middle class, by region, millions, 2010–2050
2010 2015 2020 2025 2030 2035 2040 2045 2050
CAGR2010–40: 40–50:
Overall 3.5% -0.7%
n Sub-Saharan 5.9% 4.2%Africa
n Middle East 3.5% 1.8%& North Africa
n Central & 2.3% 1.0%South America
n North America -0.5% -1.2%
n Asia Pacific 6.3% -1.1%
n Europe -0.3% -1.9%
Sources: European Environment Agency; OECD Development Centre; PwC analysisNotes: Data is forecast and was last uploaded by the European Environment Agency on 29 November 2010;middle class is defined as households with daily expenditures between USD10 and USD100 per person inpurchasing power parity terms
6,000
5,000
4,000
3,000
2,000
1,000
0
Over the next 30 years the urban population isforecast to grow by almost 1.8 billion people. Mostof this urbanisation is expected in Asia and Africa,increasing the world’s urban population to 5.6billion6 and creating one of the most importantcompetitive battlegrounds for financial servicesbusinesses.
5 ComScore, July 2011
6 United Nations, Department of Economic andSocial Affairs, Population Division, 2009 Revision
Technological changeTechnology has always shaped societyand commerce in unpredictable ways,changing customer behaviour, spawningnew enterprises and wiping out existingbusinesses that are unable to keep pace.As the speed of technologicaldevelopment accelerates, the risk offalling behind becomes more acute.
Breakthroughs in biotechnology,nanotechnology and other frontiers ofresearch and development (R&D) areincreasing productive potential andopening up new investmentopportunities. Whole new industries arebeing created, which could have asignificant impact on the size and shapeof the world’s manufacturing, andhigh-tech sectors and the companies thatoperate within them. The key question foryour business is: ‘Are you ready and able
to support and capitalise on thesedevelopments?’ These emergingtechnologies and the industries theygenerate also carry a new set of risks,which need to be fully understood if youare to make the most of the financingopportunity.
In the digital world, the internet, mobilephones, data analytics and cloudcomputing are well established. Yet, manycompanies across all sectors are stillgrappling with how these developmentswill affect consumer expectations, theway they interact with their customersand the underlying business models thatsupport this.
While the transformational impact ofdigital technology has been slower toreach financial services than other fieldsof commerce, the sector has finally
reached a tipping point. Enhanced digitalinteraction would offer your business theopportunity to engage more closely withits customers and increase wallet share.At the same time, digital transformationcould be highly disruptive, allowing newentrants to break into the banking market,pick off the most valuable revenueopportunities and seize control ofcustomer relationships. In a digital world,it will be harder for your business todifferentiate itself, especially if serviceexpectations are set by non-financialcompetitors. The ease of switchingafforded by digital technology could alsodrive down margins and profits. Someorganisations could be strained tobreaking point.
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Figure 9: Income split of those who currently use a mobile to purchasefinancial services, all geographies*, 2011
Sources: PwC Digital Tipping Point Survey 2011; (Based on approximately 3,000 responses) PwC analysisNotes: *Geographies surveyed were United Kingdom, United Arab Emirates, Poland, Mexico, India,Hong Kong, France, China and Canada
Proportion of responses, %
100
80
60
40
20
0Mass Market Savings >£25,000 Savings >£50,000
More than 40% of people using social networksites in the US are interested in interacting withfinancial services firms via Facebook andMySpace.7
The demand for branchless banking is significant in all segments of thepopulation, regardless of geography.
The ‘war’ for naturalresourcesThe expanding size and prosperity ofthe global population is leading torapidly rising consumption and puttingunsustainable pressures on the world’smost critical natural resources.
Even basic commodities such as waterare now in increasingly short supply,providing the spur for the developmentof new markets, technologies andinvestments on the one side and thepotential for unrest, commercialdisruption and protectionist behaviouron the other. The growing shortages of
resources will be exacerbated by climatechange, heightening catastrophe risk andputting further pressure on land, watersupplies and food production.
The ‘war’ for natural resources is likelyto play out on multiple fronts. Examplesinclude the response to the increase inwater withdrawals, which are forecastto rise dramatically. Food production willnaturally gravitate to more plentifulsources of water, which may be outside acountry’s border and therefore extend thesupply chains of and potential cost offood production.
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7 ‘The Social Tools Consumers Want From TheirFavourite Brands’, Forrester, 16 April 2009
14 PwC Project Blue
In turn, demand for energy is forecast toincrease by around a third by 2030.8
While alternative energy sources will gainmarket share, the overall global demandfor oil, gas and coal is forecast to remainstrong, particularly as technologytransforms currently uneconomic sourcesof oil.
