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Globalization 3.0Globalization 3.0C lt & C ti it I d tC lt & C ti it I d tCulture & Creativity IndustryCulture & Creativity Industry
September 2011Sung-Hun Park Partner
September 2011Sung-Hun Park PartnerSung-Hun Park, PartnerSung-Hun Park, Partner
Today's agendaToday's agendaToday s agenda Today s agenda Economic recession originated in developed countries, and economic hegemony is shifting to developing countriesNew Normal is shifting to developing countries
• Trade-up/Trade-down provides a huge opportunity to Korean companies • New efforts are required for mega markets based on urbanization in developing
countries
New Normal Economy
Korea is heavily dependent on IT & heavy industry-driven export, and desperately needs new growth engines
• Failed to create new growth engines in the past decade • Needs for change increased due to fast catch up by late comers such as China and
Transformation Requirements
• Needs for change increased due to fast catch-up by late comers such as China and India
3 main growth pillars for new growth engine development St 1 D l K t l l b li ti d l d l t l b li tiGlobalization • Step 1: Develop Korean-style globalization model and evolve two-way globalization
• Step 2: Reduce dependence on IT and heavy industries to foster new growth engine
• Step 3: Develop creativity/culture industries as core
Globalization 3.0
Needs for Design Capability Enhancement to repeat Korean-style globalization • Strong belief in fast-evolving Korean DNA
Key takeaways for Design I d t
1
g g• Needs for Public Investment to drive global expansion Industry
N N l EN N l ENew Normal EconomyNew Normal Economy
• Recession originated from developed world resulting in the shift of economic hegemony to emerging countries
• Increased importance of emerging & Asian consumer markets due to battle for hegemony in production, consumption and currency
• Growth of diverse consumption culture based on increased urbanization d iddl l i i t i
2
and middle class in emerging countries
Recent crisis originated in developed world and l b l h l bl
Recent crisis originated in developed world and l b l h l blglobal economy has structural problemsglobal economy has structural problems
Debt-fueled consumption Export surplus Debt-fueled consumption in North America and UK and reserved savings
in China/Japan/German/etc.
Excessive economic expansion by Western Europe
Commodity boom based on liquidity benefit in Russia/MENA
3
Key criteria to judge economic recovery potential d i d
Key criteria to judge economic recovery potential d i dand economic soundnessand economic soundness
Dependence on foreign Gl b l d t j t i tiDependence on foreign economy
Consumption index and f f
Global economy exposed to major uncertainties
Vitality issue in national economy optimism for future
Potential default of financial institutions
Stress test reliability issue as a big variable
Unstable consumer financing sector
Potential problem in national consumption
National fiscal deficit and
Inflation controllabilityMid-to-long term economic stability index
Economic stimulus and national competitiveness National fiscal deficit and debt level
Unemployment rate and liti l i t bilit
Economic stimulus and national competitiveness indicator
Tolerance to social and political instability factors
4
political instability Tolerance to social and political instability factors
Global economic growth lead by emerging economies after reco ering from the recessionafter recovering from the recession
Bigger Role for E i E
% S
ha
100 Others24567
$19T $29T $36T $63T $109T Center of industrialization and urbanization
Emerging Economy
are of Global
80
60
Advanced Economies5154
6769
Rapid increase of contribution to global GDPG
DP
60
40
676972 • Contribution expected to increase 2~3x more than past decade
20Emerging Economies4742
282521BRICS
Other Developing
• Expected to be 50+% in 2030 (1970: 18%, 200025%, 2030 50%)
020302010200019901980
Source: IMF, Total Economy Database
p gAsia
Latin America
Eastern Europe
Higher influence expectedin currency as well as real economy
5
economy
Trading up in developing countries and trading down i d l d iTrading up in developing countries and trading down i d l d iin developed countriesin developed countries
Share in consumption pattern of developed/developing countryShare in consumption pattern of developed/developing country
Trading up
No change
Trading down
UnitedStates
Europe Japan Brazil Russia India China
6
Source: BCG Consumer Sentiment Survey 2008-2009 Source: BCG Consumer Sentiment Survey 2008-2009
