Technology and the smart city

What is a smart city? It is an urban area that uses information and communication technologies, alongside modern infrastructure developments, to increase operational efficiency, to improve information sharing between and with residents, and to help improve the quality of urban services and citizen welfareⁱ . The idea of the smart city comes from the convergence of two themes: the rapid growth in urban centers globally (now home to 55.3% of the world’s population) with the emergence of new technologies. The MSCI ACWI IMI Smart Cities Index is one of an expanding range of MSCI thematic indexes designed to represent the performance of companies associated with structural changes occurring in the economy. We think that the transformation of tomorrow’s large and megacities into smart cities is one such megatrend.

The rise of megacities?

The United Nations projectsⁱⁱ that by 2050, 68% of the world population will live in urban areas. By then, they forecast the global population will have increased by 2.5bn, with some cities doubling in size. 50 megacities – most of them in Asia – will be home to more than 10 million versus only 26 today. McKinsey has forecast that Asian megacities, with their higher population of younger digital natives and higher growth rates, will lead in the adoption in the smart city concept ⁱⁱⁱ.

How does a city become smart?

The Smart Cities Council^iv , a consortium of leading companies worldwide that provide solutions to the public sector, has identified five principles it thinks guide such a transition:

• Strategic - Urban development is based on a strategy that lays out how technology investments will actually benefit “liveability, workability and sustainability”.
• Connected - High speed and pervasive connectivity, and interoperable devices.
• Aware - The collection, integration, analytics and communication of data as a basis for improving and enhancing urban services
• Responsive – Urban change driven through data-based insights and intelligence.
• Innovative – Support for disruptive business models, start-up businesses and associated education services for the urban workforces^v.

This focus on technology was mirrored in the 2018 Eden Strategy Institute and ONG&ONG Pte Ltd. ranking of the world’s top 50 smart cities . London, which ranked first, scored highly on its Vision 2020 with its emphasis on digital inclusion. Estimates vary, of course, but Allied Market research forecast in 2018 that the global smart cities market was expected to exceed US$ 2.4trillion by 2025, up from around US$ 500 billion in 2017, an estimated annual average growth rate of +21%^vii. This estimate includes a wide range of industry sectors, including “smart” building, healthcare, transportation and infrastructure.

MSCI ACWI IMI Smart Cities Index

The MSCI ACWI IMI Smart Cities Index aims to represent the performance of a set of companies that are expected to derive significant revenues from smart solutions for urban infrastructure. The companies selected are assessed to have high exposure to, for example, smart infrastructure, smart connectivity, smart mobility, smart waste management and smart energy grids.

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i  https://internetofthingsagenda.techtarget.com/definition/smart-city
ii  https://www.un.org/development/desa/en/news/population/2018-revision-of-world-urbanization-prospects.html
iii  https://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/smart-cities-digital-solutions-for-a-more-livable-future
iv  https://smartcitiescouncil.com/
v  https://anz.smartcitiescouncil.com/resources/guidance-note-smart-urban-development
vi  https://www.smartcitygovt.com/
vii  https://www.alliedmarketresearch.com/press-release/smart-cities-market.html
 

A growing trend driven by the fourth industrial revolution

The Fourth Industrial Revolution—a term coined by Klaus Schwab, founder of the World Economic Forum—represents disruptive technologies and trends such that are changing the way we live and work. One of those advances is Future Mobility, which describes the evolution of future human transport, including shared, autonomous and electric vehicles. The MSCI Future Mobility Index aims to represent the performance of companies that potentially stand to derive significant revenues from energy storage technologies, autonomous vehicles, shared mobility and new transportation methods.

The future of transport

Transportation remains one of the primary household expenditures, representing between 9% in the U.S. and 13% in Europe of household budgets.ⁱ To date, only 1% of the world’s transport vehicles are electric (EV), autonomous or shared. Only 2% of all cars sold worldwide in 2018 were electric vehicles, but some investors believe demand is expected to grow, supported by the accelerated launch of new models (in Europe under regulatory pressure) and fiscal incentives in some countries. For example, in Norway, sales of EVs represented 37.1% of new car sales in the first half of 2019, thanks in part to important government subsidies, including the elimination of import and annual road taxesⁱⁱ and exemption of the value-added tax (VAT).

A survey conducted each year by KPMG with auto industry leaders reveals that the focus has switched from cost savings and emerging markets to the development of new types of cars, including electric and autonomous vehicles. For example, Volkswagen has announced that it will invest over $33 billion to launch an EV by 2023 and according to The Fuse, more than 200 EV models will be available worldwide by 2021, compared to just 60 in 2018ⁱⁱⁱ.

