The primary concern for South Korea’s mobile phone industry is neither technology nor marketing strategy. What worries manufacturers is growing signs that the Chinese government might take measures aimed at lowering the share of Korean players.
“The portion of sales in China is growing fast, and it’s natural that we are very concerned about what the Chinese government does in connection with trade polices with Korea,” says an official of a mid-sized Korean handsetmanufacturer.
The move shows two conflicting aspects: Korea’s export to the fast-growing Chinese market is rising, but its increasing dependence is now set to generate difficulties.
Analysts and observers have warned that Korea faces a serious dilemma over the recent “China boom”. The Korean economy, the fourth-largest in Asia, has depended heavily on exports amid a lengthy slump in domestic demand. Overseas sales contributed 98.2% of the nation’s 3.1% economic growth last year, according to the Bank of Korea.
Rush to China
Against this backdrop, China’s role as a key market that absorbs Korean goods is becoming ever more important. With its proximity and common cultural heritage, Korean companies are rushing to the Chinese market.
As a result, Korea’s export to China jumped 48% to $35.1bn in 2003, compared with the previous year, according to the Ministry of Commerce, Industry and Energy. The figure shows that shipments to China accounted for 18.1% of the country’s total exports last year, pushing the Asian neighbour past the US to become Korea’s number one export market.
All this is good – except for one sobering scenario. Korean manufacturers have put too much emphasis on China in too short a period. If the go-go economy of China slips into a downdraft, its negative impact on the Korean economy will be multiplied to a dangerous level.
“China’s dizzying economic growth may taper off this year and Korea should prepare for the slowdown in its biggest export market,” says Lee Kyung-woong, an analyst at Woori Securities.
Hyundai Economic Research Institute, a major think-tank in Korea, has also issued a warning in a report that the ballooning trade volume with China poses a threat to Korea especially if the Chinese economy suddenly loses its steam and hits a hard landing.
Bilateral trade between Korea and China stood at just $2.8bn in 1990. But the figure soared to $58bn in 2003, reflecting the red-hot trade between the two Asian countries. Korea-China trade is now expected to reach $100bn in 2006 and $200bn in 2011.
According to the Export-Import Bank of Korea, Korea’s investment in China was $1.28bn in 2002 before surging to $4.4bn last year. A growing number of Korean companies continue to tap into the Chinese market, setting up manufacturing bases there. Critics have said some of the joint ventures in China might leak Korea’s core technologies, which could spark a serious backlash, given the intensifying competition on the global trade arena.
LG Economic Research Institute said in a report that Korea should utilise China as a strategic base for global management, but take steps to safeguard its core functions such as research and development and investment to stay ahead on the global market in thelonger term.
The hollowing effect
Some analysts point out that Korea is feared to take the same path as Taiwan. The fast growth of the Chinese economy sparked a hollowing effect in Taiwan, limiting its economic growth rate to less than 4% since 2000. The Taiwanese government also grapples with a brain drain sparked by the emergence of China as a new economic powerhouse in the region, offering a clue about what Korea might face in the near future.
There are already worrisome signs in Korea. The so-called polarisation – surging exports and the sluggish domestic market – is deepening. In other words, greater sales in China has not yet had a tangible impact on the Korean economy that is battling to revive its anaemic consumer spending.
“China is an important market for Korea’s export drive, but we should prepare for a time when China will rely less on Korean imports, especially advanced components,” says Kang Seung-ho, director of the Korea-China Center at the Incheon Research Institute.
But other observers urge Korean companies to increase investment and outsourcing in China to boost competitiveness. Indeed, major family-run conglomerates are scrambling to set up manufacturing factories and other key facilities in China. LG Group is investing heavily in China to strengthen its market position. The conglomerate runs a holding company in China and posted $7bn in sales last year. In particular, LG Electronics, a key unit of LG Group, plans to post $10bn in sales next year.
Samsung Group, the country’s largest chaebol (conglomerate), overhauled its top management at Samsung China and established three sales subsidiaries to beef up its marketing and expand its market share. Samsung is well aware of the importance of the Chinese market. Its publicity-shy Chairman Lee Kun-hee already revealed his view two years ago when the group set about expanding its investment in China.
“Business strategy for China parallels Samsung’s own survival. China will soon emerge as the largest overseas market for Samsung, replacing the US, Europe and Japan,” he said.
Market share battle
But China has turned out to be far more than a destination for Korean exports. The Korea Development Institute (KDI), a state-run think-tank, has said that Korea and China will be engaged in an intensifying battle to expand market share in the globalmarket.
According to the report released in the KDI’s monthly journal, information technology goods, semiconductors, textiles and chemical products made up a large percentage of Korea’s exports, which corresponded with areas where China is showing prowess.
The KDI report said that the sharp growth of Chinese exports in the IT sector, from 7% in 1992 to 16% as of 2000, showed that the two neighbours were expanding in the same market. During the same time frame, the share of IT products and semiconductors in proportion to Korean exports rose by 13% and 20% from 9% and 12%, respectively.
KDI researchers said that Korea possessed an edge in IT, consumer electronics, autos and certain areas in textiles, while China excelled in clothing, lower-end consumer electronics and electronic parts manufacturing.
But the edge is disappearing at a pace that is fast enough to alarm Korea’s key exporters. The Korea Industrial Technology Foundation (KOTEF) said in a recent survey that China is forecast to quickly narrow the technology gap with Korea over the next six years in fields such as mobile phones and flat-panel displays.
China’s fast pace of technology adoption, training and partnerships will help put the country on par with Korea by 2010 in the mobile handsets, displays, petrochemicals and refrigeration sectors. The survey results signal that Korea, which leads mobile phone and many high-tech markets in Asia, is likely to see its competitiveness weaken in the face of cheaper and technologically better products made by Chinese manufacturers.
Currently, Korea leads China in mobile-handset technology by two years, thin-film-transistor liquid-crystal displays by eight years, organic electro luminescence by three years, petrochemicals by seven to 10 years and refrigeration by five years, the foundation said.
KOTEF, affiliated with the Ministry of Commerce, Industry and Energy, has said that China’s mobile technology is advancing at a rapid pace and is forecast to match Korea in 2007, bolstered by the Chinese government’s aggressive investment and funding by foreign handset makers.
More troubling is the prospect that Chinese mobile handsets – even with similar technology – will be priced much cheaper than Korean models in 2010, thanks to its huge manufacturing base that churns out products at lower costs.
Korea’s trade account with China is expected to swing into a deficit starting in 2011 if the current trend continues, the Korea International Trade Association has warned.
ASEAN free trade
Meanwhile, Korea has to tackle other pending trade issues besides China. In early March, Korea and the Association of South East Asian Nations (ASEAN) held the first round of exploratory talks in Jakarta, Indonesia, to study the feasibility of signing a free trade agreement between both sides. The two sides discussed how to increase their annual $37.3bn bilateral trade, which accounted for 10.4% of Korea’s overall trade last year.
The talks with ASEAN are part of a government strategy to pursue more FTAs after National Assembly ratification of one with Chile in February, the first for Korea. The trade agreement went into effect on April 1 after suffering a long and bumpy road for approval in Korea including three failed attempts in parliament. At the moment, Korea is discussing trade pacts with Japan, Singapore and Mexico.
