The Demographic Cliff

Economic forecaster and author of “The Demographic Cliff,” Harry Dent, says people between the ages of 45 and 49 are typically the heads of families and spend the most money on things like housing, cars and appliances. As populations age, fewer people will make up the prime spending age group of 45 to 49, and there will be a drop in consumption. Dent calls this the “demographic cliff,” or the “consumption cliff”. The world has seen proof of this theory in places like Japan, Western Europe and the U.S., where economic downturn has come at times of a population downturn.

The Japanese stock market crashed in the early 90s, and they have yet to fully recover. (Source: Huffington Post)

Japan, for example, was one of the first nations to experience a demographic cliff in the early 90s. It was also the time when its stocks and real estate prices fell 60 percent. Those prices never rebounded. Since then, the country has spiraled into debt (the world’s highest at 246 percent of GDP) with an increasingly aging workforce and stagnant economy. From 2010 to 2015, Japan’s population decreased by almost 1 million people, and the government is working to prevent the population from falling below 100 million by 2060.

The U.S. 2008 Financial Crisis came shortly after its demographic cliff. (Source: Reuters)

Dent also argued that the American baby boomers of the early 60s peaked in 2007, at their highest spending age, and then the economy experienced a downturn, in the form of the 2008 financial crisis. Since then, the U.S. government has added USD 8.4 trillion in debt. Although the reasons for the 2008 crisis are complex, Dent does prove a point: demographics have a huge impact on economics.

Falling Steel Consumption

As it was with Japan and the U.S., consumption will decrease in industries critical to the steel market. In Japan, steel consumption decreased 81 percent from 1995. According to a report by POSCO Research Institute, construction accounts for 42 percent of total steel demand and the auto industry accounts for 18.5 percent. Decreased spending on homes and cars due to the demographic cliff will have a significant impact on the steel industry. Decreased demand in other industries such as machinery and home appliances will also affect steel demand.

The construction industry will be the hardest-hit by a demographic cliff. (Source: CNBC)

Moreover, manufacturers will be faced with the problem of a shrinking workforce. Those entering the workforce will do so with the burden of sustaining government programs with a larger portion of their paychecks, and employers will start to notice the gaps not only in age but experience and skill as well. With fewer people entering the workforce, employers will be forced to outsource jobs and governments may factor in more lenient immigration policies to fill the gaps.

How can Steelmakers Prepare for the Future?

Although there is no quick solution to the aging population and low birthrates, steelmakers can start preparing for a demographic cliff in two ways. Enter markets with growing populations and introduce smart technology to fill the human labor gap.

In developing countries in Asia and Africa, there are little signs of population and economic stagnation. As those countries invest in their infrastructure and start to consume more homes, cars and appliances, steel will be in high demand, more than those countries can produce domestically.

India’s solar energy industry will lead to an increase in demand for steel. (Source: WLE)

India is one of the countries with a growing population. The government is undergoing numerous projects to boost its economy and prepare for growth, including the project to boost its solar energy market. The Indian government has plans to invest USD 100 billion and 100 gigawatts (GW) of solar capacity for the country by 2022. Steel is a vital part of solar panels and suppliers like POSCO are already partnering with Indian firms to provide the leading material and technology for India to meet its growing renewable energy demand. POSCO also has partnerships in the U.S., Bangladesh, Myanmar, Uzbekistan and more to help each country fill their supply gaps.

In order to fill the domestic labor shortage, POSCO is incorporating leading AI technology, IoT and big data to its smart factories.

It is true that today’s developed nations have reached, or are heading towards a demographic cliff. Japan is a classic example of how detrimental a shrinking and aging population can be for a country’s economy. Governments and industries have to start factoring in demographics to their long-term strategies and plan for a changing future.     

Cover photo courtesy of 24×7 Daily.

China is rapidly catching up with Korea in major manufacturing sectors, including automobiles, steel, and smartphones and Japan’s price competitiveness has improved thanks to Abenomics and the weak yen. The Korean government and companies agree that manufacturing is in crisis. This is a serious concern because manufacturing still accounts for the lion’s share of Korea’s economy.

Korea’s Rapid Growth

After the share of manufacturing in Korea’s GDP surpassed 20 percent in the 1990s, it continued to rise to 29 percent in 2014. Korea has the largest share of manufacturing in GDP among OECD member countries, and the second largest share in the world after China.

