Business Opportunities

64
Preliminary analysis of US government stimulus package and implications for high-tech providers February 26, 2009 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited Discussion document

description

A very good presentation by McKinsey on the US Stimmulus pla. It showes great opportunities for Mexican Companies in the US and gives a guideline on the sectors Mexico should focus on.

Transcript of Business Opportunities

Page 1: Business Opportunities

Preliminary analysis of US government stimulus package and implications for high-tech providers

February 26, 2009

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

Discussion document

Page 2: Business Opportunities

|McKinsey & Company 1

Executive summary

▪United States stimulus package will be $787 billion including spending and tax break, which is greater than a third of $2.0 trillion economic stimulus packages total committed by major world ecomomies. The top 4 packages– US, China, Japan, and EU account for 90% of total stimulus spend.

▪Seventy percent of the stimulus will be in the economy by September 2010–dollars are being spend and regulations are being set right now, making this a perishable opportunity

▪US stimulus spending will have a major impact on technology with $59 billion in direct and $194 billion indirect technology spending. Spend will impact multiple technology areas including software, hardware, and specialized technology systems (e.g., airport baggage scanning systems)

▪Most technology spending will come from projects in five key areas: broadband, electronic medical records, infrastructure, education, and energy / CleanTech

▪Technology firms need to act now since spending will begin immediately. Specifically companies should conduct detailed analysis and understand line by line implications of stimulus package and develop “shovel-ready” strategies to capture short-term pockets of spend

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Global stimulus efforts are massive in size and scope

SOURCE: Lit Search , CIA World Factbook 2008 Estimates

34

China

275Japan

260EU and ECB2

45Canada

20Russia

2,047

20

US

Other3

Total Stimulus1

India

586

787

Australia 20

Worldwide stimulus spendBillion USD

1 Represents lower bound on total stimulus spending as some country packages not included in this total2 Total includes contributions from EU, ECB and EU member states3 Combination of stimulus packages from Indonesia, Norway, S. Korea, Brazil, Thailand, Singapore, Chile

Percent of domestic GDP

5.4

7.5

6.1

1.7

3.4

0.9

0.6

2.4

0.6

▪ US stimulus package is over one third of the worldwide stimulus

▪ Global stimulus packages focus on infrastructure, clean technology, direct investments in the market, and packages to support individuals

▪ The top four packages account for nearly 90% of total stimulus packages

▪ Even “small” packages are significant when looked at as a percentage of country GDP

Focus of this analysis

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Over 70% of US stimulus package will be spent within the first 2years, creating a perishable opportunity

1 Static scoring2 Includes tax credits, accelerated depreciation provisions, tax-free bonds, unemployment and other benefits, health insurance for unemployed workers,

and health information technology incentives. 3 Assumes exchange rate as of 2/24/09 of 0.146257 RMB/USD

SOURCE: Congressional Budget Office (2/13/2009)

120

126

4630 28 -1

8

180

65

-0

-5-612

2009

219

10 11

-10

12

-3 -6

13

-7

15

-2

16

-3

17

-5

18

-1

19

Spending

Revenue2

14

FY

Negative revenue in later years is due to: (1) accelerated depreciation in early years and (2) increased tax revenue associated with income related to electronic medical records

Estimated outlays and revenue impact of the approved US stimulus package1

Billion USD

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Direct tech spending is $59b including clean tech, with >$200B in spend that has ancillary benefits for IT

199

4

18

14

1

19

81

67

14

2

3

23

3

10

22

18

Education

46

Energy/ CleanTech

100

Social aid

Direct technology implication

Spending

No technology implication

487

91

98

Save public sector jobs and services

9102

111

787

Total

25

Healthcare

7

24

Science & Tech

84

Infra-structure

Indirect technology implication2

1

301

Tax cuts3

280

59

230

1 Sum may not add to total due to rounding2 “Indirect tech” refers to the category spend that could result in tech spend. For example, new bridge/road construction spend could result in

technology spend on CAD/CAM software and traffic control technology; in this case all the spend for infrastructure would be included3 Direct and indirect technology tax cuts apply to CleanTech applications

Stimulus spend breakdown1

Billion USD

SOURCE: Congressional Budget Office (2/13/2009), House Committee on Appropriations; McKinsey

Focus of analysis

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Major opportunities for IT providers in US stimulus package

SOURCE: Congressional Record, ARRA Bill

Opportunity overview Types of IT providers affected

Science and technology

▪ $7.2b investment in national broadband infrastructure

▪ $17b indirect technology spend through scientific research

▪ Telecom access providers▪ Computer hardware/software▪ Scientific instrumentation

Education(largely indirect)

▪ $650m investment in educational instructional technology

▪ $250m investment in school data systems

▪ Computer hardware/system integrators▪ Educational software▪ Data storage and analysis

Healthcare ▪ EMR software providers ▪ IT hardware provider including PCs,

servers, storage, handhelds and networking devices

▪ $17.2b in incentives for EMR adoption + $2b for interoperability infrastructure

▪ $9.3b in targeted medical IT

Energy/ CleanTech

▪ Semiconductors, hardware ▪ Range of opportunities for high tech

players across all subsectors▪ Semiconductors, software, hardware, IT

services and electronics▪ Hardware, software, services, electronics

▪ $27.5 for renewables▪ $19.7b for increased energy

efficiency ▪ $11b for energy infrastructure

including $4.5b for smart grid▪ $5.5b for cleaner vehicles

Infrastructure (largely indirect)

▪ Design and engineering software developers

▪ IT hardware including data storage, PCs and specialized hardware

▪ Specialized software providers

▪ Significant opportunity for IT support of infrastructure projects

▪ Direct IT opportunities involving IT upgrades for Social Security Administration and airport security

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Significant challenges for government agencies in the implementation of the stimulus spending

SOURCE: News reports

"Forty billion dollars is a huge amount of money…Absorbing the money, making sure it's spent appropriately and gets into the hands of the right recipients...are going to be significant challenges.” –Gregory Friedman, Inspector General, DOE

“You have a huge policy shift here of moving a bureaucracy that'sbeen focused on research and development to being a manager of amassive amount of money” –Rep. Frelinghuysen, R-New Jersey

“An obscure Commerce Department office with a $19 million budget and fewer than 20 grant officers could end up in charge of $7 billion in grants to expand Internet access in rural areas” –WSJ 2/13/09

“We are asking the American people to trust their government with an unprecedented level of funding … we must prove to them that their dollars are being invested in initiatives and strategies that make a difference in their communities and across the country.”–Memorandum to Head of Departments and Agencies 2/9/09

Unprecedented spending will challenge agencies to spend wisely and maintain accountability…

…creating opportunities for private sector

• Work with regulators to understand and define what transparency and impact should look like, e.g. what metrics, processes, tools required

• Proposals/solutions that address implementation challenges will have competitive advantage, e.g. tracking of spend, usage of technology, social ROI

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Questions for discussion

▪ How quickly are you assessing and prioritizing the opportunities? – Hundreds of categories, each w/ very different dynamics– must conduct detailed analysis on

timing, size, decision makers, relevance to product portfolio, and business implications– Spend and regulatory design have already started– prioritize (e.g. size, ease of capture) and

develop comprehensive strategy immediately

▪ Do you have access to the new decision makers and customers?– Many decision makers not typical IT customers, e.g., gov’t regulators, doctors, school boards– New customer segments emerge (e.g. rural consumers, small medical clinics) that existing

channel may not reach

▪ How can you solve the government’s implementation and regulation challenges?– Implementation/regulations being developed currently – understand legislative/presidential intent

and develop solutions/influence implementation to address– Gov’t will have significant implementation challenges (transparency, speed, impact, multiple

agencies, existing regulations)– understand trade-offs and craft solutions to help solve them– Position offers to reflect public nature of opportunity – regulatory requirements, social benefits

▪ What is the impact on the stimulus spend on your product portfolio? – Dramatic shifts in market size may change product investment decisions (e.g. 30-50% increase

in broadband capex /opportunity for wireless broadband, doubling of clinical mgmt market)

▪ How will this impact your governance, organization and go-to-market model? – Opportunity is inherently cross-functional – product teams, government affairs, field sales,

channel partners must all be able to work together; are incentives aligned?– Additional spend is likely (e.g. education, clean tech from budget proposal); need to link gov’t

affairs with your sales organizations real-time to capture opportunities

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Contents

▪ Healthcare

▪ Science & technology

▪ Infrastructure

▪ Education

▪ Energy/CleanTech

▪ China stimulus

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Healthcare stimulus spend will have significant technology implications, both directly and indirectly

SOURCE: Congressional Budget Office (2/13/2009), House Committee on Appropriations

Tax cuts

Invest to lower healthcare costs

Energy / CleanTech

Infrastructure

Social aid for individuals

Save public sector jobs and services

Education

Scienceand technology

Indirect technology implication

1.5Community Health Centers

0.5Training Primary Care Providers

1.1Healthcare Effectiveness Research

1.0Prevention and Wellness Fund

19.2Health Information Technology

Direct technology implication

Focus of detailed analysis

No technology implication

1 Sum may not add to total due to rounding

0.5Indian Health Service Facilities

0.5Healthcare for uninsured

Specific Opportunity

▪ To jumpstart efforts to computerize health records to cut costs and reduce medical errors.