Urbanization in developing countries causing change i i f d i l dUrbanization in developing countries causing change i i f d i l din infra and consumption landscapein infra and consumption landscape
Rising stars Boom towns Latent townsCluster cities
~100 km
Chengdu Suining
Suining
Mianyang
~100 km
Chengdu Suining
Suining
Mianyang
~100 km
Chengdu Suining
Suining
Mianyang
13 ~100 5,000~Hub: ~1501
Satellite: 500~1 0002
Ya'anMeishan
Leshan
Ziyang
CapitalSatellites
Ya'anMeishan
Leshan
Ziyang
CapitalSatellites
Ya'anMeishan
Leshan
Ziyang
CapitalSatellites
Expected #
f iti
Pursue future global mega city and international gateway
• Mega population (>10M)Hi h GDP/ it (>5K)3
High growth, industrialization oriented (e.g. industrial complex/ resource development) city
Mid l ti (1 5M)
Low growth, residential focused local small city
• Small population (<1M)L d l d i f
Satellite: 500 1,000
Cluster of a hub city and small satellite cities
• Mid-large pop. (1-10M)R i l t
Characteristics
of cities
• High GDP/capita (>5K)3 • Mid population (1-5M)• Rapid industrialization
• Less developed infra.• Regional center
• High-tech city road • Subway, monorail, light rail• Large water/sewage, water, etc.
• City connecting road • Highway, railway, etc. • Water/sewage, water treatment
• Road/railway for industrial logistics
• Industrial and residential infra
• Residential/housing related basic infra
• Water/sewage, water treatment
Infra type
• Pattern of premium luxury consumption
• Matureconsumption market
• Hybrid of consumption in developed and emerging
• Market with highest recent growth
• Explosive growth of living, fashion, car, electronics markets
• Consumption market similar to that of emerging and underdeveloped countries
Consumer
market type
g g , , g ,facility, Road
7
g
1. 1. ~150 cluster capitals/hubs; 2. One cluster typically has 3 – 6 cluster satellites; 3. These thresholds are adjusted in different EM countriesSource: Expert interview, BCG analysis
1. 1. ~150 cluster capitals/hubs; 2. One cluster typically has 3 – 6 cluster satellites; 3. These thresholds are adjusted in different EM countriesSource: Expert interview, BCG analysis
Business opportunities from macro-trends in d l iBusiness opportunities from macro-trends in d l ideveloping-country developing-country
Key trendsKey trends Opportunities and implications for Korean companiesOpportunities and implications for Korean companiesKey trendsKey trends
P d ti
Need to diversify role of SEA/India as a production hub• Weakening competitiveness of China due to rising
Must find a differentiation point beyond simple low-
Opportunities and implications for Korean companiesOpportunities and implications for Korean companies
Production power shift
g p glabor cost and prices, shift to SEA/India
• Must diversify the rule of operating low-cost, large-scale plants
p y pcost advantage
Importance of Asian
New Normal
Consumption power shift
China and Asia becoming world's biggest consumers• Increased consumption driven by world's largest
population and fast economic growth, acquired global
Importance of Asian market leadership increased from globalization perspective
hegemony
top consumption hegemony over US/Europe
Massive disruption of export competitiveness caused by Must define a multi-dimensional global
Currency power shift
p p p yreversed trends in exchange rate
• Huge appreciation of RMB due to loosening of fixed currency policy, huge appreciation of emerging country currencies and worldwide disruption of export
gstrategy
8
country currencies and worldwide disruption of export competitiveness
Business opportunities from micro-trends in d l iBusiness opportunities from micro-trends in d l ideveloping-country developing-country
Key trendsKey trends Opportunities and implications for Korean companiesOpportunities and implications for Korean companies
Intensifying trend of 'Death of the Middle' is driving high-end market growth
Bold brand positioning is needed rather than
Trading
Key trendsKey trends Opportunities and implications for Korean companiesOpportunities and implications for Korean companies
• Consumers prefer high-end brands that offer unique experience while rational consumption pursuing value for money is also increasing
middle quality/price strategy
Trading up/down
Rising importance of women as leader in consumption• Increased social participation and leader status • In the long term, women will exert crucial influence on
80% f l b l ti d t l 60% f t
More opportunities from innovation in women-centric perspective
Evolution of
consumerWomen power 80% of global consumption and control 60% of assets
