Dealing with the
Global Transformation

Editor’s Note: Following is an edited transcript of remarks by Alain Belda, chairman and CEO of Alcoa Inc., Pittsburgh, who spoke May 7 during the Aluminum Association’s spring meeting.

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 backyard, it is happening in the BRICK countries—Brazil, Russia, India, China and Korea.

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 are happening at the same time. 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 population with per-capita income in excess of $20,000. 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.

It 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, environmental legacies and labor costs. We must deal with facility closing 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 time. 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 that 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 initially will be manufacturing dominated. Progress will be fast. These countries will be coming after many of the products, processes and technologies in the West. They will also leapfrog to the latest products, latest applications and the latest manufacturing processes.

Organization assets need to accompany social assets. At Alcoa, this includes shared business systems and a common infrastructure applied across a globally connected workforce.

We 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. We 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 and 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 years and bad years, and there will be social and political problems. We are more concerned about a hard landing in the United States than one in China.

I will next address the global trends: demographics, globalization, urbanization, natural resources and environment, and science and technology—and their impacts and opportunities.

Demographics. The world population is growing by 80 million individuals each year. Forty percent of the world’s population will be living in China and India by 2007. There will be 1 billion more people living in cities by 2015, and 300 million people will be joining cities with populations over 1 million. Three hundred million new people will be making annual incomes of $20,000. Twenty-two percent of the population in the Group of Seven countries—Canada, France, Germany, Italy, Japan, the United Kingdom and the United States—will be 65 years and older. Seventy-eight percent of the world population will still be poor in 2015.

These demographics represent opportunities for absorbing all available capacity and prices for a period of time, as well as opportunities for infrastructure products such as railcars, building and construction materials, signage, packaging products, small airplanes and boats, primary metals, extrusions, common alloy products, etc.

Globalization. Enormous opportunities will emerge for labor arbitrage, not only in direct production, but also in indirect building and construction. What products should be made for the local market, and what products should be made for export?

The ability to leverage positions in local markets will be a key development. China is today’s largest market for refrigerators and air conditioners, the third largest for packaged products and the fifth largest for automobiles.

World trade as a percentage of global GDP will grow from 25 percent to 40 percent.

Emerging opportunities will leapfrog technologies, quality standards and material choices, and people’s lifestyles will change.

Economic volatility will increase, as will political risk and conflicts.
Globalization represents opportunities for the defense industries, including combat vehicles, plus blast-proof containers and portable power sources. Fast deployment in various crises will require lighter equipment.

Urbanization. Within two years, the number of people living in cities will surpass the number of people living in rural areas for the first time in recorded history.

With 60 million new urban residents every year, we will be creating a new Paris or Beijing every other month through 2050.

Cities have been engines of growth during the past 150 years. They have also been the flashpoint for social, economic and environmental explosion.

Two hundred million new cars will be needed around the world if we achieve Korea’s current level of six people per vehicle. This will create demand for fuel-efficient and environmentally friendly sustainable vehicles.

How we meet the challenge of mass urbanization in the next 50 years will be critical to the kind of world we create, and is essential for closing the gap between the wealthy and the poor.

Natural resources/environment. There will be a significant increase in factors correlated to pollution, energy production, manufacturing and transportation. Global carbon dioxide emissions will increase 25 percent within 10 years, with developing nations catching up to developed countries. Energy demand will continue to grow 25 percent over the next 10 years, making it more expensive. Half of the world population will live in water stressed regions.

These factors represent opportunities for new technologies that reduce carbon dioxide emissions, have smaller footprints, reduce energy consumption, and involve more recycling and use of scrap.

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 (such as production of commodities) will continue a lateral development into new markets and applications.

Innovations will advance, such as nanotechnologies, portable energy sources, multi-fuel products, and intelligent materials that can be customized by use or application.

Other innovations will be realized in biotechnologies such as biomedical engineering, genetic modification and genetic therapy.

So how are we coping with these challenges and the opportunities that result?

At Alcoa, we put a spotlight on innovation and in developing the next business models, not only on new products, processes and services. We are identifying novel segments and geographies, we are quickly spotting new competitors and partners, and we are establishing global positions quickly through acquisitions, alliances and licensing.

We must create a more differentiated value proposition to serve micro-segments in the BRICK countries 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. We must reach a balance between maximizing the margin vs. the share, by segment and time.

In addition, we must manage our strategic risks, not just operational or political risks.

These mega-trends are driving our speed and flexibility, our market knowledge, our choices for alliances and acquisitions, and what innovations we develop.

Today, we have before us opportunities not seen since the end of World War II—60 years ago. Major assets are in the private sector, not in the hands of governments, which presupposes more rational investment and behavior. We have huge challenges both in the industrialized and large developing economies, and they are coming at us simultaneously. We cannot take them on sequentially; we must play two hands.