▪ To fight preventable chronic diseases and infectious diseases

▪ Increase the number of uninsured Americans who receive quality healthcare

▪ Renovate clinics and make health information technology improvements

▪ Healthcare Research and Quality programs to compare effectiveness of different medical Medicare, Medicaid, and SCHIP treatments

▪ Address shortages and prepare our country for universal healthcare by training primary healthcare providers including doctors, dentists

▪ Modernize aging hospitals and health clinics; includes $85m designated for health IT systems

$787 billion stimulus spending1

100

98

111

84

46

25

24

301

Billion USD

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Details of healthcare portion of stimulus package

▪ Incentives are designed to encourage early adoption – Incentives for physicians▫ Physicians who adopt by 2011 earn incentives of up to $41k per qualified professional, but

benefits decline and phase out completely by 2016; ▫ Starting in 2015 Medicare reimbursements are reduced for non-adopters; there is a 1% penalty in

2015, increasing to 5% in 2020– Incentives for hospitals▫ The first year a hospital adopts EMR they receive an award equal to the product of a base amount

plus a discharge related amount1 and the Medicare share. The payment declines to 75% then 50% then 25% of the amount paid in the initial year in the subsequent three years. No incentive payments will be made after 2015▫ Hospitals who have not adopted EMR by 2015 will forfeit 25% of the Medicare market basket

adjustment in 2015. This amount will increase by 25% per year until 2017 when non adopting hospitals forfeit 75% of the market basket adjustment each year until adopting EMR

▪ Additional potential IT expenditures in other health care related to IT – $10.4b in spending on other IT projects related to healthcare creates varying targeting IT opportunities

▪ Significant funding to create incentive for Healthcare IT – $17.2b allocated to create incentives for healthcare providers to adopt EMR, with additional $2 billion for interoperability infrastructure

▪ Incentives apply to certified EMR systems – In order to receive incentive benefits and avoid incentive penalties the EMR system must meet the requirements for certification

1 Base amount equals $2 million, and discharge related amount equals $0 for discharges 0-1,149, $200 for discharges 1,150 – 23,000 and $0 for discharges in excess of 23,001

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Federal funding will drive development of new products and services

1 CBO estimates

Source: HIMSS, CBO

▪ The US government incentives (totaling $17.2b) could accelerate EMR adoption from the current 45% in hospitals and 65% in ambulatory practices, to 70% and 90%, respectively1, in 2019

▪ $2b in government funding for interoperability infrastructure, as well as a portion of $4.7b for the Broadband Technology Opportunities Program, will promote the creation of nationwide electronic health records, improving continuity of care across providers

▪ Part of the funding for Department of Agriculture’s Distance Learning, Telemedicine, and Broadband Program ($2.5b) will go towards promoting increased use of remote monitoring and telemedicine, especially for the care of the chronically ill

▪ Healthcare reform legislation will likely fuel creation of Health Insurance Exchanges, where individuals can shop for health insurance with increased transparency and portability

▪ Public funding ($1.1b), private interest, and data availability could cause rapid growth in comparative clinical and health economic effectiveness research leading to increased information transparency and rapid evolution of care protocols

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Current HIT landscape can be broadly divided into five segmentsNOT EXHAUSTIVE

Example services/systems Example providers

Patient health management

▪ Patient billing▪ Claims processing▪ Eligibility management▪ Visit scheduling▪ Claims transaction management

Description

▪ Technology that enables interactions with and delivery of services to patients

Clinical management

Health data repository and analytics

Exchanges

Revenue cycle management

▪ EMR▪ Picture Archiving Systems (PACS)▪ e-prescription▪ Computerized Physician Order Entry▪ Clinical decision support (CDS)▪ Health information exchanges (HIE)

▪ Patient portals▪ Payor CRM▪ Online physician/patient communities▪ Online healthcare services▪ Remote delivery of medical services▪ Remote monitoring of patient vitals

▪ Clinical data analytics for medical product safety and post-market risk

▪ Health insurance exchanges

▪ Clinical tools that support patient treatment and data management

▪ Protocols and analytics that enable generation of insights from real-world data

▪ Online tools that support consumer shopping for health insurance

▪ Systems that support provider back office operations

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Market size

Ma

rke

t g

row

th (

CA

GR

)

Small (<$5 billion) Medium ($5-10 billion) Large ($10+ billion)

Low(<5%)

Medium(5-10%)

High(10%+)

Source: Expert interviews

Revenue cycle

management

Clinical management

Health data repositories &

analytics

Patient health management

Projected market position in 2013

Width of arrow indicates govt. investment

Recent disruptions will significantly alter the HIT landscapeNear-term opportunities

Exchanges

NOT TO SCALE

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Federal government is considering potential additional investment in data analytics and healthcare exchanges to promote access to information

Source: ONC Federal Health IT Strategic Plan 2008-2012, press releases

1 AHRQ - Agency for Healthcare Research and Quality2 ONC - Office of the National Coordinator3 NLM - National Library of Medicine

▪ FDAs Sentinel Initiative aiming at creation of a national, integrated, electronic system for monitoring medical product safety and post-market risk– Develop methods to access and analyze data from disparate sources (e.g., EMR

systems, medical claims databases)– Establish a post-market risk identification/ analysis system to better detect and

prevent adverse effects

▪ Government investment in national healthcare exchanges capable of delivering higher quality and performance at lower cost to consumers, with 3 broad goals– Serve as an unbiased source of information for consumers– Establish minimum standards and monitor performance of participating health plans– Form a marketplace and increase competition among insurers

▪ AHRQ1 assistance to ONC2 to meet its strategic goals with respect to data standardization and Health Information Exchanges (HIEs)– Fund HIEs for states demonstrating data sharing and interoperability activities– Standardize the flow of drug information from drug manufacturers to FDA to NLM3

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Questions for discussion for healthcare stimulus

▪ What is your strategy to target the clinical management software opportunity?– Software for clinical management will double to greater than $10b by 2013,

particularly in low-end of market (ambulatory care clinics). – Hardware players need to identify strategies to drive pull-through revenue (e.g.

partnerships w/ EMR players, new devices, storage for imaging, networking?)

▪ How will you scale into smaller provider clinic segment?– Service-based offerings will be major factor in this space– software, storage,

implementation services. Is product built for needs of small providers? – Channel strategy essential–~165k physician practices in US. Does channel

strategy scale (e.g. VARs, telesales) and have appropriate

▪ How will you target IT opportunities beyond clinical management?– Smaller initiatives also offer significant opportunities but get less attention (e.g.

$4.7 billion for broadband technology and $1.5b for community health center IT upgrades); are strategies in place to capture this spend?

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Contents

▪ Healthcare

▪ Science & technology

▪ Infrastructure

▪ Education

▪ Energy/CleanTech

▪ China stimulus

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Broadband stimulus spend will have significant direct technology implicationsBillion USD

SOURCE: Congressional Budget Office (2/13/2009), House Committee on Appropriations

Tax cuts

Invest to lower healthcare costs

Energy / CleanTech

Infrastructure

Social aid for individuals

Save public sector jobs and services

Education

Scienceand technology

Indirect technology implication

0.65DTV conversion coupons

15.3Scientific research

7.2 Broadband

Direct technology implication

Focus of detailed analysis

No technology implication

1 Sum may not add to total due to rounding

1.1Creating small business opportunities

$787 billion stimulus spending1

100

98

111

84

46

25

24

301

4.7

Broadband Technology Opportunities Program

2.5Department of AgricultureRural Utilities Service broadband program

0.25Sustainable adoption of broadband service

3.9Provide access, equipment, training, and support to implement national plan

0.35Develop national broadband access plan and inventory map of existing service

0.2 Expand public computing

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Key points of federal broadband stimulus package

SOURCE: Congressional Record, ARRA Bill

▪ Specifics still to be determined– Statute is open to interpretation and regulators are still discussing detailed implementation (e.g.,

targeted funding for mobile broadband was explicit in January House draft, but left out of final bill)– Grants will be available for a wide range of stakeholders (e.g., state governments, private

foundations, broadband providers)

▪ Short funding timeline– Goal of stimulus is to quickly create new jobs; grants will be awarded prior to finalization of

national broadband plan– Statute will be interpreted and spending will be planned within first four months– Official requests for broadband grants must be processed by September 30, 2010

▪ Size and base requirements will change economics of industry in rural markets– Increase total US broadband access capex by 30 - 50% by 2012– Federal grants provide up to 80% of rural project cost– Priority to open infrastructure or multi-service provider partnerships