Even more impressive is the manufacturing sector’s contribution to economic growth. It had reached 29.8 percent by the 1980s and rose steadily each year until it reached an average of 43.9 percent from 2010 to 2014. Given that its share of GDP is 29%, manufacturing’s contribution to economic growth is substantial and its effect on economic growth is high. In terms of operating profit margin by industry, manufacturing is 1.5 times higher than the service sector.

Korea’s Potential Crisis

Now, the all-important manufacturing sector is facing three major challenges. First, slow global economic growth is persisting, and oversupply in major manufacturing sectors is worsening. Korea highly depends on the global economy, with an export-to-GDP ratio of nearly 50%.

The second challenge is the fact that Korea is sandwiched between China and Japan. Bolstered by the weak yen, Japan’s export competitiveness has increased significantly, and China is rapidly catching up with Korea in terms of technology. In 2014, China had 1,431 export items that were global best-sellers, while Korea had only 63 such items.

It’s evident that Korea’s manufacturing competitiveness is on a downward slope and has been for some time. According to the U.S. Council on Competitiveness, Korea slipped to fifth place in manufacturing competitiveness in 2013, from third place in 2010, and is expected to slide to sixth place in 2018.

The third challenge for Korea is that its manufacturing sector has limited differentiation strategies and no new growth engines. The competitive industrial performance (CIP) index, released by the United Nations Industrial Development Organization, placed Korea eleven places higher than China in 2000, but only three places higher in 2011. As it stands now, Korea is only 1.9 years ahead of China in scientific and technological competitiveness.

Five Year Plan

In order to stimulate the manufacturing industry, Korea must first encourage a culture that values manufacturing, a creative workforce, and innovative technology that will lead the future of Korea’s manufacturing progress. These three elements are the basis of a manufacturing powerhouse.

To this end, the Korean government has announced the “Five-year plan for Development of Companies of Middle Standing (2015~2019)” with the aim of nurturing 5,000 medium sized enterprises and 100 hidden champions by 2019.

Next, Korea should nurture a creative workforce and make the most of its talent. As it stands, Korea’s human resource capability is low relative to the size of its economy. This is an important task for Korea because in the 21^st Century one person’s innovation is more important than any product or service. For instance, startups, such as Facebook and YouTube, employ more than 5 million people. To take the lead in creating innovative technology Korea must develop a system to find, nurture, and utilize creative talents.

The Fourth Industrial Revolution

Backed by a culture that values manufacturing, a creative workforce, and innovative technology, Korea should instigate a new manufacturing revolution. If Korea plays its cards right it will enter the fourth industrial revolution, which will open a new chapter in manufacturing.

The fourth industrial revolution will be led by intelligent factories that integrate traditional industries with ICT (Information and Communications Technology). These factories will be operated by a two-way communication system between production facilities and products built on a single platform to optimize all production processes.

Smartification is also rapidly gaining ground at industrial sites, such as POSCO’s smart plate factory at Gwangyang Steelworks. In order for Korea’s manufacturing to survive global competition and grow sustainably, it should strive for manufacturing innovation through smart factories, and add value to existing products and services.

Korea’s manufacturing sector may be facing a crisis, but it has the ability to come out on top. According to the report by Dr. Park, Korea boasts strong manufacturing competitiveness, prowess as an IT powerhouse, and world-class ICT infrastructure. With such advantages, Korea should actively embrace the future of manufacturing and implement innovation strategies tailored to its manufacturing.

Related Link:

In Southeast Asia, Surging Imports Lead to Rising Trade Barriers

China’s Era of New Normal and its Implications on the Steel Industry

The Evolution of the Steel Production Process

The Myth and Reality of Global Steel Overcapacity

POSRI Releases First Edition of Bi-Annual English Journal “Asian Steel Watch”

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Following his inauguration, POSCO’s CEO Ohjoon Kwon gave a special lecture on March 22^nd about ‘POSCO the Great’. This special lecture took place at POSCO Center in Seoul and caught the public eye as it was also broadcasted to a total of 32 other locations including Pohang, Gwangyang, Song-do, Pangyo, Changwon and more. Over 2,500 individuals connected to POSCO, including employees, department managers, CEOs of external partners, tuned in to hear CEO Kwon’s speech. Read on for the passionate speech that CEO Kwon gave to elaborate on the new management philosophy of POSCO.

POSCO’s Vision, ‘POSCO the Great’!

New vision of POSCO – ‘POSCO the Great’. How was the vision born? & what does it mean?   

