The Rising Influence of Rising Affluence

[DewDiligence]

Who Benefits from the IT Demands of Global Urbanization?

[IBM, the purveyor of the “Let’s Build a Smarter Planet” campaign (#msg-58969771) is an obvious choice; other companies mentioned in this piece are ABB, ACN, BMI, CSCO, GE, GE, HON, HPQ, JCI, MSFT, ORCL, SAP, SBGSY, SI, and VE.

The article in #msg-66835915 and the graphics in #msg-62043930 and #msg-56438958 are good companion reads.]

http://online.barrons.com/article/SB50001424052748704783104576599051649765770.html

›OCTOBER 1, 2011
By LESLIE P. NORTON

Cities are experiencing one of the biggest booms since the Industrial Revolution got under way.

In 2008, the number of urban dwellers for the first time in history eclipsed the number living far from the madding crowd. The United Nations projects that by mid-century, cities will be home to 70% of the world's 9.2 billion inhabitants, a figure that tops today's population by 30%.

The trend is mostly the result of the welcome prosperity of the emerging markets and should bode well for the world economy. Cities are the engines of innovation, as economist Edward L. Glaeser asserts in his recent book, Triumph of the City. Urban growth raises output per capita. In the United States, for example, Glaeser reports that workers in big metropolitan areas earn 30% more than workers laboring elsewhere,reflecting this higher productivity.

As encouraging as that prospect is, it also poses Malthusian challenges. Cities of the future will be larger than anyone ever imagined, straining both those who dwell in them and those who run them. In China alone, population growth and migration will create 81 new cities by 2025. [I think they meant to say 81 new cities of least 1M population.] How can they and their counterparts around the globe organize themselves to cope with the surge? What's the most efficient way to supply power? Speed traffic? Haul waste? Manage health care? Prevent crime? And where's everyone going to park?

The challenges are also long-term opportunities for the companies that can help solve them—and their shareholders. The issue requires some imagination since some of the cities barely exist and others are unfamiliar to U.S. investors. "These immense urban 'conurbations' like San Francisco, Mexico City, Cairo, the Boston-to-Washington, D.C., strip, will be peanuts in terms of the mega-cities in Asia," says Stephen Stokes, an analyst at Gartner Group. "The huge opportunity is in the appropriate design and development of those cities to make sure they're as efficient and green as possible."

Of the top 20 urban populations, more than three-quarters are in emerging markets, where migrations are under way as part of the relentless path of economic development. Some of these countries will also populate greenfield cities -- brand-new and planned to the last function of each building. For example, every inch of New Songdo City in South Korea, built on landfill 35 miles from Seoul and scheduled for completion in 2015, is wired for broadband access by Cisco Systems (ticker: CSCO). Another is Masdar, just outside Abu Dhabi. This urban oasis has banned private automobiles and aims to produce zero waste.

Still other sources of opportunity will be our inherited cities -- those built along the mouths of rivers or seas, where settlers landed their boats -- with familiar geography and infrastructure.

Serving urban migration is a tangible business. "Smart-cities projects are large and transformational. They are good, profitable projects for us," says Bruno di Leo, who's worked on a number of them for his employer, International Business Machines (IBM), which has adopted a "Smarter Cities" marketing campaign. IBM claims to have booked about 2,000 projects to date.

Already some investment firms are factoring these developments into their strategy. Forward Funds, a San Francisco-based mutual-fund manager with $5.7 billion in assets, has made urbanization a major theme in its Forward Global Infrastructure Fund (FGLRX). "Currently infrastructure is not built to support the population surge into the urban centers," explains Aaron Visse, a portfolio manager. That's particularly important in emerging markets, where governments face a big inflow of people and can afford to fund expansion, he says. Visse likes Siemens (SI) and ABB (ABB), which are "very much at the vanguard of energy efficiency for better use of infrastructure" and are growing rapidly in the emerging markets. "They will have outsized growth opportunities," he says.

Like Siemens and ABB, most of the beneficiaries of urbanization will be infrastructure and technology outfits that provide or utilize smartphones, sensors and software and services to track the use of a city's assets and commit resources when and where they're needed. Cloud technology, which can cut costs while boosting computing capacity, will play a big role. Even social media will participate, as cities multiply the ways a citizen can spot a problem–anything from a water-main break to a traffic snarl–and then alert others to avoid it or do something about it.

Technology researchers at IDC estimate the size of the smart-city information-technology market is now $34 billion annually and will gain 18%-plus a year to $57 billion by 2014. That's not a huge amount to global giants, but certainly enough to help drive growth. (The companies don't break out earnings related to these projects.) The market has broadened to include items like broadband connectivity, green belts, renewable energy, green buildings and other intelligent-city systems. "You are talking about smart water, smart transportation, better public safety," says Jennifer Bélissent, a consultant at Forrester.