▪ Multiple agencies will increase implementation complexity– Department of Commerce, Department of Agriculture, FCC, and Department of Interior (Bureau

of Land Mgmt, for right of way access) will all be involved in stimulus spend– each have specific priorities / agendas that must be addressed

▪ Unprecedented, rigorous transparency, but limited resources– Regulators (e.g. Dep’t of Commerce NTIA, ~20 person group) must determine how to quickly

grant ~$7B funding while collecting, analyzing, and publishing data transparently

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Details of federal broadband stimulus package

SOURCE: Congressional Record, ARRA Bill

Rural Utilities Service

Department of Agriculture

National Telecom and Information Administration

National broadband access plan

Implement national broadband access plan

Encourage sustainable adoption of broadband service

Expand public computing

Funding

$2,500m

Up to $350m

$3,900m

At least $250m

At least $200m

Mission as described in ARRA

Provide grants and loans to create broadband access to rural communities that do not have sufficient access to stimulate rural economic development and are not covered under the National Broadband Access Plan

To monitor national broadband access availability and create a plan to establish access in un-served and under-served areas (Urban, suburban, and rural)

Implement the national broadband access plan (e.g., provide access, education, awareness, training, support) to all un-served and under-served areas

Fund innovative solutions to encourage sustainable adoption of broadband service

Update and expand computer and broadband access in community colleges, libraries and other public community centers

Authority

Secretary of Agriculture

Assistant Secretary of Commerce for Communications and Information and the Federal Communications Commission (FCC)

Assistant Secretary of Commerce for Communications and Information

Assistant Secretary of Commerce for Communications and Information

Assistant Secretary of Commerce for Communications and Information

Timing

National plan completed by Feb 13, 2010;Inventory map published by Feb 13, 2011

Awards must be made by end of fiscal year 2010; project timelines must be less than 2 years

Unspecified

Unspecified

Unspecified

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Federal stimulus package will invest significant capital in broadband infrastructure…

SOURCE: Gartner Dataquest Market Statistics 2008, CBO, Congressional Record, ARRA Bill

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2007 08 09 10 11 12 2013

FederalStimulusInvestment

Wireless BB

Cable

DSL

Fiber

+29%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2007 08 09 10 11 12 2013

FederalStimulusInvestment

Wireless BB

Cable

DSL

Fiber

+51%

Federal funding will▪ Subsidize up to 80% of projects that would not be feasible without stimulus investment▪ Focus on national un-served and under-served areas through the NTIA and on rural

areas through the Department of Agriculture▪ Support a national broadband plan, but will be granted before the plan is finalized▪ Spread between all 50 states▪ Prioritize open infrastructure and multi-ISP partnerships

Scenario 1: Current projected growth (2008 estimate) Scenario 2: Flat broadband investment growth

Recent and projected US broadband access revenueMillion USD

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... but provider must submit proposals within 18 months to receive funding

SOURCE: Gartner Dataquest Market Statistics 2008, CBO, Congressional Record, ARRA Bill

2010 2011 20122009

Establish NationalBroadband Plan

Compile and publishbroadband inventorymap

Process RFPs forinfrastructure grants

Provide stimulusfunding for grants

Activity

Broadband proposal final decisions by Sep 30, 2010

End products

▪ Defined technology standards (e.g., which national technology platforms will offer ideal performance and scalability?)

▪ Strategy to maximize affordability and utilization of broadband infrastructure

▪ Roadmap to provide broadband access nationally

▪ Public broadband inventory mapwith continuous updates

▪ Distribution of funding to be based on interpretation of initial ARRA, and later, based on the national broadband plan

▪ Inform FCC on latest broadband technology to maximize public benefit of widespread adoption

▪ Analyze ARRA to realize maximum opportunity – multiple decision-makers and ambiguous language will require strategic effort

▪ Short proposal timeline will require providers to move quickly

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Congressional Budget Office predicts broadband stimulus funding will be apportioned through 2015

SOURCE: Congressional Budget Office, Summary of Estimated Cost for ARRA

756 860

1,250 1,210

390150

350

587

575475

325

12563

84

147

2009

1,106

10

1,447

11

1,825

12

1,685

13

715

14

275

2015

Estimated outlays of broadband stimulus packageMillion USD per FY

NTIA

Dept. of Agriculture

Funding predicted to extend past bill

deadline

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Questions for discussion for broadband stimulus

SOURCE: Congressional Record, ARRA Bill

▪ Are you evaluating the impact on your product/service offering? – Large rural access investments may favor wireless solutions (e.g., WiMax); open access

requirements may have direct technology/product implications

▪ How can develop solution/proposal that achieves administration’s goals?– Regulators will prioritize solutions that meet the “intent” of the administration– does your proposal

have a compelling social ROI?– Begin and finish rapidly (i.e., quickly create jobs and efficiently provide national broadband solution)– Create financial and performance transparency plan; regulators will prefer turnkey strategy that

addresses transparency requirement

▪ Does your strategy address priorities/issues for multiple agencies?– NTIA, FCC, Department of Agriculture, and the White House will all have significant authority in

determining implementation of the broadband technology opportunity plan– Each agency has a set of priorities (e.g. FCC for open access, Ag for previous grantees, White

House for speed)– proposal should address each concern in turn

▪ How quickly and closely are your working with regulators?– While RFPs will be processed through FY10, near-term interpretation of the broadband technology

opportunity plan will largely shape future allocation of the $7.2b in stimulus funding; help influence standards/requirements to meet policy goals while getting best thinking from private sector

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Scientific research stimulus spend will have significant indirect technology implications…Billion USD

SOURCE: Congressional Budget Office (2/13/2009), House Committee on Appropriations

Tax cuts

Invest to lower healthcare costs

Energy / CleanTech

Infrastructure

Social aid for individuals

Save public sector jobs and services

Education

Scienceand technology

Indirect technology implication

0.65DTV conversion coupons

15.3Scientific research

7.2 Broadband

Direct technology implication

Focus of detailed analysis

No technology implication

1 Sum may not add to total due to rounding

1.1Creating small business opportunities

$787 billion stimulus spending1

100

98

111

84

46

25

24

3011.0 NASA

3.0 NSF

0.1Education and human resources

0.4

Major Research Equipment and Facilities Construction

2.5Research and Related Activities

0.36National Institute of Standards and Technology

8.7 NIH

0.6NOAA –Satellites and Sensors

0.14US Geological Survey

1.3University research facilities

0.23

NOAA –Operations, Research and Facilities

0.5Buildings and Facilities

8.2Scientific Research

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… but will have limited direct impact on technology providers

SOURCE: NIH Website, NSF Website, Congressional Budget Office (2/13/2009)

2.9

5.7

2009

11.3

21.1

2010

12.8 13.2

2011

5.2 5.8

2012

0.92.7

2013

0.4 0.1

2015

0.2

2014

1.1

NIH

NSF

1 NIH FY08 Budget = $29b; NSF FY08 Budget = $6b

▪ Incremental spend will be difficult to capture – while there is significant incremental funding, it will be delivered through highly fragmented groups of researchers

▪ Highly variable indirect technology impact –Majority of science and technology stimulus has indirect technology implications; IT provider impact directly related to types of experiments funded

▪ National Science Foundation research distributed over 15,000 awards

▪ National Institutes of Health research distributed through 27 centers and over 50,000 competitive grants

Relative increase in research funding from stimulus packagePercent (normalized to FY08 budget1)

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Contents

▪ Healthcare

▪ Science & technology

▪ Infrastructure

▪ Education

▪ Energy/CleanTech

▪ China stimulus

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Infrastructure stimulus spend

SOURCE: Congressional Budget Office (2/13/2009), House Committee on Appropriations

Tax cuts

Invest to lower healthcare costs

Energy / CleanTech

Infrastructure

Social aid for individuals

Save public sector jobs and services

Education

Scienceand technology

Indirect technology implication

7.1EnvironmentalCleanup

0.5 Other

0.9Technology Efficiency improvements

13.5 Clean Water

49.8 Transit

Direct technology implication

No technology implication

1 Sum may not add to total due to rounding

11.8Government Facilities

$787 billion stimulus spending1

100

98

110

83

48

25

24

301

29.0 Highway infrastructure

9.3 Rail Transit

3.1Transit security and airport

1.5New construction, upgrades and repair

6.9 Capital assistance

6.0Clean and drinking water state revolving fund

4.6 Corps of engineers

0.3 Watershed Infrastructure

2.6 Other

2.4 Military Facilities

1.8 Medical Facilities

7.0 Other Facilities

0.5 Reducing wild fire threats

6.0 Nuclear waste cleanup

1.1 Other cleanup

0.2Fire station modernization

0.3 Other

Billion USD

0.8Transit upgrades and repair

0.8New transit construction

1.0TSA Explosive detection system

2.1Other transit and border security

4.5 Other facilities

2.5 Public lands

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Key elements of the Stimulus Bill investment on the infrastructure space