‘POSCO the Great’ was born through careful consideration of keywords that signify POSCO during the CEO selection interview process. At that time, I was reminded Korea’s most respected and famous ruler, ‘Se jong Daewang’ where ‘Daewang’ means “the Great”.  I wanted to apply that same phrase to POSCO as it also got good responses during the interview process. Thus, after becoming CEO, ‘POSCO the Great’ has become incorporated into our vision for the future. This is how ‘POSCO the Great’ came to be and it signifies a revival of past achievements and glorious history to continue moving forward.

Using ‘Innovation POSCO 1.0’ to Implement the ‘POSCO the Great’ Vision

“POSCO family…have pride in leading the steel industry!”

Prior to elaborating on ‘POSCO the Great’, let me say to the POSCO family…have pride in leading the steel industry. In Chinese characters, ‘steel(鐵)’ is constructed by the characters that mean gold(金), king(王) and a particle. So it means “the king of metals”. I believe that even our ancient ancestors acknowledged the wonder of steel and therefore gave the Chinese characters that meaning. As you see, from ancient times, steel has been an integral and essential element of our lives. Moreover, the total GDP of our country made by non-steel materials cannot even reach 1/10^th of the GDP accounted for by steel. So I hope that everyone here takes pride in their association with steel and helps POSCO achieve its vision for the future.

What’s the meaning of ‘Innovation POSCO 1.0’?

After I was elected as the CEO, I established ‘Innovation POSCO 1.0’ as an execution plan for overcoming the current challenges and to revive the glorious past through the vision of ‘POSCO the Great’. Why 1.0 instead of 3.0 or soon-to-be 4.0?

‘1.0’ signifies going forward as one entity, creating a new start based on differentiating ideas, and being number one in technology, sales, quality and all other aspects. I believe that if we can implement ‘Innovation 1.0’, POSCO can once again be great.

Global crisis for the steel industry and future direction for POSCO

Despite the continued crisis for the steel industry, POSCO is striving to overcome it in various ways.

Looking back at the global steel industry, the demand in China has plummeted since the 2000s, causing a huge surplus in production. In the past, POSCO’s operating profit margin reached nearly 20% but now reaches only single digit figures. Despite this difficult operating environment, POSCO has pursued various strategies to overcome this crisis.

POSCO has mobilized its business strategy to increase investments and foster innovation. POSCO has expanded its core business, steel, to cover other areas including renewable energy and also has invested in the materials industry. In addition, POSCO has invested in creating a world-class production system in the Americas, Asia and Korean markets. Furthermore, POSCO has introduced an innovative methodology for work process.

In particular, creating and applying QSS has led to increased profitability and improved performance through development of employees. POSCO has been able to be a well-respected and loved company because of its focus not only on profitability but the growth of its employees and other stakeholders.

Pictured here: CEO Kwon’s speech broadcasted to 32 locations on March 22nd

POSCO to expand abroad.  A new leap through humility, introspection and reflection

Until now POSCO has strived to create good results, however I think now is the time to take a look back at POSCO. First of all, POSCO has ranked 1^st as the world’s top steelmaker for four years in a row. It was also ranked as the most respected company by Fortune and was recognized as a global sustainable leading company for 9 consecutive years in the SAM-Dow Jones Sustainability Indices (SAM-DJSI). It was also included in World Economic Forum’s global 100 group.

On the other hand, the internal rate of return has been low for four consecutive years since 2010 making prospects for a turnaround difficult. Furthermore, market capitalization ranking has fallen from second to third. Operating profit to sales ratio decreased compared to net debt equity ratio rising and credit ratings have fallen as well. All in all, I strongly believe that it is time for POSCO to humbly take a step back to reflect.

I’d like to compare POSCO’s current state to ‘Dong-yi-bul-hwa’ – ‘同而不和’. The meaning behind these Chinese characters is acting in agreement on the outside, but not fully acknowledging on the inside. ‘Too big to fail’ is no longer valid. To rise above the current environment, POSCO must have faith in itself to take on new challenges.

3 Management Ideologies and Agenda behind ‘POSCO the Great’

3 management ideologies behind the vision of ‘POSCO the Great’…

3 management ideologies behind the vision of ‘POSCO the Great’… are One POSCO, Creative POSCO, and Top POSCO.

First of all, One POSCO puts importance on pursing business development based on shared values and seeking shared growth for customers, suppliers and society. This can be achieved through harmonious cooperation and all employees having a sense of ownership.

Creative POSCO means to propose new ideas to create new value. This places importance on going beyond traditional thinking so that new creative ideas can be developed. Through this, better customer services can be delivered to meet customer needs.

