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South Korea’s ‘export’ crisis

On the streets of Seoul, there has lately been a conspicuous increase in the number of high-end imported cars with brand names like BMW, Mercedes-Benz and Lexus, in stark contrast to five years ago when the country’s auto market was virtually monopolized by the two domestic names of Hyundai and Kia.

Statistically imports in 2012 surpassed 10 percent of the South Korean car market for the first time in terms of volume and accounted for 23.2 percent in value. BMW, in particular, became the fourth-largest automaker in the Korean market in terms of sales value.

This growth of imported cars can be attributed to a shift in South Korean car buyers’ tastes toward more sophisticated designs, performance characteristics and brand images. More important, this reveals the local manufacturers’ inability to design and build products with high added value and attractive brand images.

This is true not only of automobiles but also of electronic products. Samsung Electronics, for example, did succeed in overwhelming all of its Japanese competitors but has no technologies or products of its own development that can be called the “first in the world.”

The South Korean manufacturing industry as a whole may well be entering the twilight years at an unexpectedly rapid pace due to this lack of innovative skills, coupled with recent cost increases, the rising value of the won currency and mounting instability on the Korean Peninsula.

In the auto sector, the Hyundai-Kia Automotive Group sold 7.12 million units globally in 2012, ranking fifth among the world automakers and may well surpass the fourth-ranking Nissan-Renault group this year. A big difference from the other auto giants, however, is that Hyundai-Kia still follows the marketing policy of producing vehicles domestically and exporting built-up products overseas.

Although its production abroad reached 3.63 million units in 2012, surpassing for the first time its domestic manufacture of 3.49 million units, it lags far behind Toyota, Nissan and Honda, which turn out more than 80 percent of their vehicles from plants outside Japan. Even Toyota, which is determined to keep its domestic production level above 3 million units per year, has the offshore production ratio of nearly 70 percent.

Hyundai-Kia is not blessed with a large number of affiliated parts makers that can build factories near its overseas production bases and operate there. Japanese carmakers have succeeded in having their parts suppliers set up new facilities near their production bases in North America and Europe and later in other regions like South America, China and India.

Samsung Group has grown by leaps and bounds during the past two decades following Samsung Chairman Lee Kun-hee’s announcement of the “new management.” During that period, Samsung endeavored to learn everything from the top-ranking corporations in each product category, and succeeded in overtaking Panasonic and Sony and forcing Hitachi to withdraw from every product category that competes with Samsung.

Samsung-brand smartphones and flat-panel TVs have highest shares in the world, with the former accounting for 29 percent in the October-December period of 2012 and the latter 27.7 percent in calendar 2012 while its semiconductor memories are scoring an overwhelming victory around the world.

But Chairman Lee is said to be feeling a strong sense of crisis. What concerns Lee is the changes taking place in the smartphone market — the biggest source of profit for the company. Although Samsung’s Galaxy series of smartphones are outselling Apple’s iPhone in Japan, the United States and Europe, the markets in these regions are already nearing the point of saturation and new demand for low-priced products is rising in newly developing economies.

Indeed, Nokia Corp. of Finland, which lost its position as the market leader to Samsung in 2012, has started selling smartphones at less than one-third the price of the Galaxy in China, India, South America and Africa, while three Chinese competitors — Huawei Technologies, ZTE Corp. and Lenovo Group — are increasing their market shares with their own low-priced smartphones. The three Chinese companies now each enjoy a 4 to 5 percent share of the world market.

Samsung has yet to come up with new products to compete with those producers of low-end equipment. Lee has been reported by South Korean media as having confided that his company would probably be able to survive in the smartphone market only for another two to three years.

Big changes are also taking place in the market for liquid crystal display television sets, the very product which has made Samsung grow to what it is today.

During the past couple of years, Chinese TV manufacturers have started operating six new factories in China to produce the “eighth generation” LCD panels. Chinese makers such as TCL, Sichuan Changhong, Skyworth and Hisense have started making the panels on their own to replace imports from South Korea and Taiwan. This could deal a serious blow to Samsung and LG, since the LCD panels and other TV-related electronic products account for 20 percent of Korea’s total exports to China, its biggest trading partner.