SOURCE: McKinsey interviews

Issue / topic Details

Shift toward public sector

construction projects

The Stimulus Bill primarily will drive public sector construction projects, which will lead to

a shift in project portfolios for many contractors. Public sector projects are more difficult

to execute than private sector projects as a result of stricter contracting regulations,

which will pose a challenge for those not experienced in these types of projects

Rapid allocation of funding by

federal agencies to state and local

level agencies

Federal agencies are under tight deadlines to allocate the Stimulus Bill funding, and

often must use criteria (e.g., job creation) with which they are not accustomed. This will

create short term challenges over the first quarter of 2009 for those agencies

Bolstering of construction volumes Due to the economic collapse, construction volumes are expected to fall considerably in

2009. The Stimulus Bill will help limit the fall, but will not reverse it. Some economists

are estimating a 3% to 9% drop in construction volumes in 2009, with a double digit fall

prevented by the Stimulus Bill

Oversight of expenditure to measure

and document impact

The Stimulus Bill funding comes with significant reporting requirements and will receive

unprecedented scrutiny from the media and those critical of the Bill. As such, those

receiving funding will face new and difficult challenges in tracking where the money is

going and its impact (e.g., job creation)

Increase in demand for energy

efficient / alternative energy

materials

While most construction material volumes will simply decline less than otherwise with the

Stimulus Bill, materials used in energy efficiency projects may see meaningful increase

in demand

Rapid implementation of newly

funded projects by state and local

agencies

The state and local agencies receiving the funding must put it to work very quickly once

it is allocated. In some cases projects are ready to go, but in others (e.g., home

weatherization) the funding must be allocated on a competitive basis and will create

difficult management challenges

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|McKinsey & Company 29

• The CBO estimates that stimulus infrastructure spending will peak in 2010 at $20 billion

• Peak stimulus spending is equal to only 6.3% of current government infrastructure spending

• 6.3% stimulus related growth is only slightly more than 5.7% CAGR of infrastructure spending

Incremental infrastructure spending is low relative to recent government infrastructure spending levels

SOURCE: US Census, Congressional Budget Office

0

50

100

150

200

250

300

350

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Federal

State

Historical State and Federal infrastructure spendingBillion USD

5.7%

• Incremental infrastructure spend is in-line with typical infrastructure spend growth

• Infrastructure providers are not likely to need significant growth in IT spending to keep up with stimulus demand

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Questions for discussion for infrastructure stimulus

Key points from infrastructure stimulus

▪ Pockets of high IT spend exist within larger programs – Infrastructure upgrades and modernization clauses will result in pockets of high IT spend

▪ Much of funding will support existing programs – $49.3 billion will be applied to accelerating projects currently in process, funding projects currently in backlog, or funding projects where need has been demonstrated

▪ Significant funding, but varying IT impact– $29 billion in highway infrastructure

investment will likely have low IT component

– $3.1 billion in airport, border and port security upgrades will result in higher targeted IT investments

Questions for IT providers

▪ Are you targeting the IT-heavy initiatives?– Likely larger capturable opportunity in $500

million in Social Security modernization than in $29 billion in highway infrastructure

– Some specialized projects, (e.g., nuclear waste clean up) have opportunities for niche IT providers

▪ How will you engage with existing customers and high potential users ?– Likely federal dollars will be awarded to

existing infrastructure contractors (e.g., Turner, TSNA); on average, construction firms use 2.1% of spend on IT

– Large existing heavy industry players (e.g. Caterpillar) likely to see disproportionate benefit due to scale

– Minority owned business have explicit provisions in bill to receive portions of contracts; potential alliances with industry associations

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Transportation infrastructure investment

By DOT and Maritime Admin on discretionary basis100xxx

Assistance to small shipyards

By Coast Guard to authorized bridges ready for construction240

Rehabilitate and repair Coast Guard infrastructure and obstacles to navigationCoast Guard bridges

By TSA on competitive basis in consideration of security risk1,000Upgrade baggage screening systems

TSA explosive detection systems

1,300

1,500

8,400

9,300

27,500

Amount ($m)

By FAA on discretionary basis

Make grants to airports to improve safety or increase capacity; repair Federal Aviation Administration equipment and facilities

Invest in air transportation

By DOT on competitive basis

Provide competitive grants for state and local transportation investments

Invest in local surface transportation projects

By existing FTA urban and rural transit formula

Provide grants to states for public transit infrastructure investment, reallocating money that is not spent quickly

Invest in public transit

By FRA on competitive or discretionary basis

Expand passenger rail capacity and make grants for high-speed rail projects, including Amtrak

Invest in rail transportation

By FHA to state DOT’susing existing formula

Provide money to states to repair or construct highways or bridges, reallocating money that is not spent quickly

Provide money for highways and bridges

Distribution methodDetailsProgram

SOURCE: American Recovery and Reinvestment Act of 2009, Association of General Contractors of America (AGC), McKinsey analysis

BACKUP

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9,300

40,000

49,300

Total

Rail

Othertransportation

Detail: Rail infrastructure investment (example)

By FRA on competitive and discretionary basis(The DOT estimates the NE Corridor alone has a backlog of over $10b – prioritization of projects will be difficult)

1,300 (funds available

through Sept. 2010)

Improve the speed and capacity of intercity passenger rail service. $450m targeted for security, remainder ($850m) for projects that repair, rehabilitate, or upgrade railroad assets or infrastructure, and for capital projects that expand passenger rail capacity including the rehabilitation of rolling stock

National Railroad Passenger Corporation (Amtrak)

8,000 (funds available

through Sept. 2012)

Amount ($m)

By FRA on competitive and discretionary basis. Strategic plan for use of funds required from Sec. of Transportation within 60 days of enactment of bill

Advance the development of high speed rail and to improve the intercity passenger rail service in corridors across the nation

High Speed Rail and Intercity Passenger Rail Grants

Distribution methodDetailsProgram

SOURCE: American Recovery and Reinvestment Act of 2009, McKinsey analysis

Transportation related ARRA investment, $m

“FRA is an active participant on the Department’s Transportation Investment Generating Economic Recovery (TIGER) team, which will act as a vigorous and vigilant steward of taxpayer dollars by utilizing sound evaluation criteria and reporting standards. As part of those efforts, FRA will help identify and prioritize passenger rail projects that embody and optimize use of recovery funding. Among them, advancing development of high-speed passenger rail corridors, launching ready to go improvements to Amtrak and intercity passenger rail service, as well as other infrastructure projects that promote intermodalism and facilitate the movement of freight.” – FRA website (www.fra.dot.gov)

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Detail: Text of Stimulus Bill addressing high speed rail corridors and intercity passenger rail investment

SOURCE: American Recovery and Reinvestment Act of 2009

CAPITAL ASSISTANCE FOR HIGH SPEED RAIL CORRIDORS AND INTERCITY PASSENGER RAIL SERVICE

For an additional amount for section 501 of Public Law 110– 432 and discretionary grants to States to pay for the cost

of projects described in paragraphs (2)(A) and (2)(B) of section 24401 of title 49, United States Code, subsection (b)

of section 24105 of such title, $8,000,000,000, to remain available through September 30, 2012: Provided, That the

Secretary of Transportation shall give priority to projects that support the development of intercity high speed rail

service: Provided further, That within 60 days of the enactment of this Act, the Secretary shall submit to the House

and Senate Committees on Appropriations a strategic plan that describes how the Secretary will use the funding

provided under this heading to improve and deploy high speed passenger rail systems: Provided further, That within

120 days of enactment of this Act, the Secretary shall issue interim guidance to applicants covering grant terms,

conditions, and procedures until final regulations are issued: Provided further, That such interim guidance shall

provide separate instructions for the high speed rail corridor program, capital assistance for intercity passenger rail

service grants, and congestion grants: Provided further, That the Secretary shall waive the requirement that a project

conducted using funds provided under this heading be in a State rail plan developed under chapter 227 of title 49,

United States Code: Provided further, That the Federal share payable of the costs for which a grant is made under

this heading shall be, at the option of the recipient, up to 100 percent: Provided further, That projects conducted using

funds provided under this heading must comply with the requirements of subchapter IV of chapter 31 of title 40, United

States Code: Provided further, That section 24405 of title 49, United States Code, shall apply to funds provided under

this heading: Provided further, That the Administrator of the Federal Railroad Administration may retain up to one-

quarter of 1 percent of the funds provided under this heading to fund the award and oversight by the Administrator of

grants made under this heading, and funds retained for said purposes shall remain available through September 30,

2014.