Importance of speedy response has increased due to fast Consumer experience management through
consumer DNA
p
change in consumer preference• Speed to market: Need to reflect changes in consumer
trend immediately • Importance of design and emotional factors increasing
design/emotional approachExperience
Centric
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Importance of design and emotional factors increasing
T f i R iT f i R iTransformation RequirementsTransformation Requirements
• Export-driven Korean economy with a heavy dependence on two areas of IT and heavy industries
• Shortage of high value-added products, lack of resources and narrow domestic market causing "sandwich crisis"
• Reform of economic structure under a new paradigm required
10
Export, the sole source of revenue for Korean economy: IT and heavy industry as the two major sources: IT and heavy industry as the two major sources
500
B USD
Industrial Proportion on Korea’s Export
500
400 371
422
363
300 Others
325
254
205
284
200
100
IT Products162 28% 28%28%24%
32% 31%
29%31%
31%
0
Heavy Industry
2009200820072002 2004 20052003 2006
32%32% 31% 33%30%28%26%
30%
25%
11
Source: KITA Statistics
Korean economy at "strategic inflection point" due to i h/h k d i i
Korean economy at "strategic inflection point" due to i h/h k d i iresource-rich/home market-driven countriesresource-rich/home market-driven countries
Industry value chainIndustry value chain
Raw material
Finished products
Intermediate material
Domestic market
formation
Core Technology
yy
p formation gy
4 models for national industrial development4 models for national industrial developmentCountries with
high value-added products/
source technology
US, German, JapanUS, German, Japan
Countries with large domestic
market
technology
China, IndiaChina, India
Russia Brazil MENARussia Brazil MENAResource-rich
countries
Countries with focus on value for
Russia, Brazil, MENARussia, Brazil, MENA
Korea, Taiwan, etc.Korea, Taiwan, etc.
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money and intermediate
material exports
, ,, ,
Risk of Korean companies losing industry-leading iti ith th f l t
Risk of Korean companies losing industry-leading iti ith th f l tposition with growth of latecomers position with growth of latecomers
Overseas order-winning cycle of Korean construction, EPC players (1970~2010)1Overseas order-winning cycle of Korean construction, EPC players (1970~2010)1
80
(Unit: B$2)
?
Boom in overseas general construction market is over due to growth of Chinese/ Indian latecomers
60
40
? Indian latecomers
Risk of losing current dominance in plant
20
General Plant
dominance in plant industry to latecomers• Korean companies have
recently overtaken Japanese players
1990
1985
1980
1975
1970
1995
2000
2005
2010
construction
1st boom ('78~'84)1st boom ('78~'84) 2nd boom ('90~'97)2nd boom ('90~'97) 3rd boom (after '05)3rd boom (after '05)
2015
2020
Japanese players• However, risk exists in
Korean companies' main construction type that encompasses
: Overseas market penetration with government assistance
• General construction (civil engineering, architecture)
: Overseas market penetration with government assistance
• General construction (civil engineering, architecture)
: Overseas market expansion led by private players
• Japanese companies' entry into general construction market with competitiveness in
: Overseas market expansion led by private players
• Japanese companies' entry into general construction market with competitiveness in
: Growth focused on industrial plant EPC
• Overseas power plant and oil & gas facilities
• Japanese companies' market penetration
: Growth focused on industrial plant EPC
• Overseas power plant and oil & gas facilities
• Japanese companies' market penetration
encompasses power/chemical engineering due to rapid growth of Chinese/Indian players
13
pcost/delivery due date
pcost/delivery due date
pp players
1. Reflected CPI-based inflation; 2. Conversion based on absolute monetary value in 2010 US dollarSource: International Contractors Association of Korea, US Bureau of Labor Statistics 1. Reflected CPI-based inflation; 2. Conversion based on absolute monetary value in 2010 US dollarSource: International Contractors Association of Korea, US Bureau of Labor Statistics
Most of Korea's flagship industries can face "Korea g pSandwich" risk in 10 years
Around yr 2000(’95~’05)
Around yr 2010(’05~’15) Around yr 2020
“General Construction Boom” “Recession of domestic “Continuous Recession of Domest
-icConstru
ction
• On contract deals, 12% annual growth on avg.
