MGI director Chris Bradley on the next big arenas driving global growth

Chris Bradley from the McKinsey Global Institute discusses the emergence of new "arenas of competition" that are driving significant economic value creation. These arenas, representing about 10% of global revenue, have accounted for over half of market cap growth and nearly all revenue growth in the last three years. Without these arenas, the average large company would have seen minimal growth. MGI identified 18 such arenas, each characterized by a large market, a significant technological trajectory unlocking new capabilities, and competitive dynamics akin to a race. These arenas fall into five broad themes: 1. **AI Foundation:** This includes areas like semiconductors and cloud computing, which are central to current technological advancements. 2. **Completing Digitization:** While digitization has been ongoing, its journey is not yet over, with e-commerce being a prime example. 3. **Electrification:** This theme encompasses electric vehicles (EVs), batteries, and nuclear fission, representing a shift towards new energy sources. 4. **Tech Going Physical:** This involves extending technological capabilities into the physical world through robotics, shared autonomous vehicles, space exploration, and future air mobility. 5. **Molecules and DNA:** This theme focuses on how technology is driving innovation in new biological frontiers. Collectively, these 18 arenas are projected to generate up to $50 trillion in revenue over the next 15 years, potentially contributing to one-third of global economic growth. The "race" in these arenas is demonstrably underway, evidenced by a rapid escalation in capital expenditure (capex) and research and development (R&D) spending. Just seven companies have spent $743 billion on capex and R&D in the last five years, with spending projected to exceed a trillion dollars next year. This level of investment is enormous, comparable to multiple "Apollo programs" annually, and signifies a fundamentally different and intensive style of competition where success is not guaranteed. Over the last three years, these arenas have added $1.4 trillion in revenue but a staggering $18 trillion in market capitalization. While much of this value creation is concentrated in the AI foundation, with companies like Nvidia becoming highly valuable, other arenas are also showing significant growth. MGI's predictions for these arenas are largely on track or even exceeding expectations. A notable phenomenon observed is the rise of "omniscalers" – companies that are not only investing heavily (over $20 billion annually) but also participating in three or more of these 18 arenas. Nine such companies have been identified, and more may emerge. These omniscalers demonstrate a broad spread of activity across seemingly disparate arenas, suggesting underlying connections through competitive styles or technological synergies. For instance, a combination of space, EVs, social media, AI, and robotics might seem unusual but is now a reality for some of these companies. Omniscalers are massive, generating $640 billion in operating cash flows last year – a sum comparable to annual new business loans by US banks and significantly larger than the IPO or private equity markets. Even more striking is their spending: over $800 billion on capex and R&D last year, a figure that will reshape industrial and economic landscapes. Omniscalers grow faster, generate more cash, and invest a significantly higher proportion of their revenue (three times more) in capex and R&D compared to normal industries. Geographically, these arenas are heavily concentrated in the US and China, which account for 90% of the market capitalization. In the US, these arenas represent 37% of market cap, compared to only 7% in Europe. The US leads significantly in market cap within these arenas, with China also being a major player. Europe, on the other hand, lags behind, participating in fewer arenas and having significant catching up to do. This investment gap, particularly the $800 billion difference in capital allocation towards these arenas, is a key factor contributing to the productivity gap between Europe and the United States. A substantial shift in capital allocation is needed for Europe to effectively participate in these next big arenas of competition. In conclusion, the world is undergoing a rapid transformation driven by these new arenas, altering industries, companies, economic models, and strategies. The effects are felt broadly, whether one is directly involved in these sectors or adjacent to them.