There has been a lot of growth over the past few years in taxi, ridesharing and carsharing services. According to Statista, the number of vehicles in the different car sharing programs will reach 610 000 units by 2021 against 32 000 in 2010. In terms of size of the market, according to Visiongain, the car sharing market set to reach $2.4 bn in 2019. TSRC estimated that there were carsharing organizations in 2,095 cities worldwide. Fleet size was globally over 157,000 vehicles and about 15 million members are registered. Asia is by far the largest carsharing region with over 40% of all carsharing vehicles operating there. Europe is the second largest carsharing market with 37% of the global fleet deployed in that region^iv.

The road for autonomous vehicles

The development of autonomous vehicles is another sector associated with the Future Mobility theme. Until recently, autonomous vehicles had limited capabilities. Major automakers have only reached level 3 of the six levels of driving automation that range from 0, fully manual, to 5, fully autonomous. According to the Society of Automotive Engineers (SAE), level 3 means that “the vehicle is in full control in some situations, and monitors the road and traffic. It can inform the driver when he or she must take control”. However, the path to remove the need for a driver over the next 15 years is being widely researched. For example, in the U.S. Waymo, the self-driving division of Alphabet, which is considered one of the leaders in autonomous vehicles, launched an experiment in 2017 in the Phoenix, Arizona area with self-driving cars. Last September, a Morgan Stanley analyst valued Waymo at $105bn, more than any American car company or the combined market capitalization of Tesla and General Motors.

MSCI ACWI IMI Future Mobility Index

The MSCI ACWI IMI Future Mobility Index aims to represent the performance of companies that are expected to derive significant revenues from the transformation of the transport industry.

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i  (https://ec.europa.eu/eurostat/statistics-explained/index.php?title=File:Household_expenditure_by_consumption_purpose_-_COICOP,_EU-28,_2017,_share_of_total.png; https://www.bts.gov/browse-statistical-products-and-data/transportation-economic-trends/tet-2018-chapter-6-household)
ii (https://elbil.no/english/norwegian-ev-policy/).
iii energyfuse.org
iv https://escholarship.org/uc/item/49j961wb
 

Transforming business and society with unprecedented speed and scale

What exactly is the “Digital Economy”? It’s much more than the internet unicorns that grab our attention with startling funding rounds and promised IPOs. And it’s much more than simply the growth of e-commerce from its tentative beginnings in the 1990s internet bubble (when it was a mere 1% of total sales). It is the economic and business transformation that has arisen because of the growth of connectivity and digitization – the growth of connections between people, businesses and machines, powered by the explosion of accessible data and the speed and reach of the internet, especially via the mobile internet. Companies have moved their business models to digital platforms using cloud computing and analytics-as-a-service, transactions via digital payments are becoming dominant and people engage in billions of social media interactions and communications every day.

Sizing the growing opportunity

The digital economy continues to evolve at breakneck speed. The emergence of the mobile internet and fast devices is critical to this: more than five billion have mobile devices¹. With the transition from 4G to 5G, smartphones will only become more important alongside the internet of things (IoT). Today’s online population of 3.3 billion represents a penetration rate of 43% or 57% of the people over 10 years old². In 2019, 3.5 billion people around the world are using social media, a number that is expected to increase by 50% within 10 years³.The current value of the digital economy represent at least $3.5 trillion or between 4.5 to 15.5 per cent of world GDP⁴ and includes cloud computing and social media. In the U.S., the digital economy represents nearly 10% of all retail sales and it is expected to double in the next five years to represent up to 20% of total sales⁵. Fewer than 7% of American internet users are now reluctant to buy online and one-third make an online purchase at least once a week⁶. The development of online sales will rise further in the coming years. By 2022, according to a report on global consumer electronics, 89% of retail computer sales, 78% of books, and 66% of electronics, will be sold via the internet in the U.S.⁷

New models and new leadership

The evolving digital economy continues to undermine conventional notions on how businesses should be organized and which companies can be dominant players. In the distribution world, Alibaba and Amazon are now considered the world’s largest retailers: Alibaba even has no inventory as it operates via ownership of merchant sites like Taobao. Traditional retailers have had to fight back and develop their own technology or acquire online platforms: Walmart acquired Jet.com in 2016 for $3.3 billion⁸, while Kroger linked up with Ocado⁹.

Business processes across all economic sectors have been transformed by cloud computing services with Amazon Web Services the market leader, illustrating how technology models can be highly scalable and transferable. The sales process has been transformed by web and mobile delivered technology platforms currently led by salesforce. There now appears to an increasing convergence of interest between stores, the web, the smartphone and social media. This omnichannel model is becoming the new model against a backdrop of fears over “surveillance capitalism”.

In the media sector leaders have emerged like Facebook or Weibo with a vast audience and broader influence than traditional media – aided in part by the promotion of the “super-app” which keeps customers operating within a single ecosystem (an ironic throwback to the early days of the internet). Streaming content and digital music have seen more cross-sector growth for platform providers (Netflix, Apple, Google, Spotify) and a battle over content ownership and creation with incumbents. In financial services, new entrant companies such as Square and Venmo compete with internet veterans like Paypal against the long-standing incumbent digital payment leaders. It’s clear that technology will continue to be at the center of the evolving digital economy with augmented reality, big data and analytics leading to further horizontal and vertical integration and cross-sector disruption.