– 58T(’95)→99T KRW(’05)
construction market”
• On contract deals, -1% annual growth on avg.
– 99T(’05)→95T KRW(’10)
domestic construction market”
• Considering macro indexes of housing distribution rate & population growth rate, -ction
Market• General construction of
apartments, housing leading overall market growth
99T( 05)→95T KRW( 10)
• Housing distribution rate over 100%, apt and housing market on recession
possibility of extra growth is limited
“Foreign Plant EPC Take-off “Foreign EPC Boom” “Tough competition in foreign EPC”
Foreign Constru-ction
Foreign Plant EPC Take-off Preparation”
• General construction take over by Chinese newcomers
Shift ti f l t
Foreign EPC Boom
• Growth around energy, petrochem →Japanese firms market entry
F t th f Chi fi
Tough competition in foreign EPC
• Possible competition with global, Japanese pioneer firms on technology, with Chinese newcomers on price.ction
Market• Shift preparation for plant
EPC formerly lead by Japanese firms
• EPC more important after ‘
• Fast growth of Chinese firms in Energy (price competitiveness and main facility production ability)
Chinese newcomers on price.
14
“Korea Sandwich Era”“Trend Ascending Era”
Competitiveness of Korea's top-tier companies is d h
Competitiveness of Korea's top-tier companies is d hunder threatunder threat
Most opportunities in source technology are preoccupied by others• Can the late comers catch up with the leaders? • What new approach should they pursue?
Most opportunities in source technology are preoccupied by others• Can the late comers catch up with the leaders? • What new approach should they pursue?What new approach should they pursue?
Old paradigm industry model
What new approach should they pursue?
Old paradigm industry model• What is source of our productivity? (plant operation days, working hours,
craftsmanship, diligence, etc.)• What productivity indicator should we pursue?
• What is source of our productivity? (plant operation days, working hours, craftsmanship, diligence, etc.)
• What productivity indicator should we pursue? p y p• To what extent should we reinforce our technical/brand capabilities to enhance
our competitiveness to the level that can justify resource input cost?• Can we generate cash even if considering environmental cost?
p y p• To what extent should we reinforce our technical/brand capabilities to enhance
our competitiveness to the level that can justify resource input cost?• Can we generate cash even if considering environmental cost? g g• What will be the demographic structure after 10 years?
g g• What will be the demographic structure after 10 years?