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Detail: Text of Stimulus Bill addressing grants to National Railroad Passenger Corporation (Amtrak)

SOURCE: American Recovery and Reinvestment Act of 2009

CAPITAL GRANTS TO THE NATIONAL RAILROAD PASSENGER CORPORATION

For an additional amount for the National Railroad Passenger Corporation (Amtrak) to enable the Secretary of

Transportation to make capital grants to Amtrak as authorized by section 101(c) of the Passenger Rail Investment and

Improvement Act of 2008 (Public Law 110–432), $1,300,000,000, to remain available through September 30, 2010, of

which $450,000,000 shall be used for capital security grants: Provided, That priority for the use of non-security funds

shall be given to projects for the repair, rehabilitation, or upgrade of railroad assets or infrastructure, and for capital

projects that expand passenger rail capacity including the rehabilitation of rolling stock: Provided further, That none of

the funds under this heading shall be used to subsidize the operating losses of Amtrak: Provided further, That funds

provided under this heading shall be awarded not later than 30 days after the date of enactment of this Act: Provided

further, That the Secretary shall take measures to ensure that projects funded under this heading shall be completed

within 2 years of enactment of this Act, and shall serve to supplement and not supplant planned expenditures for such

activities from other Federal, State, local and corporate sources: Provided further, That the Secretary shall certify to

the House and Senate Committees on Appropriations in writing compliance with the preceding proviso: Provided

further, That not more than 60 percent of the funds provided for non-security activities under this heading may be

used for capital projects along the Northeast Corridor: Provided further, That of the funding provided under this

heading, $5,000,000 shall be made available for the Amtrak Office of Inspector General and made available through

September 30, 2013.

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Water infrastructure investment (example)

By NOAA on discretionary basis830

Construct and repair facilities, ships and equipment to support weather research

NOAA Environmental Research

By existing formula to State Revolving Funds (SRFs)6,000

Provide money for wastewater treatment projects and projects that improve the quality of drinking water

Finance local water projects

By Corps to fund existing project backlog4,600

Includes $2 billion for construction projects like dam repair and flood control, $1.9 billion for maintenance, $100 million to clean up early atomic energy facilities

Provide additional money to the Army Corps of Engineers

By USDA on discretionary basis1,400

Provide grants and loans for water supply and waste disposal programs in rural areas

Finance rural water and waste facilities

By Bureau of Reclamation to fund existing project backlog1,000

Provide clean, reliable drinking water to rural areas and ensure adequate water supply to western localities impacted by draught

Provide water to rural areas and Western areas impacted by drought

By USDA, NRCS, and IBWC on discretionary basis560

Provide additional funding for watershed improvement programs. Repair flood control systems damaged by storms

Provide additional resources for flood control

Amount ($m) Distribution methodDetailsProgram

SOURCE: American Recovery and Reinvestment Act of 2009, Association of General Contractors of America (AGC), McKinsey analysis

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A large number of federal agencies will oversee the spending or distribution of the infrastructure investment

SOURCE: FedSource

0.8%1,000Bureau of Reclamation

0.8%1,000SSA

0.8%1,000Transportation Security Administration

1,150

1,300

1,475

1,800

2,500

2,500

3,500

4,510

4,550

5,250

5,800

7,200

7,852

8,400

9,300

22,183

27,500

Amount ($m) % of TotalAgency

0.9%Forest Service

1.0%Federal Aviation Administration

1.1%Army

1.4%National Institutes of Health

1.9%Health Resource and Services Administration

1.9%Rural Utilities Services

2.7%Office of the Secretary

3.5%Public and Indian Housing

3.5%Corps of Engineers--Civil

4.0%Community Planning and Development

4.5%General Services Administration

5.5%EPA

6.0%DoD

6.5%Federal Transit Administration

7.1%Federal Railroad Administration

17.0%Energy

21.1%Federal Highway Administration

▪ 20 agencies are responsible for at least $1b in investment (cumulatively representing ~93% of total investment)

▪ More than 30 agencies are responsible for the remaining investment

Agencies responsible for at least $1bn in investment

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|McKinsey & Company 37

0

50

100

150

200

250

300

350

NY FL IL PA OH MI GA NCCA NE ID ME NH HI RI MT DE SD AK ND VT WYNJ VA WA AZ MA IN TN MO MD WI MN CO AL SC LATX OR OK CT IA MSKY KS UT NV NM WVAR

State level transportation investment is largely distributed according to existing funding formulae, which is roughly equivalent per capita by state

SOURCE: Transportation and Infrastructure Committee – US House of Representatives

States with very low populations have higher per capita spend, likely the result of their having higher per capita transportation infrastructure costs

State level transportation investment, $m

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

MS AR KS UT NV NM WVCA TX NY FL IL PA OH MI GA CTNC NJ VA WA AZ MA IN TN MO MD WI MN CO AL SC LA KY OR OK NEIA ME NH HI RI MTID SD AK ND VT WYDE

Per capita state level transportation investment, $/person

Total = $34bnBACKUP

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Contents

▪ Healthcare

▪ Science & technology

▪ Infrastructure

▪ Education

▪ Energy/CleanTech

▪ China stimulus

Page 40: Business Opportunities

|McKinsey & Company 39

Detailed education stimulus spend breakdownIndirect technology implication

12.2Special Education/IDEA

0.25IES Data Systems

15.8Student Financial Assistance

13 Title I

53.6State Fiscal Stabilization Fund

Bonus grants for meeting key performance measures

5.0

Local school districts and colleges to prevent cutbacks

39.5

School turnaround3.0

Incentive grants5.0

Targeted grants (e.g., Reading First

5.0

College work study0.2

Expanding Pell grants15.6

Direct technology implication

Focus of detailed analysis

No technology implication

High priority needs, inc. renovation/repair of education facilities

8.8

0.1 Higher Education

4.0 Job Training

1.0School improvement

Homeless student assistance

0.07

State/local technology grants

0.65

School facility modernization

0.1

IES performance-based compensation research

0.2

Tax cuts

Invest to lower healthcare costs

Energy / CleanTech

Infrastructure

Social aid for individuals

Save public sector jobs and services

Education

Scienceand technology

$787 billion stimulus spending1

100

98

111

84

46

25

24

301

1 Sum may not add to total due to rounding

SOURCE: Congressional Budget Office (2/13/2009), House Committee on Appropriations

Billion USD

Page 41: Business Opportunities

|McKinsey & Company 40

Questions for discussion for education stimulus

SOURCE: Congressional Record, ARRA Bill, Ed.gov

Key points from education stimulus

▪ Primarily offsets state budget shortfalls –$54b of the $100b of education stimulus funding will be apportioned to filling state budget shortfalls, leaving at most $46b for education stimulus

▪ Primarily non-tech focused – Major stimulus appropriations will have little impact direct impact on technology (e.g., $12.2b for IDEA and special education, $13b for Title I funding, and $15.8b to increase federal Pell Grant awards)

▪ Direct technology stimulus will significantly increase current funding levels– $650m directed to school technology grants

over 2 years, of which, 25% will be professional development (equivalent to $4.50 tech investment per student (K-12) vs. $9,000 current education spending per student)

– $250m to fund state data collection systems vs. $48m appropriated in FY08

– Note: Federal direct education technology spending has decreased from $700m in 2002 to $260m in 2008

Questions for IT providers

▪ Will you be first to help advise districts?– 6-9 months to spend (w/ budget cycles),

decisions by districts will be made quickly, creating first mover advantage

– Schools lack time/ability to know how to spend. Shape/advise how schools can spend (e.g., work w/ states to establish guidelines/ whitelists, establish information portal for schools)

▪ Do you have access to right decision makers?– IT education VARs work primarily with IT

groups. Decisions will be made by different customers-- superintendents, school boards. Alternative channels will be importants, e.g. instructional publishers w/ large sales force and relationships w/ education decision makers

▪ What changes in the produt portfolio?– Rapid change in market for new technologies

(e.g., school data systems, adaptive learning)

▪ Howa re you offering complete solutions? – Partnerships with broad array of players (both

high tech and other) to offer integrated solutions for schools (e.g., ‘modern science lab in a box’)

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Stimulus funding will significantly increase state education technology grants, but will remain below recent levels

SOURCE: Congressional Record, ARRA Bill, Ed.gov

325 325

268268

268272289

496

692696701

593

2003 2004 2005 2006 2007 2008 20092 20103

593

2002

-15%

+121%

Title II D funding1

Stimulus Tech Grants

1 Title II D is federal funding to states for education technology2 Title II D funding for FY09 based on Senate committee appropriation3 Title II D funding for FY10 assumed to remain constant based on recent funding levels

Federal education technology grants to statesMillion USD

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Some educational stimulus items will create incremental technology expenditures

SOURCE: House Committee on Appropriations; Center on Reinventing Public Education; news reports

0.7Enhancing EducationThrough Technology

0.3Institute of EducationSciences

12.2Individuals with DisabilitiesEducation Act

13.0Education for theDisadvantaged

39.5State FiscalStabilization

0.4Other1

1 Includes $100m Impact Aid, $70m Education for the Homeless Children and Youth, and $200m for Teacher Incentive Fund

Educational itemSpending Billions USD Description

Incremental impact? Reason

Improving student achievement through the use of technology

Data systems to analyze individual student data and improve achievement

Funding to local districts for costs of educating students with disabilities

Funds for districts with disadvantaged children

Offsetting projected cuts in state budgets

Teacher incentives and funding for areas with military and homeless populations

Funds must be used to support professional development and curricula related to technology

