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

9

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.

12

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?

15

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

16

• 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

17

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

20

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