South Korea: Tech's Test Market

Call it a mania for all things digital. South Korea spent billions building up its infrastructure over the past five years and now boasts one of the highest adoption rates in the world for both broadband Internet connections and advanced mobile communications. Nearly two-thirds of Korea's 16 million households have broadband service, and 68% of its 48 million citizens carry cell phones -- more than half of which are capable of transmitting data at high speeds, and many can handle multimedia messages, streamlined TV broadcasts, and movie downloads.

This rapid uptake of the best in high-speed data communications has turned Korea into the world's test market for state-of-the-art wireless and Internet services and applications. "Korea has a mass of people who are using this technology in a format that's a couple of years ahead of anything we'll see in the U.S.," says Mark Headley, portfolio manager of the Matthews Korea Fund (MAKOX). That's especially true now that U.S. tech markets are moribund. "We've stalled out, while Korea is powering ahead," Headley admits. "I don't think that U.S. tech companies have been as cognizant of this as they should be."

MADE IN KOREA. Whatever else they know, Westerners are beginning to understand that South Korea is a tough market to compete in. As the quality of consumer electronics manufactured in Korea has improved, foreign products have become less coveted. In fact, exports are making up an increasing percentage of Korean gross domestic product as national powerhouse Samsung and other Korean manufacturers churn out world-class mobile phones, personal digital assistants, and liquid-crystal displays.

Finnish handset king Nokia (NOK) has even pulled its marketing team out of Korea because of the fierce competition there. Add to those difficulties slowing consumer spending, thanks to the threat of war in the Middle East and rising concern over North Korea's nuclear program, and it's no surprise that Nokia's spending is cooling somewhat in 2003, according to tech research firm IDC Korea. It now forecasts 8.2% growth in overall tech spending in South Korea, to $12.37 billion, down from an earlier prediction of 14% growth.

Nonetheless, given the slack state of global info-tech demand, South Korea is still a robust market for outside companies to sell into. And tech outfits that are still in business probably aren't the kind to shrink from a little competition. One of the best opportunities may be licensing software needed for the country's national pastime of online gaming, says Headley. Indeed, Microsoft (MSFT) will launch Xbox Live in South Korea sometime this year to tap into the sophisticated gaming market there.

INTEL INSIDE. Consumer products aren't the only ones that have a future in South Korea. The country's tech and telecom infrastructure boom, which kicked off in earnest after the government received billions from an International Monetary Fund bailout in late 1997 following a currency crisis, is still in full swing. U.S. software and components make it into many Korean-made products. Qualcomm (QCOM) has licensed its CDMA technology for wireless communications to Korean phone companies including SK Telecom, KT Freetel, and LG TeleCom. Qualcomm boasts in its 2002 annual report of having 32 million CDMA subscribers in South Korea, up from 24 million in 1999.

"All the major U.S. companies sell a lot into Korea," says Tae Hea Nahm, a founding partner of Palo Alto (Calif.) venture-capital firm Storm Ventures. "If you want to buy a PC in Korea, most likely it's going to have an Intel (INTC) chip and a Microsoft operating system."

More recently, the drive for greater productivity and efficiency across the Korean economy has created demand for U.S.-provided technology services and business-class hardware and software. Steffi Han, research manager at IDC Korea, expects double-digit growth this year in software and services revenues in Korea. "Leading the market will be integration

and expansion of existing and new systems, especially those catering to Web-based services," she says. Other growth areas for applications: "Mobile enablers handling multimedia services and financial transactions, and business-continuity programs that ensure recovery after disasters such as the September 11 attacks."

CUSTOMER FOCUS. IBM (IBM), for one, forecasts better than 10% growth in Korea's IT services market, which IDC puts at about $4 billion this year. Lee Hwi Sung, general manager at IBM Global Service Korea, says the American giant sees growth opportunities in providing new hardware and software that allows businesses to outsource such functions as billing and purchasing.

After improving their operational efficiency over the past several years, Korean conglomerates, or chaebol, are also beginning to place greater emphasis on better customer service. This trend is particularly notable among phone companies. "With the telecom market reaching saturation and competition among rivals remaining fierce, telcos are locked in a race to keep their customers," says Park Jyung Hwa, an IBM Korea marketing executive.

They're spending particularly on customer-relations-management software and systems. Korean research company Knowledge Research Group forecasts a 30% rise in CRM software spending this year after a 75% jump last year. IDC expects an 11% increase in overall software demand in Korea this year, to about $2 billion.

BANKS LEAD THE WAY. The country's digital-or-die mentality has also been fueling a spending spree in servers and data-storage devices. Hewlett-Packard (HPQ), which is the largest technology multinational operating in Korea, reaped an increase in sales of about 10%, to $1.34 billion, last year. Given the economic uncertainties, HP is reducing its growth projection to 5% to 6% this year. "But we expect a recovery in the latter half of this year," says HP Korea CEO Choi Joon Keun. "With broadcasters, banks, and manufacturers all expanding their storage capacities, that sector is still recording the fastest growth in our hardware business."

Banks, which have gone through a period of deregulation and consolidation, are in the forefront of a drive to improve efficiency as well as to adopt next-generation technology that will support their efforts to sell insurance and securities. Banks are also aiming to boost their profits and return on equity by cutting down on lending to risky

chaebol in favor of retail customers. That change has led to greater investment in systems aimed at offering the kind of customer service that can compete with such retail banking giants as Citibank (C) and HSBC (HBC).

Local companies are likely to become even more competitive vs. U.S. outfits in years to come: South Korea's IT output, the bulk of it for export, accounted for 15.5% of gross domestic product in 2002 and is estimated to hit 17% by 2005 and 20% by 2010, according to the Korea Information Society Development Institute (KISDI) and Samsung Economic Research Institute.

"FULL CONVERGENCE." Lee Inn Chan, an executive director at state-funded KISDI, expects Korea's entrepreneurial zeal, unleashed after the Asian economic crisis, to create many tech startups that will roll out innovative online products. Already, education-related content providers and online gaming companies are making handsome profits in the $1.1 billion market for online content. "I have no doubt Korea will be one of the first places witnessing the full convergence of fixed-line and mobile communications," Lee says.

That could spell opportunity for U.S. tech outfits with promising new applications and experience in providing technology services. South Korea's growing tech market, top-of-the-line infrastructure, and population of consumers ready to embrace high-speed services makes it a country well worth jumping into. By Moon Ihlwan in Seoul, with Amey Stone in New York

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