Fewer restrictions on how funds are spent, so districts are likely to use them to offset $54b shortfall in state funding. Some restrictions on title 1 funding still to be determined

Grants are for designing and developing new data systems

At least half the funding must be used to increase special education expenditures; some regulations to be determined

Indirect IT spending

Direct IT spending

No IT spending implications

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Much of the education stimulus funding will be concentrated in large districts and states with large low-income populations

Concentration of students in the largest U.S. School districts% of total K-12 student population1

56%20%

11%

12%

Largest 20 Districts

Next 80

Next 400

Next 3300

1%

All others

500 largest districts account for 43% of total student population

13

3

60

3

3

3

3

3

4

5

10

12

14

Georgia

Michigan

Louisiana

States 1-10

19States 11-20

Ohio

Pennsylvania

California

New York

Texas

States 21-30

Florida

Illinois

7States 31-40

States 41-51*

10 states account for 60% of low-income K-12 students

1 Total K-12 student population = 49 million students2 Total K-12 population eligible for free / reduced lunch = 18.5 million students

SOURCE: Characteristics of the Top 100 School Districts, 2005-06 (released June 2008), NCES, Expert Interviews

Proportion of low-income students by state% of total K-12 students eligible for free / reduced lunch2

Majority of education stimulus funding distributed proportionally by total number of students or total number of students receiving free / reduced lunch

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Even $1 billion in stimulus K-12 renovation/modernization spend would significantly increase spend

3.7%

12.3

02

14.6

2006

Other: Trade Books, Book Clubs & Fairs, Periodicals, Tests

Instructional Materials:Textbooks

Instructional Materials:Supplements

Comprehensive courseware

Internet

Software

Distance learning

Hardware

5.5%

6.9%

11.2%

22.0%

15.7%

20.4%

14.5%

16.8%

21.7%

15.0%

3.7%5.7%

6.1%

10.6%

20.3%

12.3

03

17.5%

21.5%

14.9%

3.9%

6.2%

5.8%

10.4%

19.8%

12.9

04

17.8%

21.1%

14.9%

5.7%

9.7%

19.6%

4.0%

6.3%

5.9%

10.0%

19.9%

13.8

05

18.3%

21.0%

15.1%

4.1%

6.4%

Tech products

$7b in historical annual technology spend

SOURCE: EMR Complete K-12 Report, 2007

K-12 instructional materials market sizeBillion USD

Page 46: Business Opportunities

|McKinsey & Company 45SOURCE: American Recovery and Reinvestment Act – H.R.1

Funding flows for the $13 billion Title I stimulus PRELIMINARY

Within 30 days of act passing

Within 30 days of funds receipt

Within 1 year from act passing

Within 2 years from act passing

Within 120 days of re-allocation

Secretary of Education

State government

Local educational agencies

Local educational agencies

State government

Entire $13b

Timing Party Funds

~$12.9b less state admin fees

~$6.7b (51% of allocation must be spent within 1 yr)

~$6.2b (all of allocation must be spent within 2 yrs)

Any funds not used in given time frame

Secretary of Education

releases funds

Local agencies spend – phase 1

States distribute funds to local

agencies

Local agencies spend – phase 2

Re-allocation of unused funds

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|McKinsey & Company 46

Stimulus package will temporarily increase federalinfluence in K-12 education

SOURCE: Education Commission of the States

9%

91%

15%

85%

2008 2009

Federal Funding

State and Local Funding

Source of total K-12 Education Spend%

Increased Federal Funds: This bill will provide up to $81 billion in additional federal funds for K-12 education. If these funds are expended by states evenly over the next two years, this would represent an 80% increase in total federal K-12 spending over 2008-09.

Increased Federal Role: This increase in K-12 spending will greatly increase the federal government’s role in education funding. Prior to this bill the federal government provided on average approximately 9% of all education spending. Assuming these funds will be evenly expended by states over a two-year period, this bill will increase federal spending on K-12 education to between 14.8% and 15.5% of total spending.

Funding Per Student: The additional K-12 operational funding will translate into an average additional $870.60 per student nationally per year for the next two years.

Education Jobs Created/Saved: Using current education spending patterns we can estimate that this act will create or save 267,355 teaching positions and an additional 40,000 instructional staff this year.

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A case study in Washington State indicates that most stimulus education funding will replace cuts in state budgets

SOURCE: House Committees on Appropriations and Education; Washington State Office of Financial Management; expert interviews; Seattle Times

800351

1,151

737

Net budget impact

Federal stabilization funds

177

Title 1 grants

9

Education technology

228

Individuals with Disabilities Education Act (IDEA)

Total stimulus funds

Proposed reduction in state spending

▪ Bulk of the stimulus spending will replace projected cuts in state budgets▪ Some budget items such as IDEA are restricted and funds cannot be shifted to other

priorities; these areas are likely to see the largest increment spending increases▪ Since funding may not be renewed, states may spend IDEA funds on nonrecurring

items such as equipment or training

PRELIMINARY

Two-year funding impactMillion USD

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|McKinsey & Company 48

Contents

▪ Healthcare

▪ Science & technology

▪ Infrastructure

▪ Education

▪ Energy/CleanTech

▪ China stimulus

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|McKinsey & Company 49

1 Includes spend and tax credits focused directly and primarily on CleanTech; does not include spend focused on other areas that may have energy-related components (e.g., Dept of Education funds for school renovations that may include EE retrofits)

SOURCE: “American Recovery and Reinvestment Act,” H.R. 1 and S. 336 as of 2/23/2009; McKinsey analysis

The stimulus bill includes $68b for CleanTech initiatives comprised of $48b in direct spend and $20b in tax credits

19

11

48

3

15

20

16

Grants/Other

Tax Credits

11

Total

25

68

Smart Grid / Infrastructure Upgrades

Fuel Efficient /ElectricVehicles

Renewables / Cleaner Energy

0

31

212EnergyEfficiency (EE) / Building Retrofits

CleanTech focused investments1 Description

▪ $6.0b loan guarantee for innovative technologies▪ $3.4b grant for Fossil Energy R&D program▪ $2.0b DOE grant for R&D▪ $1.3b grant for biomass and geothermal R&D▪ $0.5b DOL grant for renewable energy job training ▪ $13.1b tax credit for renewable energy production▪ $2.8b in other tax credits▪ $1.6b in bonds for renewable generation

▪ $5.0b grant for home weatherization▪ $4.5b grant for federal building retrofits▪ $3.2b grant for EE and conservation▪ $3.1b grant for state energy programs▪ $1.8b grant for public, section 8, Native Am housing▪ $0.6b grant for military construction (EE/alt. energy)▪ $0.3b grant for energy efficient appliances▪ $2.0b tax credit for EE improvements to homes▪ $0.8b in bonds for greenhouse gas reductions

▪ $2.0b grant for advanced battery R&D▪ $0.4b grant for transportation electrification▪ $0.3b grant for diesel R&D ▪ $0.3b grant for efficient federal fleet procurement▪ $0.3b grant for alternative fuel pilot vehicle project▪ $0.1b grant for public transit GHG reduction▪ $2.0b tax credit for plug in hybrid electric vehicles

▪ $4.5b grant for smart grid infrastructure (incl training)▪ $6.5b additional borrowing authority for regional

transmission upgrades (Bonneville and WAPA)

Billion USDPRELIMINARY

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|McKinsey & Company 50

CleanTech spend will have technology implications across every major categoryBillion USD

SOURCE: Congressional Budget Office (2/13/2009), House Committee on Appropriations

Tax cuts2

Invest to lower healthcare costs

Energy / CleanTech2

Infrastructure

Social aid for individuals

Save public sector jobs and services

Education

Scienceand technology

Indirect technology implication

Direct technology implication4

Focus of detailed analysis

No technology implication

1 Sum may not add to total due to rounding2 Includes energy-focused grants, loans, loan guarantees and tax credits ($20b)3 Direct technology implications include spending appropriated to IT provider products as well as research that would directly involve IT providers

$787 billion stimulus spending1

100

98

111

84

46

25

24

301

30.7 Cleaner energy

Increased energy efficiency

Smarter/better infrastructure

Cleaner vehicles

21.3

11.0

5.4

3.4 Cleaner fossil fuels

27.3 Renewables

6.5 Regional transmission

4.5 Smart grid

2.0 Advanced batteries

2.7 Electric vehicles

Building retrofits21.3

0.7 Alternative-/bio-fuels

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1 Includes spend and tax credits focused directly and primarily on CleanTech; does not include spend focused on other areas that may have energy-related components (e.g., Dept of Education funds for school renovations that may include EE retrofits)

SOURCE: “American Recovery and Reinvestment Act,” H.R. 1 and S. 336 as of 2/23/2009; McKinsey analysis

The stimulus bill includes $45B in grants/loan guarantees and $21B in tax credits for CleanTech initiatives

