[Outlook]Going big on small parts

How much will Korea profit from exporting a product worth 1,000 won? According to the input-output table of the Bank of Korea, the answer is 617 won. The rest gets spent on raw materials and parts from overseas. Unless an economy is self-sufficient, it is natural that money flows abroad. This is particularly true for an economy like Korea, which is largely dependent upon resources from beyond its shores.

However, the more money that has to be spent overseas, the worse off Korea’s profit margins will be. An economy focused on importing parts and materials and then processing and assembling them faces limits in its growth.

Unfortunately, the money Korea earns from exports has continued to drop. In 1995, Korea earned 698 won from 1,000 won, but that figure dropped to 634 won in 2000 and 617 won in 2005.

Meanwhile, the trade deficit with Japan has continued to grow. Last year, the amount passed the $30 billion-mark for the first time, to end up at $32 billion. Since the two countries normalized their relations in 1965, Korea has never recorded a trade profit against Japan, but it is worrisome that the trade deficit’s rate of growth is so rapid.

It took 10 years for the deficit to grow from $10 billion to $20 billion, but it took only four years for it to exceed $30 billion.

Ironically, that is because Korea’s exports have grown rapidly. As exports increase, so do imports of parts and materials from Japan. Korea’s profit continued to shrink and the trade deficit against Japan continued to grow because Korea’s parts and materials industries are extremely weak.

Therefore, it was appropriate for President Lee Myung-bak to request Japan’s cooperation in development of industries during his recent summit with Japanese Prime Minister Taro Aso.

It was also fortunate that the two reached an agreement on Japan’s components and materials companies investing in Korea. Japanese firms have already expressed their intention to invest about $500 million.

Japan, however, needs to show that it is making an effort to adjust the trade imbalance. Over the past four decades, Korea never recorded a profit, and the deficit continued to grow. Under such circumstances, promises about improving bilateral ties may just be empty words.

The effort to adjust the trade imbalance will begin with Japan’s active support for the components and materials industries. When Japanese firms invest in Korea, joint ventures should be created and technology transfer must take place. The Japanese government should support such activities. It is not a matter of fearing the boomerang effect.

The Korean government should also reconsider its policies on the parts and materials industries. Up until now, the government has treated these sectors as the exclusive terrain of small companies and carried out policies based on this assumption. That practice must end as soon as possible.

Until now, all administrations have emphasized the importance of these industries. However, decades of efforts have left us with the disappointing situation of today because of that underlying assumption.

Many large business groups are participating in parts and materials industries. LG Chemical recently scored a GM supply deal for components for electric car batteries. Samsung Electro-Mechanics and Hyundai Mobis make components for the local conglomerates.

Many famous parts makers from foreign countries are conglomerates, because the possibility of producing cutting-edge components is far higher than in small companies. When TFT-LCD, or thin film transistor liquid crystal display, was first developed, the product was viewed with disappointment because the development cost was enormous while market was small. At that time, the deficits from the product were enormous. Such hardship was overcome because Samsung Electronics is a conglomerate.

And yet, the government has focused its policy on small companies with a low possibility of success. As a result, conglomerates have been experiencing reverse discrimination.

From now on, the government should support the establishment of a trilateral cooperation system in which conglomerates take the lead and Korea’s small companies and Japan’s component makers work together.

Government assistance for small companies should also be changed. Selective support should be provided to firms with potential. And the small companies should merge together to become a larger businesses, in order to become new leaders in the industry.

Small technology firms that do not want to expand in size can be supported through an innovative cluster system, where the industry, academia and research institutes work together. The current program of building disorderly “techno parks,” with no economic principles as a basis, is never effective.

The writer is a senior economic news reporter and editorial writer.

by Kim Young-wook