A long-held view in the South Korean industry is that it is being “sandwiched” between high-end products from Japan and low-priced goods from China. During the past five years, South Korea has been able to overcome this situation and gain the confidence of having won in its competition with Japan thanks to the rise of leading companies like Samsung, LG, Hyundai-Kia and POSCO (formerly Pohang Iron & Steel Co.), which has now become the third largest steelmaker in the world.

A closer look at this transformation reveals, however, that these companies have not been able to come up with any new technology or product that excels those of their Japanese competitors. The fact is that they still rely on Japan for the supply of production equipment and materials, and are desperately trying to imitate Japanese technologies.

South Korea’s business and government circles were shocked to read a report issued by the Organization for Economic Cooperation and Development earlier this year that said their nation ranked at the bottom of OECD member nations in terms of “technology trade balance,” which is obtained by dividing the value of technologies each country exports to others by the value of technologies it imports. The South Korean ratio was 0.33, compared with 4.60 of top-ranking Japan and 1.46 of the U.S.

That means Japan exports technologies worth 4.6 times more than it imports while South Korea’s export of technologies is worth only a third of technologies it buys from abroad.

Park Geun-hye, who became South Korea’s president on Feb. 25, made attaining “economic democracy” one of her main pledges during the presidential election. She aims to redress the concentration of wealth and human resources in a handful of big corporations and to open new opportunities to a wide range of businesses and individuals.

But the South Korean economy and industry still remain dominated by a few big companies to an extent unthinkable in other industrialized countries. As of the end of March 2013, the Samsung group accounted for 28.9 percent of the total market capitalization of all companies which are listed on the Korean Composite Stock Price Index (KOSPI). When the figures of the Hyundai-Kia, LG, SK and Lotte groups were added, the combined market capitalization of these top five conglomerates reached a record 54.8 percent, with no sign of structural changes.

In these circumstances, the South Korean manufacturing industry is faced with three changes in the business environment: the rising value of the won currency; North Korea’s hardline policy and the potential risk of the regime’s collapse; and an aging population and a decreasing birthrate.

South Korean businesses are beginning to feel the pains of the rising value of their country’s currency and of the need to globalize themselves — the same pains their Japanese counterparts have experienced during the past decades.

The problems and uncertainties of the South Korean manufacturing sector, which have so far been hidden behind the strength of Samsung and a few other giants, are beginning to come to the fore.

This is an abridged translation of an article from the May issue of Sentaku, a monthly magazine covering Japanese political, social and economic scenes.

  • zer0_0zor0

    With China rapidly developing manufacturing capabilities, the ROK middle-man in the technology food chain is going to have to evolve in quantum leaps and bounds, or become obsolete. Given the OECD data, quantum leaps and bounds would seem unlikely.

    When China can simply buy technology from Japan and manufacture goods on a par with those of ROK, world-wide market share for those products will basically be lost to ROK conglomerates.

    Japanese industry needs to stay focused to maintain its leadership at the top of the technology driven economies.

  • JTCommentor

    Chairman Lee is feeling a strong sense of crisis. True – he has been quoted as saying that is his management style – he wants Samsung to continually feel a sense of crisis so they keep running, and stay ahead of the game.

    As for the essence of the article, it is an oft-repeated statement that Korea’s big names can manufacture fast and at relatively low cost, but cant innovate and cant create new products or technology. I think this underestimates them. While there is certainly an element of truth to it, Korean companies are getting better at innovating, and will continue to. Maybe it backs up the argument here that the Korean companies are mimicking the Japanese journey, but isn’t this what the Japanese giants did last century? Learned foreign technologies, made the same products cheaply, leading to improved the products and selling superior products, and finally innovating and creating new technologies. I would argue that Korean companies are in the middle stage now, tending towards the third stage.

    Korean companies do operate in a lot of the same markets that Japan do/did. To write them off as being unable to innovate is to underestimate the competition. They will innovate, and if Japanese companies are not ready for that, they will also be beaten in those innovation rich technology markets.