6

7

13

17

21

2

Tax Credit

0

3

8 31Renewables / Cleaner Energy

017 20

EnergyEfficiency (EE) / Building Retrofits

5 11Smart Grid / Infrastructure Upgrades

0

35

Fuel Efficient /ElectricVehicles

33 67Total

Loan Guarantee

Grant/Direct Spend

CleanTech focused investments1 Description

▪ $6.0 loan guarantee for innovative technologies▪ $3.4 grant for Fossil Energy R&D program▪ $2.0 DOE grant for science and R&D▪ $2.5 grant for biomass and geothermal R&D▪ $0.5 DOL grant for renewable energy job training ▪ $13.1 tax credit for renewable energy production▪ $1.9 in other tax credits▪ $0.6 in bonds for renewable generation

▪ $5.0 grant for home weatherization▪ $4.5 grant for federal building retrofits▪ $3.2 grant for EE and conservation▪ $3.1 grant for state energy programs▪ $0.3 grants and loans for greener section 8 housing▪ $1.1 grant for military construction (EE/alt. energy)▪ $0.3 grant for energy efficient appliances▪ $2.0 tax credit for EE improvements to homes▪ $0.8 in bonds for greenhouse gas reductions

▪ $2.0 grant for advanced battery R&D▪ $0.4 grant for transportation electrification▪ $0.3 grant for diesel R&D ▪ $0.3 grant for efficient federal fleet procurement▪ $0.3 grant for alternative fuel pilot vehicle project▪ $0.1 grant for public transit GHG reduction▪ $2.0 tax credit for plug in hybrid electric vehicles

▪ $4.5 grant for smart grid infrastructure (incl training)▪ $6.5 additional borrowing authority for regional

transmission upgrades (Bonneville and WAPA)

$ BillionsPRELIMINARY

$45.68B

Page 53: Business Opportunities

|McKinsey & Company

Market disruptions

Scale-up of Renewable Generation Technologies

Focus on Energy Efficiency

Innovation in Fossil Fuel Technologies

1

2

3

Broadly, High Tech companies are well positioned to capitalize on growth opportunities in 5 of 7 areas of CleanTech

Overhaul of Energy Infrastructure

4

Shift to Transportation Electrification

5

Focus on sustainable materials & dematerialization

6

Increasing need for water conservation and treatment

7

Note: Opportunities 3 and 7 will be relevant to some high tech companies

Growth opportunities

▪ Major wind developers and OEMs▪ First generation solar thermal and PV▪ Component suppliers▪ Rate-base renewables

▪ Carbon fiber/light weight materials manufacturing

▪ Mining for high value elements

• Smart charging • Advanced vehicles• Advanced Batteries• Light-weighting

▪ Insulation, windows, doors▪ Industrial smart motors and pumps▪ Weatherization services/ESCO▪ Portfolio efficiency investments

• Gen 2 Biofuels• Advanced carbon capture and

sequestration (CCS) technologies• Micro-CHP systems

▪ Fossil CHP ▪ Solar or biomass co-firing▪ Coal gasification

▪ Transmission/distribution equipment▪ Biofuels storage and transportation▪ Rate-base T&D upgrade

• SmartMeters• SmartGrid• Advanced Storage

▪ Advanced Solar▪ Off-shore/aerial wind, ocean thermal▪ Advanced geothermal

• Building materials (concrete, drywall)• Advanced LED lighting• Advanced HVAC and water heating• Building controls, v. speed drives

• Alternative Waste Technologies: MBTand Thermochemical

• Green products• Composting and recycling• Document digitalization

• Pumping station infrastructure• Waste water treatment• Water recycling

• Ozonation• Filters and membranes• Desalination• UV disinfectation

52

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Market disruptions

Scale-up of Renewable Generation Technologies

Focus on Energy Efficiency

Innovation in Fossil Fuel Technologies

1

2

3

The economic stimulus package focused on 4 of the 5 CleanTech areas most relevant to High Tech companies

Overhaul of Energy Infrastructure

4

Shift to Transportation Electrification

5

Focus on sustainable materials & dematerialization

6

Increasing need for water conservation and treatment

7

Note: Opportunities 3 and 7 will be relevant to some high tech companies

▪ Build renewable generation equipment (e.g., PV panels)▪ Develop solutions to integrate renewables into the grid

▪ Provide hardware and software for smart grid and smart meter technologies▪ Develop IT solutions/offerings for demand side management▪ Develop utility-scale energy storage solutions

▪ Develop power saving products (green data centers, more efficient CPUs and displays, green semiconductors)

▪ Offer power saving auxiliary accessories (e.g. smart power strips)▪ Enable homes and businesses to reduce energy usage (e.g. energy mgmt within

ERP, server virtualization, algorithm efficiency, "smart buildings“, LED lighting)

▪ Provide energy monitoring systems for conventional and electric vehicles (EV)▪ Supply EV components (e.g., batteries), grid integration, or user EV grid interface ▪ Provide applications to optimize transport systems, including urban/non-urban

passenger and freight transport (road, air, sea)

Investment themes for High Tech companies

▪ Develop products with lower environmental footprint (e.g. reduced toxic materials)▪ Reduce packaging-related waste▪ Create paper-saving IT solutions ▪ Introduce recycling and take-back programs

Focus of stimulus bill

53

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Specific CleanTech opportunities vary by subsector

Market disruptions

Scale-up of Renewable Generation Technologies

Focus on Energy Efficiency

Innovation in Fossil Fuel Technologies

1

2

3

Overhaul of Energy Infrastructure

4

Shift to Transportation Electrification

5

Focus on sustainable materials & dematerialization

6

Increasing need for water conservation and treatment

7

Hardware Software IT Services PC/Laptop Cons. Elec.Semi-cond.

Significant opportunity PRELIMINARY

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Specific opportunities by sub-sector (1 of 3)

Sub-sector Market disruptions Opportunities for clients in this sub-sector

Enterprise Hardware

• Renewable generation

• Energy efficiency

• Energy infrastructure

• Transportation electrification

• Sustainable materials/ dematerialization

• Supply components to integrate renewables into the grid• Develop utility-scale energy storage solutions (e.g., alternative to sodium

sulfide batteries to enable solar/wind energy storage)

• Develop green data center solutions• Manufacture building materials/equipment (e.g., insulation, LED lighting)• Provide “smart motor” applications for process optimization/automation

• Provide smart grid infrastructure (e.g., routers, sensors) • Provide smart grid network (e.g., fiber, cellular, RF Mesh, Wimax)

• Supply components for Electric Vehicles (e.g., batteries), grid integration, or user interface for EV infrastructure

• Provide systems to monitor vehicle energy performance (e.g., tire pressure) for EV and conventional vehicles

• Develop new, lightweight materials for electric & conventional vehicles

• Develop products with reduced toxic materials and heavy metals• Reduce packaging-related waste

1

4

5

2

6

Semi-conductor

• Renewable generation

• Energy efficiency

• Energy infrastructure

• Sustainable materials/ dematerialization

• Build Photovoltaic panels for solar power

• Develop low-power semiconductors• Provide LEDs for efficient lighting

• Develop Smart Grid chipsets

• Provide reduced lead and lead-free semiconductors

1

4

6

NOT EXHAUSTIVE

2

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Specific opportunities by sub-sector (2 of 3)

Sub-sector Market disruptions Opportunities for clients in this sub-sector

Software • Energy efficiency

• Energy infrastructure

• Transportation electrification

• Sustainable materials/ dematerialization

• Provide “smart building” applications for home or commercial energy mgmt• Develop enterprise solutions for monitoring/managing energy consumption• Engineer more efficient algorithms• Develop advanced power management tools for CPUs (OS or standalone)

• Develop Demand Side Management (DSM) applications• Develop integrated Smart Grid solutions, including systems reliability (OMS,

AMI, CIS, DA), distributed & DSM resources (DA, DMS), asset management• Develop Smart Grid monitoring and analysis applications (e.g., Advanced

Monitoring & Diagnostics (M&D), billing, pre-payment, time of use tracking)

• Develop applications to optimize transport systems, including urban/non-urban passenger and freight transport (road, air, sea)

• Reduce packaging-related waste

2

4

5

6

NOT EXHAUSTIVE

Consumer electronics

• Energy efficiency

• Energy infrastructure

• Transportation electrification

• Sustainable materials/ dematerialization

• Build energy efficient devices (e.g. low power TVs, long lasting batteries)• Build home energy monitoring tools and integrate into Home Area Networks• Develop in-home displays to track energy usage

• Develop mobile DSM applications (i.e., for cell phones, handheld devices)

• Build devices for EV energy monitoring or for integration into EV grid

• Build devices with lower environmental footprint, e.g., reduce flame retardants, heavy metals, and phthalates used in cell phones

• Reduce packaging-related waste

2

4

5

6

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Specific opportunities by sub-sector (3 of 3)

Sub-sector Market disruptions Opportunities for clients in this sub-sector

NOT EXHAUSTIVE

PC/Laptops • Energy efficiency

• Sustainable materials/ dematerialization

2

IT Services • Energy efficiency

• Energy infrastructure

• Transportation electrification

• Sustainable materials/ dematerialization

2

4

5

• Provide solutions that reduce client energy expenses (e.g., server virtualization, thin client architectures)

