Finding Opportunities In The World’s Megacities [News Report]

by Avinash Saxena

Outside the austere 1825 royal palace in Munich that serves as the world headquarters of Siemens ( SI – news – people ), the streets are full of Germans celebrating Carnival ( CCL –news – people ) in their fussy way. Dressed as bears, clowns and sexy French maids, they stroll among glass-fronted stores stuffed with expensive luxury goods. Inside, Chief Executive Peter Löscher explains one reason this medieval city is so prosperous: new slums half a world away.

Löscher doesn’t use the S word. He’s talking mostly about more affluent parts of cities loaded with Siemens products, from electrical transformers and computer-operated trains to $100 million water-treatment systems. By definition, slums are the places that don’t have a lot of the stuff Siemens makes.

But that’s rapidly changing. The explosive growth of new megacities, including their outer rings of slums, favelas, barrios and shantytowns, will power Siemens’ sales and earnings for the rest of this century. Mass migrations from rural to urban areas worldwide is creating unparalleled opportunity. Staggering numbers tell the tale: Already 51% of the world’s 6.9 billion people–3.5 billion souls–live in cities; by 2050 demographers think it will be 70%, or 6.2 billion people. Nearly all of that growth will be in emerging markets like Asia, Africa and Latin America. By 2100, the United Nations estimates, Europe’s share of the world’s population will be cut in half to 6%, while Africa’s will double to 25%.

The developed nations, with their massive industrial infrastructure and huge consumer markets, still account for 70% of Siemens’ sales. “But when you talk about incremental growth, more than 50% of it will happen in emerging markets,” Löscher says. “This is a huge, huge opportunity.”

Löscher needs a huge opportunity to reach his goal of $149 billion in sales even as he discards lagging divisions like the Osram lighting unit. Buoyed by a recovering global economy, Siemens revenue should climb 8% this year to $109 billion, with earnings surging 44% to $12 billion. To help hit his higher target, Löscher recently announced a new division: Infrastructure & Cities. Already a mighty unit, with 81,000 employees and $24 billion in revenue, it will sell electrical equipment, building technology and other products aimed at urban areas.Siemens doesn’t have these markets to itself, of course. GE, with about $84 billion in industrial revenue, is a worldwide competitor; so are Sweden’s ABBABB – news – people ) and France’s Alstom and Schneider Electric. China can offer low-cost, cheaply financed electric plants, transmission lines and other infrastructure to sweeten its deals for mineral resources in poor countries. Chinese industrial conglomerates are also absorbing technology from partners like Siemens to bid for projects in more lucrative markets; last year Siemens opted to partner with China on a bid (since dropped) for a multibillion-dollar Saudi Arabian rail contract. In Brazil Siemens is increasingly going up against locals like WEG, a growing electrical-equipment maker.

There’s plenty of business to go around, however. Siemens economists estimate the world infrastructure market runs about $2.8 trillion a year, with $423 billion of that in products the company already sells. Megacities are magnets for contracts. Roland Busch, head of strategy at Siemens, says 50% of the world’s GDP is generated in the 645 cities with populations above 750,000; the largest 40 cities represent 20% of global GDP. The momentum is firmly in emerging markets. While Germany has 3 cities with a population over 1 million, India has 46 and China has 160.

“There’s a huge wave sweeping through Siemens, which is being led by India and China,” says Armin Bruck, managing director of Siemens India in Mumbai, a city of 20 million. Instead of peddling high-priced, feature-rich German machines to customers who can’t afford them, Siemens India has set up five research centers to design lower-cost products like medical scanners that can withstand Mumbai’s high humidity and huge variations in line voltages.

One product to come out of the shop is an X-ray machine that sells for $15,000 plus taxes, less than half the price of an imported German model. Launched seven years ago, it’s being exported to 36 countries. Indian engineers, meanwhile, have come up with a $5,000 portable X-ray unit and are working on a solar-powered one aimed at rural clinics. Lower price per unit but lots of units: Siemens India thinks such devices designed in and for emerging markets can generate $1.4 billion in orders by 2020.

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