Globalisation is creating global supplychains that are tying countries togetherthrough trade as never before. China andother manufacturing-based economiesdepend on emerging markets in Africaand South America to supply theirindustries. Conducting business in someof these countries is likely to require newinvestment models and fresh approachesto understanding and mitigating risk.
Economic disparities are likely to spurshort-term responses in production andconsumption that undermine long-termsustainability. Shortages could causesocial and political instability, geopoliticalconflict and irreparable environmentaldamage.
The war for natural resources and theimpact of climate change are phenomenathat will have a fundamental impact onthe way people live and companies dobusiness. It’s likely to become one of themain, if not the key driver of, governmentpolicies. It will also open up new marketsand business models for organisationsthat both understand the changingdynamics of supply and demand, andknow how to mitigate the risks.
As environmental risk increasinglyimpinges on clients (examples includehigher resource costs, pollution damageand changes in productive land), yourbusiness will need to assess the impacton your loan book, risk profile andinvestments.
Figure 10: Model simulations of global warming by the Intergovernmental Panel on Climate Change
Temperature changeºC at 2090–99 relative to 1980–99
Scenario Best estimate Likely range
High growth 3.4 2.0–5.4
Moderate growth 2.8 1.7–4.4
Low growth 1.8 1.1–2.9
Constant CO2 0.6 0.3–0.9
Sources: Intergovernmental Panel on Climate Change Fourth Assessment Report: Climate Change 2007, NASA Earth ObservatoryNotes: Surface warming is relative to 1980–1999
GlobalTemperatureAnomaly, ˚C
5.0
4.0
3.0
2.0
0.0
-1.01900 2000
Year
2100
Variability between models
High growth (A2)Moderate growth (A1B)
Low growth (B1)
Constant CO2
Global scientific consensus is that temperatures could rise between 2°C and5°C by the end of the 21st century.
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Water stress is often localised. For example,within the high population areas of the NorthChina Plain, aquifers are reported to havedepleted significantly. The North China Plain ishome to around 10% of China’s population andincludes the cities of Beijing and Tianjin.9
Higher growthscenarios
Figure 11: Possible climate impact of a rise in global temperatures (Stern Review)
Temperature rise 1ºC 2ºC 3ºC 4ºC 5ºC
Source: Stern Review, 2006
Small glaciers in theAndes disappearcompletely, threateningwater supplies for 50million people
Water Potentially 20–30%decrease in wateravailability in somevulnerable regions
1–4 billion morepeople suffer watershortages, while 1–5billion gain water,which may increaseflood risk
Potentially 30–50%decrease in wateravailability inSouthern Africa andMediterranean
Possible disappearanceof large glaciers inHimalayas, affectingone-quarter of China’spopulation andhundreds of millionsin India
Modest increases incereal yields intemperate regions
Food
Health
Sharp declines in cropyield in tropical regions(5–10% in Africa)
150–550 additionalmillions at risk ofhunger (if carbonfertilisation weak)
Agricultural yieldsdecline by 15–35%in Africa
Reduction in wintermortality in higherlatitudes
40–60 million morepeople exposed tomalaria in Africa
1–3 million morepeople die frommalnutrition (if carbonfertilisation weak)
Up to 80 million more people exposed to malariain Africa
Land Permafrost thawingdamages buildingsand roads in parts ofCanada and Russia
Up to 10 million morepeople affected bycoastal flooding eachyear
1–170 million morepeople affected bycoastal flooding eachyear
7–300 million morepeople affected bycoastal flooding eachyear
Sea level rise threatenssmall islands, low-lyingcoastal areas (e.g.Florida) and majorworld cities such asNew York and London
Environment/Ecosystems
80% bleaching ofcoral reefs, includingGreat Barrier Reef
High risk of extinctionof Arctic species,including polar bearand caribou
20–50% of speciesfacing extinction(according to oneestimate)
Loss of around half Arctic tundra
Abrupt andlarge-scaleimpacts
Atlantic thermohalinecirculation starts toweaken
Potential for Greenland ice sheet to begin melting irreversibly, accelerating sea level rise and committing worldto an eventual 7 m sea level riseRising risk of abrupt changes to atmospheric circulations, e.g. The monsoonRising risk of collapse of West Antarctic Ice Sheet and Atlantic thermohaline circulation
Continued increase inocean acidity seriouslydisrupting marineecosystems andpossibly fish stocks
Low growthscenario
The impact of global temperature rises could be extreme.
