Build on G20 role to address Korea Discount

By Kim Jae-kyoung

Staff reporter

Since the end of the Korean War in 1953, South Korea has created one of the most impressive stories of rebirth in the world by transforming a war-ravaged agrarian economy into a global manufacturing powerhouse.

Over the past 60 years, Korea has seen its ranking rise sharply in the global economic league table, becoming the 13th largest economy in the world. Korean companies also flourished, with Samsung and POSCO emerging as international leaders in the respective manufacturing industries.

Following the global financial crisis, Korean firms are rising even further by capitalizing on the fall of global corporate heavyweights. However, there is something missing more importantly not improving as equally fast. It is the brand of Korea. Korea's brand is still undervalued compared to its economic size.

Against this backdrop, President Lee Myung-bak and his administration are seeking to use the G20 as an opportunity to strengthen its national brand and turn ‘Korea Discount’ into ‘Korea Premium.’

McKinsey & Company Chairman Dominic Barton believes that hosting the G20 would be a great chance to boost its international reputation but the event alone cannot be a magic solution to address the issue, recommending that Korea must come up with a long-term plan beyond the Seoul Summit.

“I think that the Seoul summit will enhance the brand image of Korea. But it will not lead to the disappearance of the “Korea Discount.” One meeting could never accomplish that goal, although the summit will be an important step forward,” Barton said.

“To address the “Korea Discount”, the country needs to build on its G20 role, demonstrating to the world on an ongoing basis its capacity for consistency of behavior, its openness, corporate governance and its willingness to lead on urgent global issues,” he added. “In addition, Korea needs to make the migration from an export-led manufacturer to a country with a world class service industry.”

The following is the complete transcript of the interview. Q: Korea’s global brand is considered quite undervalued compared to its economic size. What kind of steps should Korea take to upgrade its global brand?

The Presidential Committee on national brand is an important initiative for Korea. The country is right to be focusing on the enhancement of its brand, and should do so by associating Korea more closely with some of its great products and companies.

I think Chris Graves, global CEO of Ogilvy, makes some interesting points on this question. In Korea 2020, a recent anthology of essays produced by McKinsey, Chris highlighted the fact that Korea does not have a symbol, an idea or a feeling that brings to mind the country in the minds of non-Koreans.

He urges the country to find one by seeking further excellence in the field of design, and to link the national brand to Korea’s achievements in designing highly attractive products and producing great designers. Consumers should know that certain products they value are in fact Korean-produced – too many people do not know that the excellent products they love come from Korea.

Korea should aim to be much more consistent and rigorous in promoting its brand identity – something it has not done in the past. The country’s great companies – its “global champions” – should be central to the “Korean story,” especially given how well some leading Korean companies have performed export-wise in the last 18 months.

Q: Many Korean people believe that the hosting of the G20 will be the biggest-ever opportunity for Korea to become a force in the global community. How do you evaluate Korea’s hosting of the G20 summit?

The G20 summit is critical for Korea and for the world as a whole. I believe that Korea should feel very proud to be hosting the event – it’s the geopolitical equivalent of hosting the FIFA World Cup or the Olympic Games.

The fact that this is the first G20 meeting to take place in a non-G8 state in Asia is very symbolic of the rebalancing taking place in the global economy: from developed societies toward emerging markets, and to Asia’s developing economies in particular.

Q: How will the world economic order be shaped under the G20 umbrella in the post-global financial crisis era?

The world economic order is already undergoing a major re-balancing. I see evidence everywhere of a clear economic renaissance in Asia, and a much more important economic role for Latin America and Africa as a result of the shifts taking place in the locus of economic activity and of trade.

These changes are the result of a host of factors – such as the impending entrance of 900 million new consumers into the global economy. These emerging market consumers will put tremendous new demands on businesses to innovate around the goods and services they produce.

The G20 should be at the center of these changes, working to smooth out the volatility that may well ensue and helping create the right environment for broad-based economic growth.

Q: Following the global financial crisis, the gravity of economic and political power is slowly shifting from the West (the U.S.) to the East (China). How should Korea position itself to emerge as a winner in the post-crisis world?

Let me begin by noting that South Korea fought back against the economic crisis faster and more robustly than perhaps any other economy in Asia. I see this as is a great foundation on which to build as Korea engages in this “new normal” global economy.

There are a number of things Korea might do as it looks to the future. Most importantly, I think Korea should study and reflect strategically on the changes and trends underway in the global economy, including five forces we identified in a recent article in our McKinsey Quarterly. The five forces are 1) The global rebalancing; 2) The productivity imperative; 3) The global grid: 4) Pricing the planet; and 5) The market state.

These trends will undoubtedly create some volatility, but also some extraordinary business opportunities. I have already mentioned one example of a pressing trend - the new wave of consumer demand resulting from 900 million people entering the middle class in the next decade.

Many Korean companies, such as LG, Samsung and Hyundai/Kia, have already demonstrated their capabilities in this area by successfully serving today’s new consumers in Asia. Korean companies should continue to respond to this unprecedented explosion in consumer demand.

A second trend to address is what I call the “technology enablement” of sectors. By “technology enablement,” I mean the deployment of new technology to transform the efficiency and performance of sectors of the economy, like healthcare and education, where productivity increases are needed. Korean companies are extremely well-positioned to drive the “technology enablement” of different sectors, following in the footsteps of companies like Hanwa who have already achieved comparable success in areas such as “clean tech”.

Two further examples of priorities for Korea are geopolitical and social. I think Korea should take a leadership role on pressing geopolitical issues including topics such as the economics of water, financial sector reform and climate change.

Korea should seek to convene countries and drive forward real change, building on its role at the G20 summit. Finally, the strengthening of Korea’s higher education system would be a priority for me.

Q: Let’s say that South Korea is a big corporation and the Lee Myung-bak administration is the management of it, while you are their key strategy consultant. What kind of strategies or plans would you recommend to help Korea join the league of advanced economies?

As I said earlier, I feel strongly that the most urgent task for Korea is to anticipate the global trends that will shape the next twenty years’ evolution of the world economy and prepare for them.

In this, I see education reform and technology enablement is a critical opportunity. I think the translation of R&D into commercial products will be very important. And I would encourage Korea to think about its strategy for the BRICs and for Africa on topics such as economic development, building on the achievements it has already seen in the Middle East.

Korea also needs a more vibrant, internationally active and larger SME sector. Such businesses will be critical to improving Korea's under-developed high value-added services sector. Korea needs to go beyond manufacturing and become a leading country in services, using many if the skills that has made the country great in manufacturing.

Q: With the global financial crisis easing, Korean financial firms (banks) are speeding up their moves to go global. What would be the most important factors for local financial firms to become successful in globalization?

Korea needs to develop strong domestic financial services champions at home, building on the improvements achieved since the Asian financial crisis in 1997. They should act now to set themselves on the path to becoming regional champions: that means picking sub-segments where they can win, and identifying potential mergers of equals to create regional scale and build capabilities.

Other financial institutions in Asia lack the scale required to win in the region because they have small home markets - they could be partners for Korea. From a mindset perspective, Korean banks also need to be much more willing to take bold actions – with the government and regulator creating an environment that encourages sensible risk-taking.