Unless there is a step up in resource productivity and expansion in supply, the world could be entering an era of sustained high resource prices, leading to increased economic, social and geopolitical risk. Richard Dobbs writes in the Korea Times.
In my last column “A resource revolution coming,” I highlighted that progressively cheaper natural resources underpinned the 20th–century global economic growth. But the 21st century could be different. Indeed, over the past 10 years, rapid economic development in emerging markets has wiped out all of the previous century’s declines in real commodity prices. And in the next two decades, up to three billion people and their spending power will be added to the global middle class. Unless there is a step up in resource productivity and expansion in supply, the world could be entering an era of sustained high resource prices, leading to increased economic, social and geopolitical risk.
This context presents opportunities and risks for Korean businesses, given the industries they are in, and given the lack of Korean domestic natural resources. It’s already clear that resource–related trends will shape the competitive dynamics of a range of sectors in the two decades ahead. Companies need to place greater attention on resource–related issues in their business strategies, adopting a more joined–up approach toward understanding how resources might shape their profits, produce new growth opportunities and put new stresses on their management of risk and regulation.
For Korean companies with locked in overseas supplies of resources, higher and more volatile prices could deliver significant windfall gains. But they also could generate input cost inflation, technological discontinuities, and a regulatory and societal backlash. For resource–consuming industries, higher and more volatile input prices may be hard to pass through fully to consumers given that competitors in other countries might have access to cheaper local natural resources. For instance, if shale gas in the US lives up to its promise, the US manufacturers in energy intensive industries such as steel could have a competitive advantage compared to their Korean peers.
The strategic implications of resource–related trends will vary from company to company, of course. A starting point for business leaders is to consider three areas in understating the impart on their businesses:
1) Identify growth opportunities. Helping consumers and companies to use or access resources more efficiently should be very good business in the years ahead. For instance, the fastest–selling elevator line in Otis’s 150–year history is the Gen2, which uses up to 75 percent less energy than conventional elevators. Major companies, such as General Electric and Siemens, are building resource productivity businesses by investing heavily in emerging clean-energy and clean-water opportunities ranging from wind turbines to industrial–energy efficiency. And in technology centers like Silicon Valley, a broad range of clean-tech investors and entrepreneurs seek profits by revolutionizing resource productivity. Despite some areas of strength such as batteries, my sense is that Korean corporations are not yet moving as fast as their global peers.
2) Boost internal efficiency. Companies have large, profitable opportunities to improve the efficiency of their resource use across the value chain. Wal–Mart has implemented a sourcing strategy that aims to reduce supplier packaging from 2008 levels by 5 percent no later than 2013, for estimated direct savings of $3.4 billion, according to the European Commission’s report this September.
Capturing many of these supply chain opportunities will require much closer collaboration between players up and down the supply chain. “Simply cleaning the dust and dirt off the coils of a building’s air–conditioning unit reduces breakdowns and can lower the unit’s energy consumption by more than 10 percent,” said Walter Levy, CEO of the industrial–product manufacturer NCH. Companies are more likely to pursue such opportunities when they “look at maintenance as a return on investment.”
3) Manage risk. As resource inputs to production processes become increasingly scarce, companies need to develop a more sophisticated understanding of their exposure to different natural resources including supply chain dependencies and regulatory risks. One major packaged–goods company recently discovered that even though natural resources account for just 35 percent of its current cost base, swings in their prices could easily account for more than 70 percent of likely changes in the company’s overall cost structure during the years ahead.
That company, like many in the packaged–goods and other industries, has long taken a fragmented approach to managing the supply of raw materials. A world with a greater correlation between resource prices will put a premium on a more integrated approach including central coordination of raw–material strategy across business units and product designs that minimize raw material risks. Input diversification strategies such as augmenting petroleum-based plastics with bioplastics or recyclable aluminum in bottling may rise in importance.
Supply and productivity opportunities can address the growing demand for resources and the environmental challenges associated with the rise of three billion new middle–class consumers. But these opportunities raise fresh questions: can business and government leaders, not to mention consumers, move with the speed and scale needed to avoid a period of dramatically higher resource prices, along with their destabilizing impact on economic growth, welfare and political stability? Or do we need a crisis, with its associated problems, to accelerate technological innovation and investment? Korean business has an important role to play. And it needs to act or it will be disadvantaged compared to their global peers.
This column is based on McKinsey Global Institute’s recent report, Resource Revolution: Meeting the world’s energy, materials, food, and water needs (November 2011), which is available for free on the MGI website.