One glimpse of the future occurred in London in 2003. The city began charging a stiff fee to drivers who ventured into congested business districts during high-traffic hours. The system uses an automatic number-plate system for billing and enforces the measure with intelligent transponders and cameras. There are heavy fines for those who don't pay. After the system, which is now run by IBM, was installed, the city found congestion dropped by 30%, traffic speed increased by 37%, and particulate matter and nitrogen oxides fell by 12%. The money raised provided funds for public transportation. Already under way elsewhere are intelligent parking systems that allow drivers to find spaces via their smartphones.

Similarly, intelligent power use around peak loads could help cities delay investment in new power generation for decades. Not only IBM, but software outfits Microsoft (MSFT) and SAP (SAP); sensor-manufacturers Johnson Controls (JCI), Honeywell (HON), Veolia (VE) and Badger Meter (BMI); efficient-grid specialist Schneider Electric (SBGSY); or efficient transport-specialists like Siemens and General Electric (GE) all stand to gain as cities try to manage their power needs.

City hospitals will get better at automating and managing data to save time and money. GE will be among the beneficiaries in this area, too.

John Tolva, a former IBM executive who's now chief technology officer to Rahm Emanuel, Chicago's new mayor, explains that cities will increasingly make their databases available to the public, letting "civic nerds" dream up new businesses that can use the information. "The tangible benefits are economic development," says Tolva. The information can also be used by city agencies to become more efficient. "At the moment, none [of the systems] are integrated, which is why a street is ripped up three times by different departments" trying to solve different problems. In the future, the work could be coordinated so it's all done at once.

In the U.S. and Europe right now, massive public-spending projects obviously aren't going to get much popular support. Over all, government IT budgets have stayed pretty stable, but demand for services is climbing while sales and property tax revenues aren't. Cities, however, have found a thin silver lining in the cloud. By essentially letting somebody else run its computer operations from a big data center, the city can save money.

Says Bob Djurdjevic of Annex Research, who follows big-cap tech stocks: "The cloud and smarter cities work hand-in-glove. The 'what' is the idea of the smarter city. The 'how' is the cloud, which provides the means for bringing it about."

Typically, a city funds big capital investments by issuing 15-20-year bonds, which require voter approval. But for many of these improvements the city doesn't need a public referendum or a bond sale; it can pay subscription fees for computer usage to a cloud provider like IBM or Microsoft. That saves major capital expenses for physical infrastructure upgrades and repairs, and keeps the investment as an operational expense. Cities can start small and scale up as usage rises.

Miami built a 311 service, which lets city dwellers call in for information or report a problem, on Microsoft's Windows Azure cloud platform. The service, which tracks progress on the issue from the time it was reported until it's been solved, produced a 75% savings on projected first-year costs because Miami didn't need to buy, host and manage physical servers. When Hurricane Irene churned up the coast in August, the city was able to add a special site on its platform to handle reports about the deadly storm. Says Eric Basha of Microsoft: "The cloud is transforming how government delivers services, driving down costs and time to market." That also provides opportunities for any vendor with cloud-related products, including Accenture (ACN), Hewlett-Packard (HPQ) and Oracle (ORCL).

In New York, the Fire Department is piloting an intelligent-operations center that will help it track inspections of hundreds of thousands of buildings and let it know when inspections are due.

Intelligent systems can also be used to communicate with the populace. A municipality, for instance, could put a "dashboard" on its portal to show how it's meeting certain benchmarks like budgets or street repairs. Says Elizabeth McGowan of SAP: "City CEOs and CIOs can show quick wins to citizens."

Thanks to broadband and mobile communications, citizens will increasingly interact with one another and their government. They can take pictures of potholes and send them in, or let others know about delays in bus service. "Crowdsourcing" will grow.

For all the opportunities likely to arise over the next generation, there are loads of risks, particularly for fledgling cities. Urban sites planned from the top down often fail to account for all the complexities, critics say. Brazil carved its capital, Brasilia, out of the Amazon but then had trouble coping as it quickly outgrew its planners' forecast. Much-lauded greenfield cities have faced big delays in their short history: "Masdar is way behind schedule," says Forrester's Bélissent. In the heritage cities, "There's lots of talk, lots of aspiration, and a lot of messaging, but systematic and carefully planned execution at the city scale remains a long way off," says Stokes of Gartner. Some cities may simply fail to support their rising populations or go through a painful decline the way Detroit has.

Still, the long-term trend seems clear and, given the range of solutions available, there's reason for optimism. Urban economics still work. In a recent article in Scientific American magazine, Luis Bettencourt and Geoffrey West, theoretical physicists at the Santa Fe Institute and Los Alamos National Laboratory, said their studies suggest that when the population of a city doubles, measures such as wages and patents per capita rise by 15% on average. "If eight million people all live in one city, their economic output will typically be about 15% greater than if the same eight million people lived in two cities half the size," they say. Investors should keep that math in mind.‹