8 International Energy Agency ‘International EnergyOutlook 2011’
9 World Bank China ‘Agenda for Water SectorStrategy for North China’, April 2001
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The rise of state-directedcapitalismThe pendulum swing away from the freemarket towards state-directed capitalismin the wake of the financial crisis ismanifesting itself in governments’increasing direction of financial servicesand the wider economy. Governments arealso becoming more competitive in theway they vie with other states for talent,investment and the primacy of keyfinancial, industrial and other productivecentres in the countries they govern.
Payback for supportWestern governments have spentconsiderable sums to stabilise theirfinancial systems. Greater stateintervention and pressure on financialinstitutions to support the real economy(e.g. through increased bank lending tosmall businesses) are likely to be a keypart of the ‘payback’ required.
Greater intervention is the paybackfor the bailoutsProfitability and growth are likely to bemore dependent on the fortunes of thereal economy than before the financialcrisis, which will in turn be more closelytied to government policies.
Pledged andutilised support, % of GDP, 2009
14
12
10
8
6
4
2
0AdvancedG20
economies
EmergingG20
economies
AverageG20
economies
UK US
Figure 12: Costs to governments of supporting the financial sector,percentage of GDP, as at December 2009
n Utilised support n Additional pledged support
Sources: A fair and substantial contribution by the financial sector, IMF, June 2010Notes: Data based on International Monetary Fund (IMF) survey sent to all G-20 members in December 2009
The high public cost prompts many Westerngovernments to take a more active role.
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As such, it will be important to work withindustry and consumer groups to helpinfluence and shape government policies.It will also be important to develop astrong relationship with government tomake sure your strategy anticipates andis aligned to government priorities andinvestment plans. Globalisation isintensifying the competition betweencountries and cities. Local leaders areever more aware of their sources ofcompetitive advantage and how to attractthe businesses, facilitate investment ininfrastructure and the secure supplychains needed to make the most of thispotential. As cities expand and develop,local and central government face thechallenges of how to attract the necessaryinvestment in housing and infrastructurewhile balancing the inevitable strains onnatural resources.
Many governments, particularly in theSAAAME states, realise that the privatesector cannot finance and deliverimportant national economic and socialpriorities on its own. As a result, we’relikely to see an increase in Public–PrivatePartnerships (PPP), particularly inemerging markets, as well as government-to-government agreements to mitigatesovereign risks, mobilise sovereign capitaland piece together industry supply chains.
PPP investment aroundthe world rose fromUS$50 billion in 2002to US$170 billion in2010.10
10 World Bank, Infrastructure Database, dataextracted from database on 30 November 2011;PwC analysis
18 PwC Project Blue
Being able to see into the future andjudge the implications will give you aninvaluable edge. Project Blue is designedto provide you with a framework fororganising your views of the globaldevelopments ahead, the implications foryour business and your resulting visionfor the future.
Coming through strongerAs we’ve developed Project Blue, we’vespoken with business leaders around the
world to assess how these drivers willaffect them. Drawing on these discussionsand our research into the impact of themain forces of change, the graphic (seeFigure 13) highlights the key areas thatboards will need to assess and address asthey look to sustain and sharpencompetitive relevance.
Shaping the futureIt’s vital that your business plays an activepart in the debate over the changesahead. This includes engaging as closelyas possible with clients, regulators,governments, consumer and communitygroups, and other key stakeholders to
Taking control of your future
Disruption to long-established business models is the one clear certaintythat the future holds. The key question is whether the various forcesshaping the sector present an opportunity or a threat to your business.
Sources: PwC analysis
Shaping the future
• Economic rebalancing
• Industry structure
• Fiscal and monetary policy
• Regulation
• Social policy
• Investor expectations
• Community engagement
Reinventing the organisation
Rethinking the strategy
• New stakeholder objectives
• Short-term adaptation
• Alignment to global trends
• Determining risk appetite
• Redefining performance targets
• Portfolio rebalancing
• Relative competitive advantage
Figure 13: The CEO agenda
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Governance
• Board compositionand qualifications
• Executive remuneration
• Regulatory compliance
• Risk management
• Financial reportingand controls
Target operating model
• Legal and physicalstructure
• Tax and capitalefficiency
• Allowable cost structure
• Technology
• Partnership structure
• People and resources
Competitive advantage
• ‘Seeing the future’
• ‘War for talent’
• ‘Constant reinvention’
• ‘Product innovation’
• ‘Strategic agility’
• ‘Operational alignment’
Project Blue assesses the impact of these changeson all aspects of the leadership agenda.
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make sure the full impact is understoodand help get important messages across topolicymakers – ultimately driving animproved financial system for all.