• Provide green data center offerings (e.g., fresh air cooling)

• Provide Smart Grid integration solutions and services (e.g. for demand side management (DSM))

• Develop integrated Smart Grid solutions, including systems reliability (OMS, AMI, CIS, DA), distributed & DSM resources (DA, DMS), asset management

• Provide solutions for electric vehicles (e.g., billing and payment, demand shaping for vehicles)

• Develop intelligent transportation (e.g., traffic mgmt, automated highway)

• Develop paper-reducing IT solutions (e.g. health record digitization)6

• Produce more energy efficient CPUs via more sophisticated power management features, more efficient power supplies, energy efficient displays (e.g. using LEDs for light source)

• Provide accessories to reduce power usage (e.g. smart power strips)

• Build green PCs/laptops with reduced toxic materials and heavy metals• Reduce packaging-related waste• Offer recycling and take-back programs for computers, print cartridges,

batteries

6

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Contents

▪ Healthcare

▪ Science & technology

▪ Infrastructure

▪ Education

▪ Energy/CleanTech

▪ China stimulus

Page 60: Business Opportunities

|McKinsey & Company 59

34

275

586

787

2,047

221

39

45

20

20

20

China

Japan

EU MemberStates2

EU and ECB

Canada

Russia

US

India

Total Stimulus1

Australia

Other3

Preliminary scan indicates limited direct tech impact

SOURCE: Lit Search

Stimulus focus

1 Represents lower bound on total stimulus spending as some country packages not included in this total2 Contribution to total EU stimulus package by member states (e.g., Germany, France, etc)3 Combination of stimulus packages from Indonesia, Norway, S. Korea, Brazil, Thailand, Singapore, Chile

Tech Impact

▪ Infrastructure in highways, housing, and schools

▪ Incentives to promote small/medium-sized companies and export industries

▪ Payouts to caregivers, pensioners, and farmers

▪ Only indirect

▪ 70% or $410B spend on infrastructure▪ Remainder in various direct support

and policies to bolster 10 pillar industries and social welfare

▪ Only indirect

▪ Spending to increase green and energy efficiency

▪ Member country support▪ $6.5b to improve broadband access

▪ Direct & indirect

▪ Payouts to every household to promote spending

▪ No tech impact

▪ Bailout package and economic stimulus measures, help for banks to increase liquidity, lowered oil export tariffs and pledges to invest in market

▪ No tech impact

Detail following

Worldwide stimulus spendBillion USD

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Chinese government is promoting a pro-growth policy on multiple fronts

1 RRR stands for Required Reserve Ratio,2 Estimated loan outstanding increase by 1.4% from Aug-Oct 2008 times 0.3 coefficient to GDP growth, given real GDP is ~30 trillion RMB3 Including estimated V.A.T. tax rebate’s subsidy by using revenue in 2007 times the VAT rebate increase (1.5%) on textile industry in 2008 4 Assuming 80 million additional migrant workers from land reform can find jobs in urban area

Source: MGI Land Reform Study; CEIC; Literature search; McKinsey Global Institute analysis

Expansionary monetary policy

Government actions Implications for the economy

▪ Lowered both deposit and loan rate from 7.5% to 5.67% from Aug to Nov

▪ Lowered RRR1 by 17.5 to 14-16 percent

▪ Lifted the limit on commercial banks’issuance of loan

▪ Reverts sharp slowdown in the growth of private investment

▪ Maintains credit growth in line with GDP growth target

Fiscal stimulus

Property rescue package

▪ Reduced the required down payment to 20%

▪ Waived stamp taxes for real estate deals

▪ Prevents the residential property market’s hard landing

Tax cuts

▪ Helps to stabilize the fragile stock market

▪ Lowers costs pressure in export-oriented labor intensive

▪ Scrapped stamp tax on purchase of equities

▪ Increased VAT rebate in labor intensive manufacturing

Land reform

▪ Allowed collective land transfer in rural area

▪ Increases wealth of rural population to address inequality between urban and rural area

▪ Accelerates urbanization progress

▪ RMB 4 trillion stimulus package for 2009-2010, including RMB 1.2 trillion provided directly by the central government

▪ Addresses rapid slowdown in economic activity

▪ Provides “seed” funding to drive private investments

Estimated size of impactRMB billion

~100-150 per year from policy measures already in place 2

~1200 over 2 years

N/A

At least 30 per year3

~7000-8000 in total by 2025 4

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Chinese government has announced policies to boost consumption both in rural and urban areas

Source: Lit search; McKinsey Global Institute analysis

Policies Details Impact/implications

Urban▪ State congress is considering increasing the base taxable income

level to 2500 from 2000 RMB, beginning in 2009▪ Tax

▪ Increase pension by 10% from Jan 2009▪ Subsidize RMB10 bn in 2009 on low-rent housing construction,

provide 2.6 mn families with low-rent housing and reconstruct slum areas affecting 0.8 mn households

▪ Annul 10 different kinds of education fees in 2009

▪ Social security

▪ Subsidize companies which limit staff reduction with unemployment insurance fund (Dec 2008)

▪ Recent graduates: offer subsidies or social insurance to graduates who work in rural villages; offer companies that hire recent graduates with favorable tax and loan policies

▪ Employment

▪ Chengdu provided RMB100 shopping vouchers to 380,000 citizens on Dec 2008

▪ Shopping voucher

▪ Central government approved RMB9 billion in direct financial subsidies for 74 million low income people on Jan 10th, 2009

▪ Direct financial supply

▪ Increase grain purchase price at least by 13% in 2009▪ Grain price

Rural▪ Increase subsidy for agriculture machinery RMB6 billion (4 bn in

2008), and allow farmers to use it as deposits to obtain loans▪ Rebate 13% of home appliances, motorbikes, computer purchase

fee to farmers (Jan 2009)

▪ Subsidy

▪ Increased disposable income can boost consumption– Tax saving– Pension increase– Rental saving– Shopping vouchers– Increased revenue

from farming (grain price)

▪ Improved job security is likely to boost consumer confidence– Control staff

reduction– Job programs for

graduates

▪ Guaranteed subsidy can drive rural consumption– Subsidy on home

appliance is expected to create RMB920 billion in additional consumption over the next 4 years

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Chinese government stimulus will hit multiple industry sectors

Source: CEIC; literature search; McKinsey Global Institute analysis

Mo

re f

avo

rab

le

Sector % GDP 2007% employ-ment 2007 Supporting facts

▪ Transportation, infra-structure, construction

▪ 60% of total spending allocated, mostly focusing on highways and railroads

912

▪ Basic material, energy

▪ Potential additional demand generation of 100 million tons of steel, and 500 million tons of cement

814

▪ Real estate ▪ RMB290 billion confirmed for low cost housing ▪ Property rescue package may help boost demand and improve

financial condition of developers

15

▪ Textile, leather, toy and apparels

▪ Significant increase of VAT rebate from 5~11% in 2007 to 13% in Oct 2008

33

▪ Healthcare ▪ Incremental demand expected due to increased budget allocated to social welfare

32

▪ High tech ▪ Payment subsidy (13%) to rural residents is likely to create additional consumption of 230 billion RMB

45

▪ Auto ▪ Tax cuts on auto purchase and incentives for development of clean fuel cars

12

▪ Retail and wholesale ▪ Benefit from consumption voucher (e.g., Chengdu) and government support for expansion of sales network into rural areas

37

▪ Agriculture ▪ Government to purchase grain at higher than market price▪ Land reform likely to boost productivity in the mid/long-term

4311

Influence on sectors creating ~61% of GDP and ~78% of employment

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Example implication of China stimulus package for HT players

Potential opportunitiesExpected impact from stimulus

▪ Top-line growth opportunities in rural areas (incremental 230B RMB expected from consumer rebates alone)– Expand channel coverage to lower tier

cities– Offer value products only for rural

customers (e.g., commodities at competitive price) but manage exclusivity to avoid brand dilution

▪ Expand share in low cost channels overseas given that consumers are likely to become more price-sensitive

▪ Direct government funds toward investing in innovative technologies to prepare for post-recession

▪ Rising consolidation opportunities– SME opportunities for h/w and s/w

refreshes due to consolidation – Manufacturing/sourcing consolidation to

reduce cost base and take advantage of local/national incentives

▪ Demand increase in rural areas based on consumption credits (“Home appliance to the countryside program”)– 13% rebate on electronics products– Government support for channel-building in

rural areas

▪ VAT refund for high-tech exporters

▪ Incentive policy on R&D to encourage innovation investments. Government plans to invest 600 billion RMB on electronic technology, clean energy and healthcare

▪ Industry consolidation among SMEs– Gov’t announced encouragement of M&A

among SMEs, potentially through bank lending and tax incentive schemes

Source:Lit search; Expert interview; McKinsey Global Institute analysis