Economics & Policy

How Korea Fretted Its Way to Success


The Korean business community thrives on worry. And for most of the past decade its main fear has been what could be called the Big Squeeze Theory. With higher labor and production costs than most Chinese exporters, the theory went, Korea's major conglomerates, or chaebol, would start losing market share to Chinese champions such as Huawei, BYD, or Baosteel. At the same time, Hyundai Motor, LG Electronics, and Samsung would, after a decade of dazzling success, finally be out-innovated by their archrivals in Japan.

The fretful Koreans got it wrong. Helped in part by a cheap won, exports of cars, ships, electronics, and semiconductors are soaring, while China has yet to pose a credible threat to Korean products. Instead, the Chinese are now mostly seen as customers, not rivals. Korea's exports to China jumped almost fivefold from 2000 to 2009, to $86.7 billion. "There's a consensus that China represents more of an opportunity than a threat," says Im Sang Hyug, senior researcher at the Federation of Korean Industries. Thanks partly to the healthy China trade, many companies, including LG, Hyundai, and Kia Motors, posted record profits last year. "Korea is the first country to stage a full V-shaped recovery," says Jeroen Plag, Korea manager for Dutch bank ING Group (ING).

The Japanese aren't putting up much of a fight, either. Case in point: televisions using light-emitting diodes as a light source. Thinner and lighter than other flat-screen TVs, the LED sets also have sharper, brighter images. Every TV maker has to have an LED offering. Yet after just a year, Samsung dominates the category with 85% of the vital U.S. market. The company forged ahead with an investment of hundreds of millions of dollars in 2009 in LEDs, despite the recession, and has trounced Japan's Sony (SNE), Panasonic (PC), and Sharp. In 2009, Samsung Electronics posted a 75% rise in profit, to $8.5 billion.

These big home runs have changed the mood in Korea. "I hear from a lot of people saying, 'Korea is on the rise. We have a lot of hope,'" President Lee Myung Bak told the nation in a recent radio address. Yet at some level, Koreans are still worrying. Big Squeeze Theory may be dead, but in its place is a new one: Finding the Next Big Thing.

The government and the chaebol now fear that some other country—India, China, even the U.S.—will come up with the defining business of the next generation. The Koreans are not sure what that business is, but they're spending billions in private and public money to discover it. They're also refining an old feature of Korean life, government planning, to lead the search.

The Middle East is already enjoying the benefits of Korean foresight. Seoul has been urging Korean construction companies to increase their presence in the Persian Gulf. In 2009, Korean companies priced so aggressively that they won half of all contracts handed out for oil and gas projects in Abu Dhabi, some $30 billion in all, says the International Contractors Association of Korea. A consortium led by state-controlled utility Korea Electric Power snagged Korea's first-ever overseas nuclear contract, beating France's Areva and a joint venture between General Electric (GE) and Hitachi for a project to build four plants in the United Arab Emirates. Soon, Korean companies will be "competing head to head with U.S. and European companies across the world," predicts Kim Kyeho, executive vice-president for Samsung C&T in Dubai. Samsung was primary contractor for Dubai's 162-story Burj Khalifa tower, the world's tallest skyscraper.

Korea's central planners want the chaebol to entertain even bigger ambitions. Led by President Lee, the cabinet last year launched a plan to expand Korea's economic base by promoting robotics, health care, biotechnology, green transportation, renewable energy, and other next-generation ventures, some 17 in all. The goal is to double exports in these areas, to $434 billion, by 2013; create a million jobs; and reduce the economy's dependence on info tech, shipbuilding, and autos. To spur this change, the government plans to spend $22 billion by 2013 to finance R&D.

In robotics, for example, Seoul has already doled out $500 million in R&D and is underwriting pilot projects to test education, entertainment, and disaster-fighting robots. Korea, which saw its robot exports jump 10.5% in 2009, to $809 million, aims to become one of the top three industrial robot manufacturers. It currently is No. 5 behind Japan, the U.S., Germany, and Italy.

For green technology, Lee's cabinet will focus on developing innovations for solar and nuclear, expanding the use of LEDs and stepping up renewable energy mandates across the country. The government will actively promote the convergence of the broadcasting and telecom industries and offer low-cost loans to help develop content for this emerging hybrid business.

Big ambitions. But Korea has a track record now. A generation ago, silicon chips and autos transformed the country and helped pull it out of an Asian currency crisis. If the Koreans succeed in half the areas they're investing in, they'll soon need something new to worry about.

Moon_ihlwan
Moon is BusinessWeek's Seoul bureau chief.

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