Rethinking your strategyThe pressing challenge for allorganisations is how to balance theadaptations needed to deal with thecurrent instability with the longer termchanges in strategy, operations andbusiness focus demanded by the driversidentified in Project Blue. Your businesscan gain significant market share if itadapts to the reforms and changingcommercial realities faster than yourcompetitors.
Reinventing your organisationAt the heart of sustainable commercialmodels are the organisational capabilitiesand flexibility needed to identify andrespond proactively to changing customerand market demands. Operations willneed to become more agile toaccommodate changing conditions.Risk and finance teams also need tobecome more proactive in managing arapidly changing and often uncertainrisk and regulatory environment.Organisational and people strategieswill be key differentiators in determiningwhich businesses are most relevantgoing forward.
As the CEO agenda highlights, theunderlying considerations include whatkind of leadership is required in thiscomplex and uncertain environment,how your risk profile is likely to change,and what kind of governance andreporting systems will be required toplot a successful course through thechanges ahead.
The businesses that come out on top willhave a superior capacity for innovationand constant reinvention, agile enoughto quickly capitalise on emergingopportunities and with the strategicapproach to talent needed to make surethat the right people are available in theright places at the right time. If yourbusiness is constantly scrambling to keeppace with unfolding events, it’s going tofind itself on the back foot competitivelyand risks losing out.
A reshaped sectorDealing with the mega-trends highlightedin Project Blue can’t be put off while youcontend with seemingly more immediateconcerns. Some developments such as theincrease in regulation, state interventionand possible protectionism that form partof the rise of state-directed capitalismare already manifesting themselves.Others, such as the increasing ageingand urbanisation of emerging marketpopulations and their impact on productand growth strategies are moving rapidlyonto the horizon. How you plan andinvest now will determine your futurechances of success.
So how will strategies change and whatkind of financial institutions will emergefrom the shake-up ahead?
SAAAME financial institutionsMany emerging markets remain relativelyunder-penetrated and have considerableroom for further development in boththe size and sophistication of thefinancial services sector. Traditionalmodels are still viable in these markets,but new partnership models withtelecommunications and retail companiesto reach the unbanked will continue togrow. Your business will need to keeppace with steadily increasing customerexpectations and associated changes inthe regulation, complexity and risk profileof your operations. The pressing prioritiesalso include the need to engage in the‘war for talent’ to make sure yourorganisation can develop the right skillsto meet the challenges and seize theopportunities in your markets.
Western financial institutionsThe constraints on funding and domesticgrowth will make it increasingly difficultto be all things to all people (‘ubiquity’).Successful institutions are therefore likelyto adopt a more ruthless focus on theircore relationships and sources of value(‘precision’). We’re already seeing sharpercustomer segmentation, greater disciplinein deploying resources and withdrawalfrom markets that offer little prospect ofdelivering an economic return. This isunderpinned by a better understanding ofcomponent costs and real returns.
The key considerations are: ‘What exactlyare my core sources of value, whowill be my most important customersand who will be my main competitors inten years from now?’ – in short,continually re-evaluating what you needto do to ensure your business modelremains relevant.
PwC Project Blue 19
20 PwC Project Blue
We’re working with a range of financial services organisations to facilitatediscussions on the impact of the mega-trends shaping their industry andwhere and how they can compete most effectively. If you’d like to discussany of the issues raised in Project Blue, please contact those listed below, oryour usual PwC contact.
Making sense of anuncertain future
Nigel VooghtGlobal Financial Services Leader(PwC UK)Tel: +44 (0) 20 7213 3960 Email: [email protected]
Andrew Dawson Author and Global lead for Project Blue(PwC UK)Tel: +44 (0) 20 7804 0130 Email: [email protected]
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon theinformation contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy orcompleteness of the information contained in this publication and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents donot accept or assume any liability, responsibility, or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the informationcontained in this publication, or for any decision based on it.
For more information on Project Blue, or other Financial Services programmes, please contact Áine Bryn, Global & UK Financial Services Marketing, PwC (UK)on +44 207 212 8839, or [email protected].
For additional copies, please contact Maya Bhatti, Global & UK Financial Services Marketing, PwC (UK) on +44 207 213 2302, or [email protected].
www.pwc.com/projectblue © 2012 PricewaterhouseCoopers LLP.All rights reserved. In this document, ‘PwC’ refers to PricewaterhouseCoopers LLP (a limited liability partnership in the UnitedKingdom). As the context requires, ‘PwC’ may also refer to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separatelegal entity. Each member firm is a separate legal entity and PricewaterhouseCoopers LLP does not act as agent of PwCIL, or any other member firm, nor can it controlthe exercise of another member firm's professional judgement or bind another member firm or PwCIL in any way.