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Gl b li i 3 0Gl b li i 3 0Globalization 3.0Globalization 3.0
• Need to implement new multi-faceted globalization innovation program
• Step 1: Constantly sophisticate existing two-way globalization differentiation strategy
• Step 2: Enter new growth areas beyond IT/heavy industry
• Step 3: Develop design based culture/creativity business
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• Step 3: Develop design based culture/creativity business
Gl b li i i d i i f "d di "Gl b li i i d i i f "d di "Globalization is a decision of "do or die"Globalization is a decision of "do or die"
OceanOceanOceanOcean
LandLand
RedRed BlueBlue
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RedRed BlueBlue
C i K l l b li iC i K l l b li iContinue to pursue Korean-style globalization Continue to pursue Korean-style globalization I
Developed countries
Emergingcountries
Under-developed countries
Sa Enter developed Dominate domestic market of emerging
24 6
les markets
Build domestic
market of emerging countries
Develop "package deal" based on under eveloped1
Produ Move production
market leadership under-evelopedcountries' national
development model
1
3Selective Expansion
f P d ti f ilit
5
uction
Move production facilityof Production facility
near advanced market
18
Must develop new biz targeting Asia marketMust develop new biz targeting Asia marketII p g gShare of Asia market among global market in 2020
p g gShare of Asia market among global market in 2020
B2C serviceB2C
consumer goods
B2B intermediate
goodsB2B finished
goods goodsgoods
• Steel: 70% + • Shipbuilding: 70%+
• IT: ~30% • Food and Beverage: ~30%
• Power/energy : ~50% • Automotive:
• Textile: 70%
g
• Retail: ~30%
• Tire: 40% +
~50%
• Construction:
• Cosmetics: ~40%• Financial services:
~30%
• Chemical: 40% +
• Construction: ~50% • Fashion: ~40%
~30%
19
Now new culture/creativity paradigm neededNow new culture/creativity paradigm neededIII Now new culture/creativity paradigm needed Now new culture/creativity paradigm needed
"Korea discount exists for capability" "Korea discount exists for capability" "Korea is demonstrating potential for creativity recently. However, industries other than electronics, heavy industry, IT and internet will need some time until perception change and paradigm shift occur"
"Korea is demonstrating potential for creativity recently. However, industries other than electronics, heavy industry, IT and internet will need some time until perception change and paradigm shift occur"Limitations
f K "Korea has traditionally been competitive in food, metal type, dance and music, but potential is limited in design/fashion""'People in White' means that Koreans are less competitive in
"Korea has traditionally been competitive in food, metal type, dance and music, but potential is limited in design/fashion""'People in White' means that Koreans are less competitive in
of Korean company/
culture
design/colors" "Weak design of IT products explains everything" design/colors" "Weak design of IT products explains everything"
VS"Share of Korean students in design schools is rapidly increasing recently""Share of Korean students in design schools is rapidly increasing recently"Actual
VS.y
"Some Korean/Korean American rookie designers are gaining spotlight""Korean designers gained huge success in Kappa China "
y"Some Korean/Korean American rookie designers are gaining spotlight""Korean designers gained huge success in Kappa China "
Actual success
cases
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Korean designers gained huge success in Kappa China..."Korean taste is increasingly preferred around the world..."Korean designers gained huge success in Kappa China...
"Korean taste is increasingly preferred around the world..."
Interest in Korean culture/creativity industry in line with 'Korean Wave'Interest in Korean culture/creativity industry in line with 'Korean Wave'
III
Potential for culture/creativity industry development Potential for culture/creativity industry development Emergence of
K W 2 0Emergence of
K W 2 0Continued popularity of K d i ChiContinued popularity of K d i Chi
Increased access/preference for
K f hi
Increased access/preference for
K f hiKorean Wave 2.0Korean Wave 2.0 Korean dramas in ChinaKorean dramas in China Korean fashionKorean fashion
• Customers have favorable attitude toward overall Korean culture rather than just individual stars
• Interest in Korean fashion is rising in China
– Consumers follow fashion
• Image of Korean fashion is rapidly improving due to the impact of Korean Wave
