Korean IT firms have little luck making it abroad

The ICT industry has been busy since the beginning of the year with mergers, acquisitions and possibly the largest IPO in history: that of Chinese e-commerce giant Alibaba. The company hasn’t said how much it intends to raise, but it is expected to exceed Facebook’s $16 billion in 2012. It may go up to as much as $20 billion.

Lenovo, previously considered a Chinese manufacturer specializing in budget laptops, surprised the market when it announced it was buying Motorola’s smartphone business from Google. “The acquisition of such an iconic brand, innovative product portfolio and talented global team will immediately make Lenovo a strong global competitor in smartphones,” Yang Yuanqing, Lenovo chairman, said during the time of the purchase. “We will immediately have the opportunity to become a strong global player in the fast-growing mobile space.”

Alibaba was only founded in the late 1990s by an English teacher, Jack Ma, not the kind of computer whizzes behind global IT titans such as Facebook, Google or even Microsoft.

It began as a website specializing in Chinese translation. Ma expanded into creating a “China Page” that indexed Chinese businesses. Now Alibaba has annual revenue growth of approximately 50 percent.

Lenovo was started by 11 engineers from the Institute of Computing Technology and Chinese Academy of Science in Beijing in 1984.

Korean companies have been making some headlines in the global IT market. Coupang, a Korean social commerce company, last week announced it has bought CalmSea, a global tech company in Silicon Valley that specializes in analyzing big data. CalmSea’s clients include Disney, Puma, Lenovo and Barclaycard.

After Facebook bought WhatsApp for $19 billion earlier this year, rumors started that Japanese IT giant Softbank, owned by Korean-Japanese Masayoshi Son, was considering buying NHN’s instant messenger Line, which NHN denied.

But compared to Chinese companies, Korean tech companies aren’t creating much buzz, with the exception of Samsung Electronics.

Despite the government’s proclaiming that its key priority was making Korea a more “creative economy,” local companies have been timid compared to their more aggressive counterparts in China.

Alibaba reportedly spent $3.5 billion on mergers and acquisitions last year. It bought ShopRunner, a retail website, in October for $206 million. The company has also been buying stock in IT start-ups, including a navigation and mapping company, AutoNavi, as well as a Chinese cable TV company, Wasu Media.

China’s Baidu spent roughly 15 percent of its annual revenue on mergers and acquisitions.

One of the world’s leading mobile messenger app companies, Tencent, even acquired a 14 percent stake of Korea’s own KakaoTalk.

Industry insiders agree that Korean IT companies like NHN and Cyworld, which started off with humble backgrounds, have become major powerhouses in the local market. After the government installed fiber optic networks for high-speed Internet even to the most remote regions in the 1990s, the Korean IT industry has become a case study for many countries.

But why do Korean companies that start humbly and have major success have trouble expanding outside of Korea? Is it because they lack competitiveness or drive?

Steven Vogel, a political economy professor at the University of California at Berkeley, notes that Korean IT firms are doing quite well and they have the competitiveness. Vogel said major companies like Samsung have been more successful in some sectors like semiconductors and displays.

Vogel said that although scale really matters in electronics, the Korean IT industry is too heavily dependent on the lead of major companies while it should be driven by smaller and more innovative companies.

According to the Small and Midsize Business Administration, start-up companies in Korea are heavily dependent on the domestic market. