 "Corporate profitability might fall in coming decades: McKinsey")
The past three decades were a period of unprecedented prosperity for global corporations. Corporate earnings before interest and taxes trebled between 1980 and 2013. But this era may well be over. A new report from Mckinsey Global Institute, titled Playing to win: the new global competition for corporate profits, projects that over the coming decade, corporate profitability could fall from 10 per cent of global GDP in 2013 to 7.9 per cent by 2025. This fall in profitability is a consequence of several disparate forces. First, emerging-market companies will account for a greater proportion of the corporate universe in infrastructure industries such as utilities, telecom, transportation and construction.
This rise in competition will lead to a fierce battle among existing companies to retain their slice of the pie, thereby lowering profit margins. McKinsey expects their increased presence to shrink future corporate profits by about $800 billion to $900 billion. Secondly, technology disruption, the rise of low-costs solutions, could reduce corporate profits by $600-700 billion in sectors such as retail, health care, and utilities. Third, the fall in labour costs observed over the past few decades is unlikely to continue in the coming decade. McKinsey expects the end of declining labour costs to reduce corporate profitability by $800 billion.
Lastly, higher interest rates and taxes could further erode corporate profitability. The report says that in today's corporate world, "value is increasingly created from patents, brands, trademarks, and copyrights rather than industrial machinery or factories". Sectors which are considered as idea-intensive accounted for 17 per cent of the profits generated by Western companies in 1999. Today their share is 31 per cent.
This rise in competition will lead to a fierce battle among existing companies to retain their slice of the pie, thereby lowering profit margins. McKinsey expects their increased presence to shrink future corporate profits by about $800 billion to $900 billion. Secondly, technology disruption, the rise of low-costs solutions, could reduce corporate profits by $600-700 billion in sectors such as retail, health care, and utilities. Third, the fall in labour costs observed over the past few decades is unlikely to continue in the coming decade. McKinsey expects the end of declining labour costs to reduce corporate profitability by $800 billion.
Lastly, higher interest rates and taxes could further erode corporate profitability. The report says that in today's corporate world, "value is increasingly created from patents, brands, trademarks, and copyrights rather than industrial machinery or factories". Sectors which are considered as idea-intensive accounted for 17 per cent of the profits generated by Western companies in 1999. Today their share is 31 per cent.