South Korea’s manufacturing industry is on the verge of a “big stall.” Key players like Samsung Electronics Co. have overstretched their global operations far beyond their capabilities, placing heavy burdens on themselves — especially as the growth of newly emerging economies has slowed.

Also, weakness in the industry’s ability to pursue research and development has come to the fore, causing a rapid deterioration in the reputation of Korean brands, both at home and abroad.

A blast furnace more than 60 meters tall has just been completed in the town of Cilegon, Banten Province, on the Indonesian island of Java as a joint venture between state-owned Krakatoa Steel Co. and POSCO, South Korea’s largest steelmaker. The furnace, the largest of its kind among members of the Association of Southeast Asian Nations (ASEAN), has an annual production capacity of 3 million tons. It stands as POSCO’s first full-scale venture away from home.

But a jovial mood is not visible within POSCO, however, as the Indonesian economy, which had been growing at an annual rate of nearly 7 percent when the furnace construction started in 2011, has slowed down rapidly, with its growth rate falling to 5.6 percent in the July-September quarter, reducing orders for construction of office buildings and condominiums to half the level of the previous year.

It appears all but certain that the joint POSCO-Krakatoa operation will be in the red from its start due not only to falling demand in Indonesia but also to a large inflow of steel products into the ASEAN market from China, which has excessive production capacity. POSCO has invested an equivalent of ¥600 billion in the furnace including investment for the second phase of construction, and that could deal a deathblow to the company.

POSCO’s operating profit during the July-September period plummeted by 47 percent from a year earlier, worse than the 36 percent drop recorded in the preceding quarter. This was due not only to sluggish sales to China, which the entire Korean industry heavily relies on, but also to a slump on the domestic front.

Indeed, real estate bubbles are coming to an end, halting many construction projects and leaving a number of office buildings unoccupied.

POSCO’s supply of steel plates to the Hyundai-Kia Motor group has fallen sharply as the automaker group, facing declining sales, has been getting supplies mainly from Hyundai Steel Co. within the group.

Superficially Hyundai Motor appears to be doing well as it sold 1.15 million vehicles in the July-September period, up 7 percent from a year earlier, and posted an operating profit of 2.01 trillion won, up 1.7 percent.

But a closer look reveals its heavy reliance on the Chinese market, where it sold 1,161,000 vehicles in the first nine months of the year, for about one-third of its global sales. With its number of car units sold in China growing by more than 30 percent from a year earlier, Hyundai has surpassed the Nissan-Renault group and now ranks third in China behind Volkswagen and General Motors.

Although Hyundai benefited from 13.5 percent growth in sales in China’s auto market during the first 10 months of this year compared with a year earlier, there are moves among major cities like Tianjin and Chongqing to restrict new car registrations to combat serious air pollution problems, making it harder to sell motor vehicles.

There is no guarantee that car sales will remain high next year. Should economic bubbles burst in China, a maker that would be hurt most would be Hyundai, a Chinese auto industry analyst said.

At Hyundai’s main plant in Ulsan, its workers won a large wage increase after a 10-day strike in late August, bringing average annual wages for union members to 94 million won (about ¥8.9 million), the highest among all automakers in the world. Company management is trying to keep total labor costs low by hiring a large number of nonregular workers who are paid only a third of what union members get and not allowed to organize a union.

These workers’ morale is low. This has become a major factor behind the deterioration of product quality. This has forced Hyundai to repair 60,000 Santa Fe model sports utility vehicles for leaky roofs.

Although an American consumer magazine once hailed the quality of Hyundai vehicles as comparable to that of the vehicles from Japanese competitors, the U.S. Environmental Protection Agency detected in November 2012 that the fuel consumption figures advertised for 900,000 compact cars sold under the Hyundai and Kia brands were exaggerated by as much as 6 miles per gallon (2.6 km per liter).

Despite these problems, Hyundai was able to keep its U.S. market share at 8.2 percent during the first half of 2013, only 0.7 percentage point lower than a year earlier. This was a result of huge discounts offered to American car buyers as evidenced by the fact that the sticker price of a medium-sized Hyundai sedan sold in the U.S. is nearly $20,000 lower than the price tag of the same model in a Korean showroom. Hyundai’s sales strategy is to leave profits from overseas sales out of consideration.

Many South Korean conglomerates, known in Korean as “chaebol,” are facing difficulties similar to those in the aftermath of the 1997 Asian monetary crisis.

South Korean investors have been shaken by news that the Tong Yong Group, a medium-sized chaebol, is close to going under. The group, whose main lines of business are cement, real estate and securities, started issuing commercial paper and corporate bonds last spring to raise funds. They may become worthless.

The STX Group, another chaebol, has been placed under bank control after its key unit, STX Offshore & Shipbuilding, went bankrupt due to the high value of the won currency since 2012 and declining orders from newly rising economies.

In September, Toray Industries Inc. of Japan bought Korea’s Woongjin Chemical Co. of the Woongjin Group, which had been battered by Chinese manufacturers of solar photovoltaic products.

South Korean industry as a whole is often regarded as generating profits from their business in the Chinese market. In reality, however, only a handful of big corporations such as Samsung Electronics, LG Electronics and Hyundai Motor are profiting in China. Other companies are fighting an uphill battle in cut-price competition with Chinese companies.

From the beginning, South Korean companies have been weak in research and development. They obtained technologies either by purchasing them from Japanese, European and American companies or by imitating them. In this way, they expanded production facilities, became price competitive and caught up with and overtook competitors from advanced countries. But if Chinese companies adopt the same strategy, South Korean companies will have little or no chance of beating them because Chinese companies are blessed with a colossal domestic market.

During the 1990s, some Korean observers expressed concern that their country would be sandwiched between Japan, which had leading edge technologies, and China, which had a huge population. This fear is now becoming a reality.

Although Hyundai has become the world’s fifth-largest automaker in terms of the number of units sold, it has nothing to show for its own innovations and lags far behind Japanese makers in the development of hybrid, electric and fuel cell vehicles. The company’s inflated figure of fuel efficiency symbolizes its weakness in research and development.

POSCO, meanwhile, has been sued for unlawfully acquiring from Nippon Steel & Sumitomo Metal Corp. certain technologies related to directional magnetic steel plates used for power transformers. If POSCO loses the lawsuit now before the Tokyo District Court, the company would not only have to pay tens of billions of yen in damages but also lose its relationship of trust and technological interchange built up with Japanese companies since the firm was established in 1968 under the name of Pohang Iron & Steel Co.

While many South Korean manufacturers struggle, Samsung Electronics is going strong as its cell phones, smartphones, semiconductors, liquid crystal TVs and tablet personal computers are selling exceptionally well. Its mobile phones, smartphones and flat panel TVs, in particular, have gained global market shares of more than 25 percent. But most of the profits come from the Galaxy brand of smartphones. Profits from fast-selling liquid-crystal-display TVs are razor-thin.

Chinese manufacturers are building one factory after another to produce flat-panel TVs and rapidly expanding their market share. In addition, new companies in countries like Indonesia and India are coming up with products priced much lower than Samsung’s.

How long Samsung will be able to maintain its market dominance is an open question. If Samsung falters, the entire South Korean industry will collapse. The Korean economy is now teetering on the brink of a collapse.

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

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