[SERI COLUMN]Rethinking traditional industry

Not surprisingly, only seven of the top 100 companies in Korea in 1955 are still operating today. The average lifespan of a company is only 13 years. Still, companies such as U.S. blue chips General Electric and 3M have managed to survive for more than 100 years, coping with economic booms and busts and continually innovating. While their success can be traced to a multitude of factors, perhaps the most important one is the ability to adapt and secure continuous growth.
In Korea, next-generation growth is an especially pressing issue. China’s torrid economic growth on the back of price competitiveness and Japan’s superior technology is fueling the concern of Korean CEOs and government officials alike. Conversations revolve around finding new growth engines to replace the semiconductors, mobile phones and flat panel screens that drive growth today. Could biomedical research or environmental management hold the key?
While such questions are important and necessary, Korean companies may want to avoid being overly preoccupied with the allure of the new. In fact, the old may have the answer.
The Korea Exchange recently released earnings for listed companies for the first half of 2007. It showed a 19.8 percent year-on-year increase in net profit, marking the first time that net profits have risen for listed firms in three years. Surprisingly, the strong performance was led by traditional manufacturing industries such as shipbuilding, petrochemicals, steel and machinery. Transportation equipment, including shipbuilding, saw operating profits surge 74.3 percent from a year ago, the highest figure recorded in manufacturing. Likewise, operating profit jumped in petrochemicals (51.4 percent), steel and metal (40 percent) and machinery (21.7 percent). In contrast, electronics stumbled badly, dropping 31.7 percent, while telecommunications fell 13.6 percent. In short, the IT industry, a longtime favorite of both investors and consumers, remains mired in a slump, while less flashy bread-and-butter industries have prospered handsomely.
The resilience of Korea’s smokestack industries is not a cyclical phenomenon. Rather it is the result of painstaking reform and restructuring. Shipbuilding, for example, rose to global dominance by breaking with convention and adopting new and innovative practices. Korean shipbuilders were the first to construct ships on dry land instead of using dry docks, and were also the first to introduce ice-breaking oil carriers. In steel, Posco was the first to introduce “Finex” technology, a next-generation iron forging technique that replaces the conventional blast furnaces that have prevailed for more than 100 years.
Whether they make ships or software, Korean companies will need to consider new methods for deploying advanced technologies. Up to now, they have largely pursued a catch-up strategy of introducing advanced foreign technologies and commercializing them. Korean companies now need to take a more proactive approach in developing new technologies and markets. At the same time, they must be more willing to accept the risks they avoided as followers.
To be sure, companies cannot easily proceed unilaterally in their search for innovations, especially at a time when uncertainty is high. Innovation may come from outside an industry’s realm. For example, Korea was the first country to commercialize code division multiple access, or CDMA, for handsets in the mid-1990s by combining fresh ideas from the outside world with production and technical capabilities from inside Korea. As the deployment of CDMA illustrates, openness to the outside world can help Korea embrace new economic growth engines.
Korean companies can create another success story as they did with CDMA. Today, the competitiveness of many manufacturers in industrialized countries is slipping. This provides an opportunity for Korean companies to break from their traditional organic growth strategy and pursue mergers and acquisitions at the global level. In doing so, they could secure source technologies, which they currently lack. In addition, Korean companies can take advantage of good product quality and price competitiveness to partner with Western companies that wish to do business in Asia.
Korean companies should strengthen ties with these advanced companies as a way to explore promising new horizons such as environmental protection and renewable energy.
Such strategic shifts will necessitate tolerance for uncertainty. The potential rewards are elevation of Korea’s innovative capability and a step forward in the continuous creation of new growth engines.

*The writer is a research fellow at Samsung Economic Research Institute. Please address inquiries about this article to youngmo.lim@samsung.com.

by Lim Young-Mo