K ' l bindividual stars– Japanese media reported the
phenomenon as the '2nd attack' of the Korean Wave
• The trend is expanding beyond
style of Korean stars in popular dramas
• Consumers who watch Korean dramas follow Korean fashion
d d
• Korean women's apparel can be purchased on Korean fashion street in Shanghai (Jiangxi Road)
– Store owners import clothing from Dongdaemun Market in Korea• The trend is expanding beyond
East Asia to Middle Asia, Islam and Latin America
• Genre is expanding beyond drama to Korean pop songs and
i l
and trend – Mostly females under 25 &
over 40– Chinese' interest in Korean
fashion is mostly women's apparel
Korea– Price range is comparable to
Zara
• Foreign travelers to Korea buy clothes in duty free and Korean fashion stores
21
musicals• Consumer scope is expanding
beyond females in 40s into females in 10s/20s and males
apparel fashion stores– 5.7 million travelers came to
Korea for tourism and shopping in 2009, 23% increase from previous year
Food culture business with design perspective has high potentialFood culture business with design perspective has high potential
III
Price comparison of domestic chocolate snack cake Price comparison of domestic chocolate snack cake • Natural/organic
g pSuccessful example of Market'O
g pSuccessful example of Market'O
Retail price
(price/gram in KRW)Market’O
Real Brownie30.77 /4 300KRW
• Natural/organic ingredient
– Sourcing from dedicated ranchNatural yeast7ea/4,300KRW – Natural yeast
• Zero artificial additive policy~200%
Price premium
• Korea's first commercial premium well-being confectionery brand
• Emphasis on nutritional balance
Dr. You Whole-wheat
chocolate cakeHaitai O- 12 /4 800KRW balance
(carbohydrate/protein/fat)• Monthly revenue of ~5B
KRW– #2 revenue within
Orion
Yes 14.3
10.77 6
12ea/3,600KRW12ea/4,800KRW
~30%Premium
Orion– #1 Choco Pie's
monthly revenue: ~6B KRWOrion Choco
Pie
7.6
18ea/4 800KRW
22
18ea/4,800KRWPremium vs. O-Yes
Presented vision of Korea as cultural powerhouse“I want our nation to become the
most beautiful nation in the
p
world. I do not want our nation to become the richest and the most
powerful nation in the world. pBecause I have felt the pain of
being invaded by another nation, I do not want my nation toI do not want my nation to
invade others. It is sufficient that our wealth is such that it makes
our lives abundant and ourour lives abundant and our military strength such that it is able to repel others' invasions. Th l thi th t I d i iThe only thing that I desire in
infinite quantity is the power of a highly-developed culture.”
23
K T kK T kKey TakeawaysKey Takeaways
• Confidence in Korean-style DNA evolution
• Public Support to create "Design Capability" infra
24
N f C CN f C CNew wave of Core CompetencyNew wave of Core Competency
Returns Culture/DNA
"Design/Creativity"R&D, Innovation
"Technology"Productivity
"Hardwork"
1960s 1970s 1980s 1990s 2000s 21st Century
Time
Hardwork
25
1960s 1970s 1980s 1990s 2000s 21st Century
Reflections on DNAReflections on DNA
DNA makes differenceDNA makes difference DNA as a key differentiationDNA as a key differentiation
• Excellence of Korean DNA
• Evolving DNA
Human
Same species share similar DNA structure
• Evolving DNA
• Rapidly changing DNA:1/10 theory
• 98% identical:1/10 theory
Chimpanzee SnakeChimpanzee SnakeSignificant difference vs. other species in terms of DNA and structure
• Existence of limbs
26
• Existence of limbs• Warm-blooded vs. cold-blooded
Design, culture, and creativity industry as realization of culture behaviour pattern and DNAculture, behaviour pattern, and DNA
Visible
• Design
• Culture Industry/Creativity Industry
“It may seem like a result of simple
creativity ”Culture Industry/Creativity Industry
Hidden
creativity...
• Behaviours based on thoughts “ b t it i ifi dg
• Subconscious thoughts and stereotypes, beliefs and habits
“...but, it is a unified result based on every individual’s behaviour
• Implicit role model within organization
pattern and DNA.
27
Investment for design education and industrial development systemdevelopment system
Funding as a Part of u d g as a a oTechnological
Development Support
Design Funding Policy
Modern Pragmatic Design of America (Market Creation)
Design Funding Policyof the Second
Industrial RevolutionFunctionalistic Design of Germany (Tech Leadership)
Overall Promotionon Fashion Industry Aesthetic Design of France (Luxurious Legacy)
Natural Assets and Inborn Insights Progressive Design of Italy (Creation of Fad)
Investment on GrowingConsilient Personnel
Sensuous Design based on Urban Life Culture of Korea
(Development of Neo-Korean Wave)
28