The television pundit and England coach believes that the defending champions have enough quality in their academy to bring more homegrown players into the first-team setup
Neville came through the United youth system to make more than 600 appearances for the Red Devils and says the defending champions need to hand more opportunities to their young players.
The England coach claims that City possess enough quality in their youth teams to bring more players through and build a strong, homegrown core at the club.
"I don’t know why they've not created a player in the last five years when Manchester City have won the [FA] Youth Cup and been in the latter stages of that competition," Neville told The Independent.
"I've seen players in their youth team when they've beaten United. You've got to create the pathway and at the moment I don't see that pathway at City, whether the players are good enough or not.
"Unless you play that 17-year-old British kid, [or] the French or African kids that come over at the age of 14 to your academy, in your first team you are never going to find out about them.
"If you asked me at the age of 17: 'Are you good enough to play for Manchester United?' I wouldn't have had a clue, until I played. And to be fair, Sir Alex Ferguson wouldn't have a clue, either.
"You might have the ability but until you test your temperament, desire and ability to compete and live at that level, you are never really going to know.
"Daniel Sturridge was good enough but he left. You can't build a long-term future for a club unless you test these players and build a core."
City face United at Old Trafford on Monday night but, with Sir Alex Ferguson's team having all but sealed the title, the inquest has already begun as to why Roberto Mancini's team has fallen short of their rivals.
The Italian has complained about their failure to sufficiently strengthen in the summer transfer window but Neville has City's failures down to a one-dimensional playing style and lack of a plan B.
"The difference for me between City and United this year is that City lack pace," he explained.
"They rely on their passing game - and it's a good one with creative players like David Silva, Samir Nasri, Carlos Tevez coming into those pockets off the front.
"But everything's got to be perfect for it work and they've got to have space - whereas with United there's a bit more. They've got width and they work the wide areas.
"On those occasions when the passing game isn't quite right, City haven't got the plan B. Roberto Mancini has tried to go to five at the back but that's very rarely worked.
"He hasn't got many players in wide areas who can beat men. Silva, Tevez and Nasri all like to play infield, so if you close that central area off they don't really have anyone to stretch you out wide."