If megacities shrink, where will your business grow?

By

EYQ

EYQ is EY’s think tank.

By exploring “What’s after what’s next?”, EYQ helps its audiences anticipate the forces shaping our future — empowering them to seize the upside of disruption and build a better working world.

14 minute read 10 Apr 2019

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As natural and technological influences transform cities around the world, businesses should address new opportunities and threats as they plan for growth.

The conventional urbanization narrative projects uninterrupted migration to ever-larger megacities. But the interaction of several emerging trends will fundamentally reshape cities as we know them. How are you planning for new opportunities and challenges in the new urban future? Megacities have been seen to be drivers of economic growth, but that may not be the future.

Digital transformation is changing where we build, how we build and where cities grow. Disruptive digital technologies are transforming transportation and reinventing work, reshaping cities along the way. They are providing new solutions to increasingly urgent urban sustainability challenges such as climate change, chronic disease, aging and affordability. And they could enable a more balanced approach to urbanization in which small cities and post-industrial cities are revitalized.

Sustainability challenges will remake the urban landscape

Cities face sustainability challenges to infrastructure, human health and livability that are remapping urbanization.

Climate change and sea-level rise are already having very real effects, challenging the direction of urban planning and transforming the shape of cities. Water, whether from sea rise or extreme weather bringing flooding and drought, is the primary medium of climate disruption in cities. Jakarta is sinking rapidly and could be underwater within a decade. Cape Town came dangerously close to becoming the first major city to run out of water.

To make cities resilient to extreme weather, urbanization patterns are starting to shift. Planners are realizing that infrastructure needs to be built differently, accommodating rather than resisting extreme weather, with extensive use of permeable pavement and more green spaces in the form of parks, ponds and green roofs. Planners must rethink or relocate urban development in vulnerable locations.

Digital enablement is a key part of this infrastructure transformation. With Internet of Things (IoT) sensors feeding data to artificial intelligence (AI) applications, city infrastructure is shifting from passive and reactive to predictive and proactive. For example, some water systems now prevent flooding by predicting rainfall and automatically adjusting water levels to accommodate anticipated inflows.

Adapting to climate change

75%

of cities have plans to mitigate and adapt to climate change but 78% said that a lack of funding for implementation is a significant challenge (global survey of 350 cities conducted by MIT).

“New financial instruments, that complement traditional public-private-partnership models, are being introduced to encourage the building of sustainable infrastructure,” says George Atalla, EY’s Global Sector Leader for the Government and Public Sector practice. “Cities should consider different financing options, whether green bonds or pay-for-success models, such as social impact bonds.”

For businesses, the urban imperative to adapt to climate disruption brings new opportunities and challenges. The need for innovative approaches, products and financing solutions that enhance city resilience will only continue to grow, as will the need for companies to enhance their own resilience by preparing for climate-related disruptions to urban markets, facilities and employees.

New financial instruments, that complement public-private-partnership models, are being introduced to encourage sustainable infrastructure. Cities should consider different financing options — green bonds or pay-for-success models such as social impact bonds.
George Atalla
EY Global Government & Public Sector Leader

Key questions:

  • What could the private sector do to fund city climate mitigation and adaption projects?
  • Is your office location strategy optimized for climate change and what are you doing to address this risk?
  • What new business opportunities could arise from the reshaping urban infrastructure in response to climate disruption?

Disruptive digital technologies will reinvent mobility within cities

How people get around cities — for work or other purposes — shapes the way those cities grow. So, profound changes in mobility enabled by digital technologies will reshape the future urban landscape. Three interrelated disruptive mobility technologies — ride-sharing, autonomous vehicles (AVs) and electric vehicles (EVs) — will collectively transform the future of cities by spurring new uses for roads, traffic lanes, parking garages and more.

To understand where things are headed, consider the impact of the disruption with which most of us are already familiar: ride-sharing platforms. The average car sits unused 95% of the time. Even when in use, most cars have underutilized capacity in the form of vacant seats. Ride-sharing can potentially squeeze these inefficiencies out of the system by combining data, algorithms and creative business models to deploy transportation assets more efficiently. Yet so far, ride-sharing has often exacerbated urban congestion, by substituting for public transit more than individual automobiles. The addition of AVs and EVs could change that, and reinvent cities in the process.

An AV can remain in operation around the clock, mitigating the 95% underutilization and reducing the need for so many vehicles. As AVs take off, car ownership is expected to plummet, bringing dramatically lower traffic congestion and a significant reduction in the urban footprint devoted to vehicles. Roads and traffic lanes could be landscaped for floodwater remediation. Parking lots could be transformed into green spaces and micro-housing. Parking garages could be repurposed as urban farms.

EVs might similarly reshape urban infrastructure. Filling and service stations could be repurposed because EVs need much less servicing than internal combustion vehicles and will likely be recharged at parking spots.

AVs may even transform the very role of the car. Instead of just providing transportation, cars could be redesigned to fulfill other needs, such as sleep or entertainment. This would make long commutes painless, leading to lower urban density and a rebalancing of population away from city centers. The future of mobility could reinvent cities, making them much more efficient and resilient.

“The future of mobility could reinvent cities, making them much more efficient and resilient,” says Vineet Gupta, Director of Planning for the Boston Transportation Department. “Instead of 1.2 people per car, if we could achieve an average of 4 or 5 people per car, we could open up travel lanes for other uses.

Instead of 1.2 people per car, if we could achieve an average of 4 or 5 people per car, we could open up travel lanes for other uses.
Vineet Gupta
Director of Planning for the Boston Transportation Department

In addition, the data collected by companies could be invaluable to urban planners, allowing us to plan based on a richer understanding of congestion patterns and peak usage times.

