As the global economy shakes off the worst recession in modern history, a host of observers have noted the resilience of Asia in general and Korea in particular. According to common perception, the economic tiger is roaring once more and has been leaping from strength to strength.
If truth be told, though, the reality is a bit more complex than that. As in centuries past, Korea is now caught in a pincer movement between the goliaths of China and Japan. Due to the squeeze from both sides, the tiger’s presence on the global stage will continue to lose its mojo over the years to come.
Granted, the slippage of the Asian tiger down the ranks is not inevitable. A ray of hope lies in the efforts of policymakers to bolster the local economy by reshaping the patterns of commercial activity and economic output.
The leading lights in Korea have joined their peers in mid-tech nations around the globe – ranging from Singapore and Malaysia to Latvia and Slovakia – in the call to move up the ladder of creativity and focus on high value-added services. The product lines on the agenda span the gamut from robotic hardware and nanotech compounds to financial services and medical tourism.
On the downside, though, the plans cooked up thus far have been squarely pedestrian and unremarkable. As a result, the initiatives on the table will not enable the nation to keep its position in the front ranks among the trading nations of the world.
Given this backdrop, the future looks cloudy for Korea. Even so, the morrow need not turn out to be bleak.
With a hefty dose of creative effort and a hearty commitment to wholesale change, the prospects downstream could look more cheery. In this sense, at least, Korea is no different from other mid-tier countries around the world.
If the tiger is to remain in the big leagues in the global forum, it will have to alter its stripes in a sweeping fashion. Sadly, though, transforming a lumbering tiger into a nimble fox is easier said than done.
In that case, the golden age of the dynamo will be on its last legs. The way things are going, the Korean tiger is slated to slide into the twilight starting in the late 2010s.
The financial crisis of 2008 and the global recession in its wake dealt a sharp blow to prosperity. On the upside, though, the stalwarts of Asia did not take long to bounce back from the drubbing.
In the absence of further bombshells, the recovery is set to continue apace all across the planet. Amid the general upswing in Asia, the Korean tiger is riding high on the groundswell of economic expansion.
On the downside, though, the comeback of the 2010s could well turn out to be the last big splash for the dynamo. After that stage, the fireball is destined to slip down the ranks among the exporting giants of the world.
Enter the Dragon
In the years to come, Korean firms will struggle mightily to hold their own against the onslaught of firebrands in emerging nations. Of all the spunky upstarts, the toughest troupe of competitors is sure to come out of China.
Within the past decade, the Middle Kingdom has proven beyond doubt that it can stamp out products to world-class standards. A case in point is the takeover of an American icon.
In 2003, Legend Computer Group of China came up with the Lenovo logo as the banner for a worldwide strategy. A couple of years later, the usurper bought up the entire PC division at IBM. After taking over the brand, the company moved its administrative headquarters to the U.S. as a token of the firm’s newborn status as a global player.
Since the autumn of the 20th century, a lot of people around the world have gotten the impression that Korea is a powerhouse of technical innovation. The spectators who subscribe to this view, however, have failed to grasp the nitty-gritty that lies beneath the patina of success.
The truth of the matter is that Korean firms are adept at taking foreign technologies and bundling them up into commercial products. A case in point is the lineup of mobile phones sold round the world by Samsung Electronics.
The heart and brain for this type of gadget is the microchip that makes sense of the complex blips of electromagnetic waves. As it happens, the software recipe and hardware design for mobile telephony are crafted and refined in the U.S. In fact, the chip itself is produced by the likes of Qualcomm, an American pioneer in wireless signaling.
Looking at the cellphone from the outside, the casing is built out of workaday materiel and equipment for molding polymers. Since the technology is nothing fancy, the shell can be readily stamped out by small or midsize firms in Korea.
For this reason, Samsung has scant reason to build its own factories and suffer the high cost of overhead for any gigantic firm. Rather, the marketer buys the shell from smallish contractors in order to take advantage of their lean operations along with the cost savings.
In line with this example, Korean firms are good at taking breakouts forged elsewhere and packaging them into salable products. This approach has worked wonders since the 1960s. The tiger has followed in the footsteps of trailblazers such as Japan in order to establish a towering position as a global exporter.
In addition, the low cost of labor served Korea well during the first couple of decades. Unfortunately, income levels soared during the 1980s and have been creeping even higher in spite of minor reversals from time to time. Due to the hefty level of wages along with the dearth of proprietary technology, the country no longer has any competitive advantage to speak of in relation to its toughest rivals.
For these reasons, the weathered strategy of adapt-and-export is losing its mettle and will begin to falter in the years to come. The main problem for Korea is that other nations such as China and India are fully capable of pursuing a similar tack.
Against this backdrop, an article in the Economist has hit the problem on its head.1
In computer chips, Samsung Electronics is comfortably ahead of China for now. But the skills needed in that business are described by one Samsung expert as like running a “digital sashimi shop”—the trick is to get products so swiftly to market that they do not lose their freshness. There is no inherent reason why Chinese firms cannot eventually catch up. What is more . . . . China is more open to imports and foreign direct investment than South Korea, which helps China’s quest for intellectual property.
On the upside, the article noted above happens to be more perceptive than the vast majority of commentary in the business press regarding the prospects for Korean firms.
