South Korea shifted up from being a country of peasants to the world's 12th largest trading nation in little more than three decades. Making more ships, electronics, cars, steel, hockey sticks, you name it, for less, South Koreans cut into many rice bowls and cost plenty of manufacturing jobs in the West.
Now Koreans wonder if China, which has nailed down the model, will leave anything in theirs.
China now buys more exports from South Korea than from any other country. Korean businessmen shuttle to-and-fro, filling flights to dozens of Chinese cities most foreigners have never heard of, overseeing factories and shunting ever more Korean-branded, China-made goods into stores. By some accounts – notional as they are, because so much Taiwan cash is funneled indirectly into the mainland – Koreans are thought to be investing more than their counterparts on the island.
Nuts and bolts
Drawn by cheap labor and growing markets, executives from chaebol large and small continue to expand their mainland operations. "It was just a few years ago that Korea was the low-wage country doing this sort of work, so Korea has a bit of a knowledge advantage in now outsourcing this work to China," says Dan Ryan, Global Insight's Asia research director in Philadelphia. Korea can also export, at low cost, the necessary machinery and tools to China that the workers need, he says.
Having started making mostly simple things like nuts, bolts and washers, or assembling appliances like washing machines and air conditioners, Korean manufacturers are moving more complex, though not their top end, products to China.
Quality, features and price have won over tens of millions of upwardly mobile urban Chinese to LG, Samsung and other brands. Korea's carmakers, led by Hyundai which has carved out huge markets for itself in the US and Europe, are also giving Western brands a run for their money – something Shanghai Automobile Industry Corp certainly noticed, spending US$500m for control of hard-up car (and, importantly, SUV) maker Ssangyong in October for their design secrets and tech know-how. (SAIC just last month said "No deal" to a JV proposal to save Britain's MG Rover, one indication of where they see Korean carmakers in the global pecking order.)
Chinese investors have been fishing in Korea for years, and have spread out to almost any industry sector. Shenzhen-listed display maker BOE Technology Group snapped-up LCD production from debt-ridden Hynix Semiconductor in November 2002 for US$380m, following on from a deal for another LCD line a year earlier. Chinese online-gaming heavyweight Shanda, which has been eyeing control of Sina.com, China's No 1 portal, took control of Korea's Actoz for US$91.7m last November.
Now if they can make their acquisitions work, a tricky business even for well-run western companies, they could start to really challenge the Koreans.
That day is drawing closer in some areas. Korean dominance of advanced ship and rig construction may not last without shifting more work to their Chinese yards – where they now build basic ship sections. And China could soon be nipping at their heels: The Chinese have already started to build liquid-natural gas (LNG) carriers, complex ships Koreans took time to master, at yards in Shanghai.
Top shipbuilder, but for how long?
Last year, Korea became the world's top shipbuilder, winning 40% of orders by tonnage, leaving Japan with 24% in second place. Commanding third place, with 14% of orders, was China, a bit player a decade or so ago. Within a decade China could be No 1. In 2004 the Korea Development Bank reckoned Korea was, on average, only 3.8 years ahead of China, about half that in computers and communications.
All this leaves Koreans worried and confused. In a survey last September, almost 80% said China was a rival, not a partner. The same Korean Broadcasting System poll found just under half thought China the most important country for Korea's economic and trade diplomats to parley with. After the US and EU, China was the respondents' third-placed overseas choice for educating their children.
Such pragmatism should bode well. Koreans in China already form one of the biggest groups learning Chinese. A taste for studying here, combined with factory migration and rising exports, suggests China is absorbing Korea's economy just as the Mainland has progressively absorbed more and more of Hong Kong and Taiwan economies.
As China's offshore Chinese counterparts have been doing, South Korea is increasingly providing more services and capital for the Mainland – roles young Koreans seem to be preparing for. "The younger generation is moving more and more into services and design engineering," says Peter Bartholomew, managing director of Industrial Research and Consulting in Seoul. "Production technology has always been a forte of Korean industry,"
That does not mean Koreans' apprehension about China is misplaced, but they would be smart to build on their technological lead. "I think that within the region, Japan and Korea can stay ahead for the foreseeable future," says Michael Enright, director of the Asia Pacific Competitiveness Programme at the University of Hong Kong Business School. "Taiwan for the medium term and anywhere else [Southeast Asia's Tigers], no."
Pressure from China might be just what Korea needs to force hard decisions needed to make hiring and firing easier, to wean small-and-medium firms off government credit guarantees (that some blame for stifling innovation) and to accelerate efforts to make its financial sector more transparent.
"In the end, they are going to address restructuring the domestic economy," says Duncan Wooldridge, Northeast Asia economist with UBS Securities Asia in Hong Kong. "Unfortunately, I do not see anybody who looks remotely like Margaret Thatcher. These are difficult decisions," he says.
Tackling restructuring early could allow Korea to maintain its economic lead. Dithering may not leave much left to fix.
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