In the past Top POSCO may have meant following advanced technologies, but now the goal is to develop products and technologies that do not yet exist. Top management is about seeking success of customers based on the best talent and confidence.

4 innovation agendas based on One POSCO, Creative POSCO, and Top POSCO

‘Innovation POSCO 1.0’ includes the 4 innovation agendas that POSCO must execute in order to fulfill the three management ideologies. Since taking office, I have been emphasizing strengthening the competitiveness of the steel industry, selecting new growth business areas, improving the financial structure and management infrastructure.

Strengthening the competitiveness of the steel industry will be done by innovating value creation, production cost, quality and business structure and global management. We should especially strengthen technology-based solutions with marketing to establish differentiation from competitors and provide products that fit customers’ needs.

Although there have been many new growth businesses, there were unexpected challenges that caused delays and made profit generation difficult. We are planning to refine and strengthen the selection of new business opportunities. We will re-evaluate market attractiveness, technology competitiveness, entry barriers, and evaluation of the value of POSCO’s materials and energy.

Furthermore, the improvement of financial structure has a close association to securing profitability through improving original competitiveness of the steel industry. In terms of financial structure, business restructuring and exchanging certain subsidiaries or selling the equity holdings will help the group’s overall efficiency.

Lastly, we will innovate the management structure to renew the work process and establish a consensus for the current situation. Projects centered around professionals will create results and project team leaders will have more responsibility. Above all, we will motivate the creation of new ideas by rewarding those who propose new projects and put forth new ideas.

Since POSCO began promoting a project-based approach set out by “innovation POSCO 1.0’, 380 projects have been developed and a professional employee system has been implemented. The managing directors have decreased by more than 50%. On one hand, it has created motivation for employees to strive to become directors which will be evaluated on the performance of project-based results.

[box] Last words to share with POSCO Family..!

In order to achieve the vision of ‘POSCO the Great’, I believe that empathy of employees regarding risk is crucial. Going forward I will do my best. The time has come for ‘POSCO the Great’. The POSCO family has the innate DNA to create from nothing. This trait will allow us to begin a renewed 50 years and to continue the history of ‘POSCO the Great’.[/box]

Can you feel the hope and positive energy coming from the words of CEO Ohjoon Kwon? We hope you now have a better understanding of ‘POSCO the Great’ and look forward to your continued interest in POSCO as we set out to fulfill the vision of ‘POSCO the Great’!

]]> https://newsroom.posco.com/en/peter-marcus-world-steel-dynamics-visited-posco-giving-special-lecture-analysis-prospects-worlds-steel-market/ Fri, 08 Nov 2013 09:00:50 +0000 Founder and Managing Partner Peter Marcus of WSD (World Steel Dynamics), a global analysis organization specializing in the steel industry, visited POSCO Center on November 2^nd to give a special lecture under the theme ‘Battle Metallica (Analysis and Prospects of the World’s Steel Market).’

Peter Marcus said in his lecture, “POSCO was able to succeed as a global steelmaker because it has its own unique corporate culture,” emphasizing the importance of continuously developing POSCO’s unique and great corporate culture.

In addition, he mentioned the importance of continuous R&D investment activities to maintain competitiveness, explaining, “5 companies globally, POSCO, NSSMC (Nippon Steel & Sumimoto Metal Corp), JFE, CSC (China Steel), and Baoshan Iron & Steel, are showing competitive R&D activities.”

He also pointed out that the steel industry today is facing an extremely difficult environment, forecasting that the growth engine from China will be exhausted while the remaining power for new growth of BRICs will not be sufficient, thus the downcycle of the steel industry will continue until around 2018.

In the long term, scrap production supply from China will increase rapidly while DRI (Direct Reduced Iron) competitiveness will recover due to shale gas, leading to distinct competition between iron sources forecasting a decline in material costs such as iron ores, DRI, and HBI (Hot Briquetted Iron).

In the mid- to long-term, increases in steel demand will be prominent in the Middle East regions rather than China, where steel production will increase 1.5% annually from 1,574 million tons in 2013 to 1,873 million tons by 2025.

Lastly, Marcus forecast that there is a high chance that the increase rate of steel demand in China will stagnate at less than 1% until 2025, and that the increase rate of annual steel production will reach 7.9% until 2014 but only 0.59% for the ten years after 2015.

Marcus explained that this is based on the decrease of GDP growth rate, decline in demand due to the depreciating construction economy, and weakened export competitiveness due to a strong Chinese yuan value.