MSCI ACWI IMI Digital Economy Index

Our MSCI ACWI IMI Digital Economy Index aims to represent the performance of companies that are expected to derive significant revenues from the digital economy value chain.

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1 GSMA: https://www.gsma.com/mobileeconomy/wp-content/uploads/2018/05/The-Mobile-Economy-2018.pdf
2 GSMA
3 Our world in data: https://ourworldindata.org/rise-of-social-media
4 UNCTAD: https://unctad.org/en/PublicationsLibrary/der2019_overview_en.pdf
5 Census government US: https://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf
6 Digital Center: https://www.digitalcenter.org/digital-future-project/
7  https://www.ystats.com/china-and-the-usa-are-the-two-giants-in-the-production-and-consumption-of-consumer-electronics-reveals-ystats-coms-new-report/
8 Walmart https://corporate.walmart.com/newsroom/2016/08/08/walmart-agrees-to-acquire-jet-com-one-of-the-fastest-growing-e-commerce-companies-in-the-u-s
9 Ocado https://ocadosolutions.com/announcement-of-international-partnership-between-ocado-and-kroger/index.html

The generation born between 1981 and 1996 is labeled the millennials (also known as generation Y) because the oldest of the demographic cohort reached adulthood at the start of the 21st century.

Millennials are the largest generation in history. They represent 25% of the world population and comprise the largest demographic in the labor market. Globally, millennials’ purchasing power is on the rise, and they represent a significant consumption target for consumer goods companies. However, there are key differences in the economic profiles of millennials located in developing countries compared to those in developed countries. In emerging countries, working millennials today are often the chief wage earner of the family. They are often well educated and have benefitted financially from the globalization trend, resulting in a higher standard of living for their family, including their parents. In contrast, millennials on average in developed countries are less affluent than their parents – the baby boomers – and the previous Generation X.

Why millennials are important

According to the Federal Reserve’s most recent Survey of Consumer Finance, the average net worth of American consumers under age 35 has fallen by 35% since 1995. This situation could be explained by the fact that these younger Americans entered the labor force at a time of major changes, notably the global financial crisis. In addition, American and European college graduates not only compete against their fellow citizens for jobs, now they are competing with job applicants worldwide. What is more, the New York Federal Reserve Bank’s Consumer Credit Panel reports that American students are shouldering an estimated $1.5 trillion in debt. On average, U.S millennials graduate with $30,000 in outstanding loans. Their attitudes toward the world and the economy overall are markedly different than previous generations. Millennials represent the first generation that cannot afford to leave home as their parents once did at a similar age. The deterioration of their economic situation also can be observed in their shopping behavior.

The wired generation

Another distinguishing characteristic that the global millennial generation shares is that they are the first generation of the digital age. Always connected to their smartphones, for them everything they need or want is a click away. They were the first generation to grow up with social media, and they use it continuously to connect with others or to watch news and events unfold. Their constant online presence also explains why they switched so early and easily to ecommerce. In that regard, millennials have different consumption habits than previous generations. For example, millennials generally distrust advertising and rely instead on other consumers’ views of products before they purchase.

Different behavior and consumption habits

Today, millennials represent half of all online purchasers and they support retailers that are fully connected. This partly helps explain the success of online retailers, like Amazon and Alibaba. Millennials want everything now and have replaced routine shopping trips to grocery stores and other brick-and-mortar outlets with online shopping for nearly all their purchases. In response, retailers are investing in several new technologies to capitalize on the digital economy and to be fully connected to this demographic.

As for other habits, millennials care more about value, and are among the least brand loyal consumers. Research (Source: Millennial Marketing) shows that 60% of Millennials prefer to purchase generic brands over name brands. They also prefer to spend their money on experiences (travelling) or on services rather than on things. They also travel more than other generations. According to Expedia Media Solutions, American millennials travel 35 days per year, on average. Another characteristic is their urban mobility. Millennials prefer sharing a car or using taxis, Uber or other ride-sharing services over buying a car. Car ownership is just not a priority for millennials. According to Mobileye Corp., they view cars as both expensive, and impractical because they are only used a small percent of the time. The same attitude is observed with respect to home ownership. It’s not just because they can’t afford a home—property prices have skyrocketed in the last decade in major cities—they simply may prefer the freedom to move from one place to another.

A persistent trend

Millennials as an investment theme makes sense now as these trends are likely to persist. Early research shows that the next generation, Generation Z, born between 1996 and 2016, is following the path of the millennials in terms of technology usage, behavior and consumption habits.

MSCI ACWI IMI Millennials Index

Our MSCI ACWI IMI Millennials Index aims to represent the performance of companies that potentially stand to derive significant revenues from industries that target the preferences of the “millennial” generation.

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Factsheet  Performance   Methodology