Editor’s Note: The following is the edited text of a presentation made by Alcoa Chairman and CEO Alain Belda during the spring meeting of The Aluminum Association and during National Manufacturing Week.
Good afternoon, ladies and gentlemen. It is a pleasure for me to be here today to talk about trends shaping our world in the coming decades.
My proposition is that we are in the midst of a market transformation and growth similar to the one experienced in the 1950s. It is a discontinuity from the 1980s and 1990s, as that one was a discontinuity from previous decades, albeit influenced by two World Wars.
This is the good news. The bad news is that rather than happening in your back yard, it is happening in the BRICK (Brazil, Russia, India, China and Korea) countries. The good news is that the world is smaller. The bad news is that the other guys—the competitors—know this, too.
What’s driving this transformation? Two revolutions that are happening at the same time:
1. Urbanization in the BRICK countries will consume an enormous amount of resources. It will impact the environment and create another Western World in terms of a population with per capita income in excess of $20,000.
2. Labor and resource arbitrage will create a new set of competitive dynamics. It will challenge those of us with legacy costs in the Western World and create opportunities for new ones in the BRICKs that will leverage their markets in the same way.
These revolutions will affect your company and my company in many ways. We must compete against cheap imports. We must deal with our legacy costs, such as health care, environment legacies and labor costs. We must deal with facility closings and relocation costs. We must follow our customers in the regions where they grow. More importantly, we must be a part of and take advantage of the market created by these urbanizing countries and then deal with the consequences on our existing businesses, people and vocations.
There is enough growth for everyone given the relative size of the Western economy vs. the emerging ones, but the nature of growth will be different in each area.
In the West, growth will be more technology dominated. It will be segmented with smaller runs requiring quicker response times. New product development will deal with issues such as an aging population, health care, leisure, more services, greater integration of different sciences and processes and management of entire supply chains—our own and those of our customers.
In the BRICK countries, it will be about infrastructure building, consumer awakening, transportation, energy, communications and long runs of simpler products (commodities). It will be initially manufacturing dominated. Progress will be fast. These countries will be coming after many of the products, processes and technologies that will be in the West. They will also leapfrog to the latest products, latest applications and the latest manufacturing processes.
How are we dealing with this at Alcoa? First and foremost, we have been dealing with capabilities and cultures for some time. Our board today is 50 percent American-born and 50 percent foreign-born. Our top management is 40 percent foreign-born and more than 50 percent international, if we consider Americans who have lived abroad.
At Alcoa, we share a global vision and global values. We live our values every day. They are the guide to how we operate. They are probably most tangibly demonstrated by our world benchmark safety performance and environmental performance.
Organizational assets need to accompany social assets. At Alcoa, this includes shared business systems and a common infrastructure applied across a globally connected workforce. Our shared business system and problem-solving process is called the Alcoa Business System (ABS). ABS places customers first, it places quality first and it places employees first.
Through our organization, including our Global Business Services group, we are able to create innovative systems that emphasize integration and help create new business models built on a customer-driven value proposition.
We also strive to put Alcoa’s strategies in line with meaningful global trends. We continually analyze our competitive position for the short and long term. We continually look at the products we make and our global footprint and ask ourselves where should we make our products? What new technologies, processes and applications should we develop? What demands and in what order will they present themselves in each of the BRICKs? And, finally, what products/processes should we be focusing on to develop for this new world?
We understand that development is not a linear process. There will be good and bad years and there will be social and political problems. We are more concerned about a U.S. hard landing than a China one.
Now, I will talk about each of these global trends—demographics, globalization, urbanization, natural resources and environment and science and technology—and their impact and opportunities.
Demographics:
• 80 million new people per year;
• 40 percent of the world population living in China and India by 2007;
• 1 billion more people living in cities by 2015;
• 300 million new people in cities larger than 1 million;
• 300 million new people making an average of $20,000 per capita;
• 22 percent of the G7 population greater than 65 years of age; and
• 78 percent of the world population living in poverty.
These statistics represent opportunities for absorbing all available capacity and price for a period of time as well as opportunities for infrastructure products, such as rail cars, building and construction materials, signage, packaging products, small planes and boats, primary metals, extrusions, common alloy products, etc.
Globalization and Market Growth:
• Enormous opportunities for labor arbitrage, not only in direct production, but in indirect building and construction. What products for the local market? What products for export?
• Ability to leverage positions in local markets will be key. China is the largest market for refrigerators and air conditioners, the third largest for packaged products and the fifth for autos.
• World trade as a percentage of GDP will grow from 25 percent to 40 percent.
• Big opportunities that will leapfrog technologies, quality standards, material of choice and have different lifestyles.
• Economic volatility will increase; so will political risk and conflicts.
These trends represent opportunities for the defense industry, combat vehicles, blast-proof containers and portable power. Fast deployment will require lighter equipment.
Urbanization:
• By 2007, the number of people living in cities will surpass those living in rural areas for the first time in history.
• With 60 million new urban residents every year, we will be creating a new Paris or Beijing every other month until 2050.
• Cities have been engines of growth for the last 150 years. Cities have also been the flashpoints for social, economic and environmental explosion.
• Roughly 200 million new cars will be on the road if we achieve Korean levels of 6:1. This will create demand for fuel-efficient, environmentally friendly vehicles.
How we meet the challenge of mass urbanization in the next 50 years will be critical to the kind of world we will create and is essential for closing the wealthy-poor gap.
Natural Resources/Environment:
• There will be a significant increase in factors correlated to pollution/energy production/manufacturing and transportation.
• Global CO2 emissions will increase by 25 percent by 2015, with developing nations catching up to developed countries.
• Energy demand will continue to grow 25 percent throughout the next 10 years, making it more expensive.
• Half the world population will live in water-stressed areas.
These trends represent opportunities for new technologies that reduce CO2 emissions; new processes that have smaller footprints, that move from molten to solid in a smaller number of steps and that reduce energy consumption; more recycling and use of scrap; efficient generation of hydrogen using aluminum, alumina and water; and flexible solar panels integrated into building and construction products.
Science and Technology:
• Advances in material technology, convergence of materials, information and miniaturization will drive less resource intensity, more complexity and smart products.
• Older, established technologies will continue sidewise development into new markets and applications.
• Innovation will occur in the form of nanotechnology, portable energy sources, multi-fuel products, miniaturization and customizable intelligent materials.
• Bio-technology—biomedical engineering/genetic modification/therapy—will continue to be introduced.
So, how are we coping with these challenges and the opportunities that result?
We put the spotlight on innovation and in developing the next business models, not only on new products, processes and services within the company. We identify novel segments and geographies and quickly spot new competitors and partners and establish global positions quickly through acquisitions, alliances and licensing.
We must create a more differentiated value proposition to serve micro-segments in BRICKs and in the industrial world. We must focus on cost positions, productivity and the relationship between price and margin as well as how they will change with time. And we must balance between margin maximization and share maximization by segment and time.
In addition, we must manage strategic risk, not just operational risk or political risk.
Speed, flexibility, market knowledge, effective alliances and acquisitions and innovation will be critical success factors required to win in an environment driven by these trends.
In conclusion, we have before us opportunities not seen since the end of World War II. Major assets are in the private sector, not the government, which presupposes more rational investment and behavior. We have both huge challenges and opportunities available both in the G7 and in the BRICK countries, and they are coming at us simultaneously . . . we have no option to take them in sequence. We must play with two hands.
The author is chairman and CEO of Alcoa Inc., Pittsburgh. The article has been reprinted courtesy of Aluminum Now magazine.
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