McKinsey introduced the content of its report, “Koreas Next S-Curve,” to international media outlets at Shilla Hotel in Seoul on Oct. 19. In the report, the company proposed three pillars of reorganization, transformation, and construction and eight action items for Korea’s economic renaissance.
McKinsey concluded that Korea is in the midst of its third S-curve, which will require the country to transition to a high-value-added economy centered on semiconductors, biotech, and artificial intelligence (AI). This follows the country’s first S-curve, which realized an economic change centered on heavy chemicals, and the second S-curve where the Korea economy saw the rise of high-tech manufacturing industries such as semiconductors, automobiles, and electronics.
However, the country faces many challenges, including a rapidly growing demographic imbalance due to its low birthrate, aging population, and labor productivity that lags behind developed countries, McKinsey noted.
Other challenges include a lack of dynamism in the venture capital market due to the low investment attractiveness of the stock market, well explained by the so called “Korean Discount,” increasing global competition in its major industries such as automobiles, chemicals, and semiconductors, and geopolitical changes such as trade friction between the United States and China.
“In the 20 years since the two S-curves, Korea’s rise in the global gross domestic product (GDP) rankings has stagnated, and its top export products have remained unchanged,” McKinsey said. “In the meantime, the number of areas in which Korea has leading technological capabilities has been on a gradual decline and the current situation has various challenges for Korea.”
“However, if Korea boldly implements its tasks with a mindset for growth, the country will be able to join the group of the world’s seven largest economies by achieving a GDP per capita of US$70,000 by 2040,” McKinsey forecast.
S&P Global, a global financial services company, predicted that Korea will rank 11th in the world GDP standings in 2040, with a per capita GDP of around US$50,000. But McKinsey forecast that Korea will be able to grow more than that.
“Some people are skeptical about whether it is possible for a country to return to 4 to 5 percent growth in a low-growth phase after becoming an advanced economy,” said Song Seung-heon, CEO of McKinsey Korea. “But Germany grew at 4 percent in the 2000s through labor reforms and manufacturing innovation efforts, and the United States grew at 4 percent in the 1990s through the development of high-tech industries and the U.S. government’s monetary and fiscal policies.”
McKinsey emphasized that to achieve the goal, Korea must pull out all the stops to implement eight tasks under the three main themes of reorganization, transformation, and construction.
The eight tasks for Korea proposed by McKinsey are to reorganize the industrial structure, reorganize business models, shift to high added value, move to new businesses centered on original technologies, embrace AI, build the foundation for industrial innovation, create a capital market with a virtuous cycle, and build a system for training top talent, according to McKinsey.
In particular, the Korean petrochemical industry faced with major risks such as declining demand, needs to be drastically reorganized, and new growth engines should be discovered by creating super-wide gap industries based on original technologies in areas such as future mobility, clean energy, biopharmaceuticals, and semiconductors, McKinsey advised.
McKinsey also noted that it is also important to improve corporate governance and regulations to make the Korean capital market more attractive for investors, given the level of foreign direct investment (FDI) and the capital-investment-to-GDP ratio, the share of foreign investment in the Korean stock market which recently fell to 26 percent, and low shareholder return.
McKinsey emphasized that Korea should aim to create a 50,000-strong army of advanced AI workers. It added that in addition to cultivating its own workforce, attracting overseas talent, and expanding industry-academia cooperation, Korea should also provide incentives to attract high-level human resources.
McKinsey predicted that the Korean economy will create super-wide gaps in at least two new global leading industries and three or more world-class industrial clusters by 2040, if the Korean economy successfully revamps itself.
What is more, the number of US$100 billion Korean companies will rise to eight from the current three, the number of Korean companies with US$10 billion or more in sales to 74 from the current 54, and the number of Korean companies with US$1 billion or more to 518 from the current 418, by five, 20, and 100, respectively, the U.S. consulting firm forecast.