It has been a decade since McKinsey revealed its final Korea report in 2013. Referring to the report, McKinsey likened South Korea’s scenario to being a “frog in a pot of slowly boiling water”, the place the temperature of the water stored rising. On this context, McKinsey has written a brand new report to look at South Korea’s present macroeconomic scenario, assess the trail it may take for its subsequent S-curve of development, and paint an image of the nation South Korea may intention to be in 2040.
Challenges surrounding South Korea
South Korea entered a low GDP development fee of three p.c within the 2010s, dropping to 2 p.c within the 2020s, and shedding its top-ten GDP standing in 2022. Three facets have contributed to this slowdown: labor, capital, and trade competitiveness.
Labor: South Korea is experiencing each a toppling of the demographic construction as a result of an growing old inhabitants and a low beginning fee, and a stagnant enchancment of labor productiveness.
Capital: Capital markets are challenged as a result of low attractiveness of public markets and a scarcity of dynamism in personal and enterprise funding markets. The monetary depth of South Korea lags that of different superior international locations.
Industrial competitiveness: A brand new development engine is missing, fueled by heightened competitors in South Korea’s fundamental industries and the low productiveness of small and medium-sized enterprises (SMEs). This may result in sustained dependence on conglomerates.
South Korea may intention to change into a top-seven financial system with a GDP per capita of $70,000 by using a brand new financial mannequin that fosters a daring aspiration of 4 p.c annual development.
South Korea’s subsequent S-curve by means of three pillars and eight actions
McKinsey has advised three strategic pillars (Restructure, Shift, and Domesticate) and eight daring actions inside these pillars to reconfigure South Korea’s financial development mannequin.
As their aggressive edge deteriorates, industries historically on the core of South Korea’s development may rethink their methods of enterprise.
Motion 1. Restructure at trade stage: Industries equivalent to refinery and petrochemicals which can be dealing with structural challenges may contemplate asset rationalization, integration, or merging to resolve overcapacity points.
Motion 2. Restructure enterprise fashions: Industries may contemplate increasing from the earlier mannequin of a good vertical integration of conglomerates and their suppliers to a extra horizontal partnership based mostly on collaboration between start-ups and enormous enterprises.
Every trade, and the financial system as an entire, would wish to shift past the bounds of the prevailing drivers on which they rely for development.
Motion 3. Shift portfolios towards excessive value-added companies: South Korea may take two approaches to develop past the restrictions of its manufacturing-oriented financial system. First, it may increase the proportion of knowledge-based, excessive value-added industries (for instance, platform, software program, or contents); and second, it may implement an in depth shift to excessive value-added services in conventional industries (equivalent to shipbuilding and semiconductor).
Motion 4. Shift to new companies based mostly on authentic know-how: South Korea may actively search to harness authentic know-how for brand spanking new companies by, for instance, supporting R&D funding and pushing collaboration between firms and academia.
Motion 5. Shift to AI: Amid stagnant productiveness enhancements and the decline within the nation’s inhabitants, industries may drastically uplift productiveness by means of the usage of AI applied sciences, together with generative AI.
For significant development, South Korea wants a system of regulation and assist to create a wholesome pipeline of firms—together with SMEs, start-ups, and overseas firms—that may contribute to the GDP.
Motion 6. Domesticate a basis for innovation: South Korea may contemplate creating targeted megaclusters fairly than dispersed clusters across the nation (at this stage, there are 18 bio clusters unfold out all through Korea). Additional, it may arrange a regulatory platform to permit firms to freely benefit from cutting-edge applied sciences.
Motion 7. Domesticate a virtuous cycle within the capital market: South Korea may diversify sources of capital by fostering company enterprise capital and overseas investments to supply a steady funding setting.
Motion 8. Domesticate core expertise: South Korea must develop skilled expertise, particularly for core industries. This could possibly be achieved by fostering home expertise and attracting abroad expertise by organizing collaboration with academia, creating incentives, and positioning Korea as a “place the place professionals wish to work.”
Future objectives of South Korea by 2040
If South Korea efficiently implements these eight daring actions, it may envision seven objectives by 2040.
Creating 5 new firms with income over $100 billion, 20 new firms with income over $10 billion, and 100 new firms with income over $1 billion (in comparison with 2022 when there have been three firms over $100 billion, 54 firms over $10 billion, and 418 firms over $1 billion). In 2040, there could possibly be new globally main firms from industries equivalent to renewable power, biopharmaceutical, AI, mobility, and semiconductor.
Small and medium-sized enterprises doubling their productiveness: Whereas SME productiveness in South Korea is lagging, roughly 99 p.c of home firms are SMEs and so they make use of round 80 p.c of the workforce—South Korea may enhance SME productiveness to Germany’s or the UK’s ranges.
Having fun with a 70 p.c share of GDP from service industries: Whereas service industries make use of about 70 p.c of South Korea’s workforce, in 2021 they solely represented 57 p.c of GDP, which is beneath the OECD common of 71 p.c (Germany 63 p.c, Japan 70 p.c, and the USA 78 p.c). There may be room to enhance this case.
Doubling the monetary depth: South Korea may intention to double its monetary depth relative to GDP by means of 2040 (to United Kingdom ranges) by cultivating a virtuous cycle within the capital market.
Growing no less than two extra world champion industries: Along with extending the lead of present champion industries equivalent to semiconductor and mobility, South Korea may deal with creating new champions in different industries—for instance, renewable power and biopharmaceuticals.
Establishing no less than three prime world clusters: South Korea may intention to create world-class megaclusters for industries equivalent to biopharmaceuticals, IT, and semiconductor.
Cultivating 50,000 superior AI careerals: South Korea may safe a number one place in industrial innovation by harnessing the productiveness potential of AI. It must foster 50,000 extra AI professionals to attain this aim.
It’s time for South Korea to drag itself out of the boiling water. By adopting the restructure, shift, and domesticate pillars, the nation may propel itself onto a brand new S-curve and change into a top-seven financial system by 2040.