Key questions:

  • How could you rethink facilities to be flexible and adaptable to the future of?
  • How will your real estate needs be affected by new forms of city mobility?

Where will cities be when the workplace is any place?

Today, proximity to work is one of the biggest factors determining where people live. The future of work promises to change this dynamic.

The growing popularity of remote work and co-working spaces challenges the long-standing norm of the traditional office. As more individuals become entrepreneurs and gig workers, the need to be located close to an employer will diminish. Augmented and virtual reality promise to further enable virtual work.

The increasingly virtual nature of work, combined with the future of mobility, could reduce the pressure to locate in megacities and give a boost to suburbs and smaller cities.

This could have profound and wide-ranging impacts. Will central business districts decline and what will replace them? How will this affect the arts and cultural amenities that cities typically nurture? Will we see a decline in community cohesion and social capital — with knock-on effects for everything from mental health to employee morale?

Key questions:

  • What risks and challenges might a massive move to remote work create for you?
  • How should your talent strategy adapt to remote work and the future of mobility?
  • Will location still matter in a world of remote work and effortless mobility?

Urbanization will be more balanced

In addition to the changing nature of work and mobility, several other factors point to a more balanced urbanization in which smaller and post-industrial cities flourish relative to the world’s megacities and hotbed regions.

Climate disruptions, resource scarcity, pollution, infrastructure gaps and high costs will increasingly constrain the attractiveness of megacities and hotbeds, and their ability to grow.

At the same time, disruptive forces are enabling new growth in smaller cities:

  • Technology: Digital technologies that democratize and decentralize the tools of innovation, collaboration and production — such as additive manufacturing (3D printing), AR/VR, IoT and AI — open new pathways to participating in the global economy from anywhere.
  • Globalization: Disruptive innovation can start anywhere and grow with global teams, whether the members of those teams are in established hotbeds or elsewhere. As a result, companies and investors increasingly look outside established hotbeds for new opportunities.
  • Demographics: Millennials and the growing cohort of seniors prioritize city livability, affordability and mobility, creating new opportunities for city re-invention.

Post-industrial city assets are becoming newly valued

For post-industrial cities, successful in a previous industrial revolution but since left behind, these changing dynamics are creating new opportunities for revival. Post-industrial cities offer what megacities and hotbeds lack: excess capacity. Their infrastructure was built out to serve larger populations and larger economies. Similarly, cultural, civic, health care and educational institutions frequently outshine what you’d expect in a smaller city.

The urban design, architecture and neighborhoods that seemed outmoded when people fled old city cores for the suburbs have become valued again as preferences shift toward urban living and work.

Second-tier and smaller cities will benefit

Usually anchored by institutions such as universities, hospitals and government, second-tier cities offer some of the dynamism of their larger counterparts at a lower cost. This situation has created an outflow of mainly young people from large metropolitan areas seeking lower barriers to entry, lower costs of living and cheaper access to entrepreneurial resources.

In India, for example, a growing number of start-up entrepreneurs are leaving or avoiding hotbeds, such as Bangalore, in favor of smaller, second-tier cities where resources and talent are more accessible, such as Jaipur, Bhubaneswar, Pune and Ahmedabad.

2019 Edelman Trust report

63%

of Millennials in California are considering leaving due to the high cost of housing in areas such as the San Francisco Bay Area.

To thrive, post-industrial and smaller cities must harness the forces reshaping urbanization by becoming platforms for innovation, not just in technology but also in public space, infrastructure and financing. Emphasizing co-creation and new forms of public-private collaboration, city development becomes less linear and more about enabling constituents to innovate their community.

Espoo, Finland, with a population of 300,000, is one such thriving small city, named the 2018 Intelligent Community of the Year in the world for its sustainability, innovation and human-centered application of technology.

“Espoo engages its university, schools, corporations, startups and residents in open-minded, bottom-up processes that break down the barriers between public and private,” notes Markku Markkula, Chair of the City Board of Espoo, and First Vice-President EU Committee of the Regions. “The goal is a more human city where technology and digitalization are strongly embedded. The outcome has been Espoo as a place-based innovation ecosystem that effectively implements UN SDGs and supports quality of life and well-being.”

Key questions:

  • Is the high cost of business in hotbed cities worth it?
  • As digital democratizes innovation, in which community should you look for the next great business idea?
  • How aligned is your location strategy to the location preferences of your talent? 
The goal is a more human city where technology and digitalization are strongly embedded.
Markku Markkula
Vice-President EU Committee of the Regions

Important questions for CEOs and boards:

  • How should we incorporate changing city dynamics into our talent, facilities and innovation strategies?
  • How will changes to the urban landscape affect cities as markets for our products and services?
  • Have we adequately assessed the resilience of the cities in which we have facilities and supply chain partners?
  • What are the new financing, revenue and business model opportunities arising from the changing urban landscape?

The “Remapping Urbanization” chapter of What’s after what’s next? The upside of disruption, Megatrends facing 2018 and beyond (pdf) report provides an in-depth exploration of the forces changing the shape of cities. Further insights into the future of post-industrial and small cities can be found in the “Innovating Communities” chapter.

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Summary

Urbanization forecasts often focus on quantity: a future with more cities, more residents and bigger metropolises. But, the trends discussed here emphasize that the future is not a linear extrapolation from the past. The convergence of several forces will fundamentally reshape cities and the global cityscape, with huge implications for corporations, citizens and governments.

About this article

By

EYQ

EYQ is EY’s think tank.

By exploring “What’s after what’s next?”, EYQ helps its audiences anticipate the forces shaping our future — empowering them to seize the upside of disruption and build a better working world.