Five Reasons Korea is the Future

ETHOS Issue 09, June 2011

1. KOREA’S ECONOMY IS BEATING THE ODDS

For a long time, the South Korean economy was dismissed as being “stuck in the middle” – it fell short of Japan on quality and could not hope to match China on price. However, South Korea did well after the global financial crisis, registering only a single sequential quarterly decline during the downturn, and returning to 3% growth by the third quarter of 2009. Production and consumption returned to pre-crisis levels within three quarters. Amid a 12.2% drop in the global real trade volume, South Korea’s exports bucked the trend with a slight increase; indeed, South Korean companies actually increased market share during the crisis.

Ironically, South Korean companies have benefited from occupying the supposed middle ground between quality and price. In the post-crisis era, consumers the world over have turned cautious, adopting a new mantra of “value for money”. South Korean companies are well positioned to capitalise on this new ethos, with products that represent an optimal trade-off: decent quality at affordable prices.

2. KOREA’S CHAEBOLS ARE REINVENTING THEMSELVES

Since the Asian Financial Crisis a decade ago, many of South Korea’s traditional chaebols have successfully restructured themselves to become frontrunners of change in the global economy, and are now venturing beyond their traditional strongholds of consumer electronics and automobiles into non-traditional industries to deliver “value for money”. A good example is Korea Electric Power (KEP), South Korea’s only electricity utility. KEP won a UAE deal in 2010 delivering a no-frills nuclear power package that beat established Western and Japanese vendors. The 10-year long project is expected to have a positive effect on the Korean economy for the next 50 years by creating economic value of about US$40 billion, and 110,000 jobs.

Why have chaebols done well in the new economic environment? The vertically integrated structure of chaebols makes them well suited to delivering new services and products that require rapid deployment and coordination across many industries. In these markets, it is not brand new technology, but the speed of rollout that gives them a competitive advantage. The Economist (March 2010) described the skills needed in this business as running a “digital sashimi shop” – the trick is to get products so swiftly to market that they do not lose their freshness. South Korean companies span many key sectors – telecoms, energy, logistics, property, payment and other related industries – and so can mobilise sister companies to deliver a vision quickly.

3. KOREA INVESTS HEAVILY IN DESIGN

Beyond speed and coordination – traits which could quickly be copied by firms in China and elsewhere – South Korean companies have an additional recipe for market success: they are making the most of the mash up between technology and design.

FIGURE 1. GROSS DOMESTIC EXPENDITURE ON R&D AS % OF GDP

Already, South Korea spends 3.2% of its GDP on research and development – among the highest levels of investment in the world. At the same time, its investment in design has also been substantial: it boasts of 230 design schools (more than the US), and major supporting institutions such as the Korea Institute of Design Promotion.

This investment is paying off. For example, in 2008, according to FT,¹ half of the most talented emerging designers chosen to be honoured in Gen Art’s Fresh Faces fashion exhibition were South Korean or Korean-Americans. At Parson’s The New School of Design in New York, nearly a third of all students are Korean.

Chaebols such as LG and Samsung, who have their own design institutes, have been sweeping international design awards. In the prestigious iF design rankings² awarded by International Forum Design in Hannover, Germany, Samsung is ranked first in the world – ahead of second-ranked Apple. LG is ranked eighth, ahead of German design legends BMW, Miele and Gaggenau.

4. KOREA IS REVOLUTIONISING FUTURE CITIES

Korea is emerging as a testing ground for creating templates for new cities. The boldest example is Cisco Systems’ project to create New Songdo city from scratch, with completion due by 2015. It is the largest private real estate deal in history, designed to emit only a third of the greenhouse gases of a typical metropolis its size and to run as a “smart city”. This is Cisco’s way of getting out of the network plumbing business and into offering cities as a service. With Asia needing hundreds of new cities in this decade, this plug and play model is attractive: Cisco has announced plans to eventually roll out 20 new cities across China and India, using New Songdo as a template.

5. KOREA IS PUNCHING ABOVE ITS SIZE

For food security reasons, the South Korean state has been directing the chaebols to buy up overseas farmland; South Korea is now the largest buyer of overseas farmland in the world.³

Furthermore, South Korea’s current President Lee Myung-Bak has declared he wants to move his country from “the periphery of Asia into the centre of the world,”⁴ turning Korea’s geographic disadvantage – its small size wedged between giant neighbours – into a geopolitical advantage. Asia today is economically interdependent but not politically integrated. Against a backdrop of steady American decline coupled with China’s rise, Korea is testing the limits of its future role as a platform to integrate East Asia. For example, it is setting an aggressive pace for a China-Korea- Japan trilateral free trade agreement (FTA); the secretariat will be set up in Seoul in 2011. Beyond the trilateral FTA, South Korea’s aspirational goal is a full Asian free-trade zone, with an Asian monetary system centred in Northeast Asia – a vision which, if realised, would diminish the role of ASEAN +3 and the East Asian Summit.

South Korea’s Lee administration is also pushing for a slew of FTAs with the US, the European Union, Peru, Colombia, Canada, Australia; as well as hosting world events such as the G20 Summit in November 2010. South Korea’s Ministry for Foreign Affairs strategically lobbies for Korean faces to head international institutions, cementing the country’s role as a central deal-maker. Korea’s development model is being positioned within Asia as a dynamic hybrid alternative to both China’s mighty command economy and Japan’s no-growth economy – part free market, part state controlled – but with more freedom for market forces, political dissent and innovation.

IS KOREA THE FUTURE FACE OF ASIA?

Observers have noted that Japan suffers from “Galapagos syndrome” i.e. its successful business models have difficulty travelling beyond Japan’s domestic fetishes. Could Korea be subject to the same limitations? Due to a limited domestic market, South Korea has taken inspiration from Japan but in fact fashions its business models for export: typically targeting China, which is able to further refine it along the price-quality curve to scale for its domestic market.

China has so far announced 17 mega-city region plans, each of which portrays a prosperous, export-oriented, technologically advanced society with a hybrid market state economy like today’s South Korea. If China succeeds even part of the way towards these plans, there may well be multiple “Koreas” within the decade. This will have implications on the economic and political landscape: Might these mega-city regions be economic heavyweights that demand their own FTAs? Will the centre of youth culture and Asian identity shift? How should ASEAN, and Singapore, be positioned to take on the momentum generated by South Korea in the creation of Northeast Asian institutions and growing cultural influence? What is our place in a future of multiple Koreas?

ABOUT THE AUTHOR

Lee Chor Pharn is a senior strategist with the MTI’s Futures Group, a unit tasked to imagine the economy of the future. His research interests include the rise of Asia.

NOTES

1. Christopher Graves, global CEO of Ogilvy Public Relations Worldwide, in "Designing a distinctive national brand", Korea 2020: Global Perspectives for the Next Decade, ed. Barton, Dominic (Random House Korea, 2010)

2. See Endnote 1.

3. According to www.grain.org

4. Barton, Dominic (ed.), Korea 2020: Global Perspective for the Next Decade (Random House Korea, 2010)

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