Last month, I visited Lanzhou and Xining in Western China. Xining, literally meaning "Peace in the west", was named when the Song dynasty regained the area from the Tibetans. Likewise, Chang'an, the starting point of the Silk Road, was renamed to Xi'an, during the Ming dynasty, meaning 'Perpetual peace' in classical Chinese. What links these cities is the Silk Road and they are the strategic hubs of the One Belt, One Road initiative, which is China's new, outward-looking Silk Road strategy.

Lanzhou and Xining are two major cities on the Silk Road. If you head west, you will reach Dunhuang, which is well known for the Mogao Caves. Traveling further west will take you to Turpan and Ürümqi. All represent major stopping points as well as central transportation and logistics locations of the Silk Road which was completed during the Tang Dynasty. Reinforced in recent years by an upgraded network of logistics, railway and surrounding cities, the cities are benefiting from the influx of investment under the One Belt, One Road initiative. It has been ten years since our company began business in Lanzhou, Xining and Yinchuan, a neighboring city which has more than two million inhabitants. We now have about thirty stores in these three cities and our colleagues are making every effort to make customers beautiful. Our journey of creating a more beautiful world is heading west along the Silk Road. The vast land of China is telling us that there are so many things for us to do in the years to come.

Have you thought about how society will evolve in the future? Of course, nobody would be 100%s sure about the future. However, we should be equipped with a certain degree of foresight at least to be able to see the major flow of the society that will shape the coming 22nd Century. I believe the future will be a networked age. In other words, everything will be connected together. The One Belt, One Road initiative is connecting cities of China with Eurasia. The network among ASEAN countries will become ever more robust. The trend of connecting everything is accelerating. We already live in a connected age and our business model is based around exploiting this trend. When innisfree opened a store in Ho Chi Minh City in Vietnam, a number of customers came to celebrate the great start together. In five to six countries of ASEAN, the stores of innisfree, Sulwhasoo, ETUDE HOUSE and Mamonde continue to open and be interconnected.

We can easily cite examples of companies who have enjoyed huge success in recent years using a network-based business, including Google, Amazon and Facebook. Going forward, enterprises with a solid platform will continue to transform the world. Only ten years ago, Japan's MK Taxi was named the world's most successful taxi company. Japanese-style hospitality service is certainly one of the key strengths behind its success. Interestingly, however, we now consider Uber to be the world's largest taxi company. MK Taxi and Uber, the former is a traditional taxi company, holding numerous brand new vehicles ready to serve its customers and the latter without a single car, but operating a transportation business in a totally unconventional way. When we compare these two, we can clearly see how global trends are changing. Let me give another example. Until several years ago, Four Seasons and The Ritz-Carlton were frequently cited as the best hotels offering distinguished service. However, when it comes to citing which hotel has the largest size now, the two hotels wouldn't even be mentioned in the same breath as Airbnb. No doubt many of you have in fact already used Airbnb for a vacation.

Both Uber and Airbnb are platform-based companies operating around a network of customer information. We are a company who is still traditionally operating based on offline stores. A traditional business is based on a model of fixed-cost allocation. Let's assume we open an ARITAUM store at Myeongdong. We need to lease the store space, pay monthly rent, securing construction and interior design at a sizable upfront cost. However, once we have secured a constant flow of customers into the store, we can save variable costs significantly. It's the same case for a factory. The set up process for land purchase, building construction and machinery acquisition incurs KRW 100–200 billion of fixed costs. Once the factory enters a stable operation stage, however, variable costs are reduced significantly. Until the 20th century, this kind of business model with high upfront fixed costs and low variable costs dominated. In the 21st century, by contrast, many IT companies operate a business model based on high variable costs. Opening a website incurs much less upfront costs than opening a brick and mortar store. In contrast, the variable costs are significant. Since customer churn is very natural and easy, you need constant investment into marketing for customer acquisition and retention.

This kind of business model requires low upfront fixed costs and while its variable costs are unpredictable, making it difficult to generate profits regularly. I used to use Yahoo for its search engine instead of Google. Interestingly, Google, which used variable costs efficiently, rose to become an Internet powerhouse, while Yahoo's fortunes have slide. This highlights the many ups and downs present in the IT industry. Amazon has recently entered the offline grocery business, selling fresh food like milk or meat, which can easily spoil, offline. The plan is to let consumers place an order by smartphone or at a touchscreen kiosk near an offline location and then pick up groceries in person. Personally I love oysters. But, like most other people, I am reluctant to purchase fresh food like oysters online. It is because I prefer fresh oyster in season to frozen ones. Amazon is no doubt keenly aware of this problem. Although it has been very successful with innovative experimentations, it continues to push the limit by venturing to deliver fresh food. It will be interesting to see how the company will solve all the problems of online business, including large volatility, limitation of fresh food and lack of customer experience. Similarly, Warby Parker sells prescription eyeglasses online. Bonobos, an online men's apparel shopping mall, lets consumers try on clothing in its offline store and then place an order online. As described, the boundary between online and offline is becoming increasingly blurred. Now, the critical success factors are whether a company can build an efficient platform connecting online and offline, as well as how efficiently it can utilize customer information through centralized and distributed processing. Success is ultimately down to who can provide the better purchase experience.

Just as Amazon is trying to sell fresh grocery, we have to be able to offer diverse, but optimized experiences to customers. Lipstick should be customizable, like LANEIGE's Two Tone Lip bar. Foundation should enable customers to choose shades, formula and texture. It's the same for haircare products. We need to provide customized shampoos or treatments depending on each customer's degree of damage and level of moisture in the hair. We first discussed customized beauty products twenty years ago. Now, we are in the process of realizing that vision.

We are now living in the age of time-space compression. There were indeed tremendous transformations in the history of human life: where once people walked, then took a horse-drawn carriage, we now drive cars. Space has been compressed: where once we drove and sailed, we can now fly. Planes can traverse mountain ranges that were impassable by car. In the age of interconnected economy and vague boundaries of time and space, we are facing a number of challenges. Let's identify and tackle new tasks relentlessly. Our stores are becoming increasingly interconnected by customer data, platform and network. Sulwhasoo just opened its 100th store in China, and innisfree is establishing its network and connecting with its customers through its 330 stores. Let's find and collect more wisdom from ARITAUM, LANEIGE, Sulwhasoo, innisfree, ETUDE HOUSE and eSpoir. Let's reconnect customer information, stores and customer experience. The important thing is not just the size of the network, but how seamlessly each factor is connected. The key is creativity. Your effort will enable us to achieve a world-first. We will be able to realize our mission to create a more beautiful world beyond time and space limit. I hope all members of Amorepacific Group join together to move towards greater challenges and achieve our dream in this age of interconnectedness and rapid change. Thank you.