Watch Out Japan, Korea Is Gaining


By Brian Bremner Anyone living in Japan these days can't escape the breathless news coverage about China's growing economic competitiveness. Judging from the scary tales in the business press, you'd think China has just spawned some superbreed of world-beating companies that will ultimately knock the stuffing out of such Japanese national champions as Sony (SNE), Hitachi (HIT), and Fujitsu (FJTSY).

Forget about China for the moment, though. The more immediate threat to Japan's global dominance in consumer electronics may come not from Shanghai but from Seoul. Case in point: South Korea's dominance in the rapidly expanding market for MP3 players -- a red hot gizmo in global gadgetry.

Believe it or not, Korea's Samsung and LG, plus a host of smaller Korean players, now control 56% of the $300 million market for MP3 players, which let users play music downloaded from the Internet or tunes copied from CDs. The market is expected to grow more than tenfold by 2005, to $3 billion plus, according to industry analysts.

FASHION STATEMENTS. MP3 players give consumers the freedom to select songs of their liking and play them in whatever order they choose. The devices are weigh hardly anything and, thanks to some snazzy designs, have become something of a fashion statement among the digerati.

World-class technology, portability, and design -- the Japanese mastered those arts long ago. But the Koreans? Actually, the real pockets of innovation in South Korean high-tech are a clutch of startup companies you've probably never heard of. One is Digitalway, which operates out of a state-built design center about 45 minutes outside of Seoul in Seongnam City.

There I recently met its CEO, J.K. Woo. He and bunch of other ex-Samsung executives and engineers launched Digitalway back in 1998, a time of national humiliation for South Korea following its financial meltdown and the International Monetary Fund bailout during the Asian financial crisis.

NEW GAME? When we spoke, Woo had just returned from Moscow, where his line of MP3 players is selling briskly. But Digitalway's critical markets are the U.S., Japan, and the rest of Asia -- it has managed to grab about 33% of the market in each. Woo is especially proud of sales in Japan. "I had to fight Sony, they are the big guys," he grins.

What I wanted to know, though, is what special set of factors allowed the Koreans to come out of nowhere and dominate the leading edge of consumer electronics. What about hefty research and development spending and years of branding? Doesn't this game belong to "the big guys"?

Woo doesn't think so, and his reasons are worth considering. For one thing, in this market what matters most is software, memory capacity, and design. Today, the kind of patented technologies, precision parts, and instruments the Japanese excel at matter less than they used too, he figures. (Though for the record, Digitalway is embroiled in a patent dispute with another Korean company.)

GADGET-CRAZY. Meanwhile, the Koreans dominate in memory chips, and their labor costs are lower than for Japanese workers. Plus, the quality of their design has improved. Digitalway's product line of lightweight players looks pretty cool to me, and the devices could easily be worn like a necklace or snapped on to a wrist. Woo also argues that the current generation of technophiles are far less brand-conscious than before. In fact, being out there with a new gadget made by a company nobody ever heard of is a badge of honor with this crowd, he says.

Then there's the fact that Koreans are perhaps the most gadget-crazy people on the planet. While mobile-phone sales have cooled off in Japan, Koreans keep trading in phones for newer models about every six months. Woo says his companies gets about 100 e-mails a day from consumers with feedback about its MP3 players and even suggestions for new features. "We have a big and wide following of consumers on the Internet," he says.

In fact, Korean high-tech players view the Net as a giant focus group. They can roll out new products, test them with customers, and refine them according to the feedback they get on the Net. Such are the advantages of working in a society that has embraced technology in a big way.

TOO COCKY? Next, Woo hopes to move into lower-end digital cameras and camcorders. They won't match the top-end products of such rivals as Sony and Canon, but he thinks the camera market offers a golden opportunity.

O.K., so South Korea is clocking a 5% economic growth rate this year, and people might be feeling a little cocky. Sony and other big consumer electronics makers like Philips aren't going to blithely watch a major market segment fall to these newcomers. But when it comes to global consumer electronics, the Koreans are starting to look like serious competition. And if the big players in Japan and elsewhere don't pay heed, the may have much more to worry about than the rise of the Middle Kingdom. Bremner, Tokyo bureau chief for BusinessWeek, offers his views every week in Eye on Japan, only for BusinessWeek Online


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