On a negative note, though, the piece does have room for improvement. The shortfall lies in the perceived level of urgency – or lack of such – for Korean industry.
The gist of the article could be summed by the word “eventually”. Yes, the dragon could catch up in due course, but Samsung is seen to be “comfortably ahead of China for now”. In that case, there’s no need to sweat for the time being.
Based on this mindset, the article takes a bemused look at the apparent urgency by the top brass at Samsung. The authorship is unaware that “eventually” ought to be replaced by “soon”. The takeover by the Chinese dragon looms in the near distance, on the order of a few years rather than a couple of decades.
In the tussle against China, a big snag for Korea is the huge difference in the pool of talent. Thanks to its immense population, the rising dragon boasts a far larger supply of able engineers. In addition, the cost of labor on the mainland is still much lower than that on the peninsula.
In the years to come, the dragon will not only steal the tiger’s thunder, but eat his lunch as well. On current trends, China is poised to overtake Korea in one industry after another as the decade wears on.
Along with the rest of the world, Korea has been recovering at a respectable pace after the financial flap of 2008 and its aftermath. The vigor of the Korean economy is highlighted by the resilience of the housing sector.
By the beginning of 2010, the average price of real estate in Korea had recovered fully from its drop during the global recession. Moreover, the housing market could well rise at an average pace of 7% or more for much of the coming decade.
In addition, the stock market as well as the local currency have been climbing back from their flops at a decent pace. The chart below shows the relative performance of the Korean Stock Price Index (KOSPI) over the past 5 years.
On the diagram – which has been adapted from Yahoo Finance (finance.yahoo.com) – the market benchmark appears as the buoyant curve shown in blue. The chart reflects the fact that the bourse has managed to recoup the bulk of the losses suffered in the deluge before, during and after the financial crisis of 2008.
By contrast, the Korean won has not recovered as strongly from its tumble. The likely cause of the weaker recovery for the currency lies in the skittishness of international investors.
More precisely, the stock market has been clambering upward as local citizens start to pile back into the bourse. On the other hand, foreign investors are still wary of returning to the Korean market in force. The muted level of enthusiasm translates into a labored recovery for the local currency.
The relative strength of the Korean won with respect to the U.S. dollar is portrayed on the same chart as the KOSPI benchmark. The path of the currency is denoted by the green line.
In the years to come, we can expect the stock market to clamber a good deal higher. The same is true of the Korean won.
As it happens, the KOSPI benchmark has not performed as well as it should have over the past decade. This viewpoint takes into account a variety of driving forces: the growth of the domestic economy, the rise in income for the local population, the efforts of the government to shore up the bourse, the demand for Asian stocks by international investors, and so on.
Given this backdrop, the KOSPI index is likely to make up for lost time over the next few years. Prior to the financial crisis, the index had reached a peak of 2,085 points in late 2007. At the moment, the benchmark hovers around 1700 or so.
For the reasons given above, the market could surge ahead over the years to come. One prospective outcome is a peak of 3,000 or even higher before the next bombshell hits the market and pummels the index once more.
Long before the blowout, the local currency is also likely to rise above its prior peak from 2007. At that juncture, Korean residents will find that foreign assets seem a lot cheaper than they have been since the mid-1990s. As a result, we can expect a gush of funds to flow out of the country and make their way to emerging markets as well as mature regions.
In line with the historical norm, Korea is caught nowadays in a vise between the juggernauts of Japan and China. For this reason, the tiger’s roar on the global stage will weaken over the years to come.
Granted, Korea’s relative decline as a trading giant is not entirely inevitable. The main counterpoint is the effort of policymakers to uplift the local economy by reshaping the product mix.
As an example, Korea has joined the parade of mid-tech nations around the globe in their attempt to move up the ladder of ingenuity and specialize in high value-added services. The targets in sight span the gamut from nanotech products and financial services to smart software and medical tourism.
On the downside, though, the plans cooked up thus far have been humdrum and colorless. As a result, the initiatives on the agenda will not enable the nation to retain its spot in the front ranks of the global forum.
While the future looks cloudy, it need not be dismal. With a large dose of creative effort and a serious commitment to radical change, the morrow could shine more brightly for the wheezing tiger. In that aspect, at least, Korea is no different from other mid-tier countries.
On the downside, though, the nation has shown scant evidence that it can embrace the wholesale changes required for a thorough makeover. Over the past decade and more, policymakers have exhorted the captains of industry to change their stripes and take to heart creativity of the disruptive kind.
Like so many other cultures, Koreans want to eat their cake and keep it too. The denizens make loud claims about the need to make sweeping changes, but few are willing to put in the effort required to throw out the old ways and usher in the new.
The standard operating procedures in place today were set up during the industrial age, when the nation could simply follow in the footsteps of the spearheads in the global forum. Sadly, though, the game of catch-up gets harder to play when the incumbent is chased by youthful rivals starting from lower rungs on the ladder of technology.
If Korea is to hold its ground in the markets of the world, then the nation will have to change its customs big time. Unfortunately, converting a lumbering tiger into a nimble fox is easier said than done.
In that case, the golden age of the dynamo will be on its last legs. In fact, the twilight is destined to encroach on Korea by the latter part of this very decade.
1 Economist, The. “Return of the Overlord”. 2010/3/31. www.economist.com/world/asia/displaystor... – tapped 2010/4/20.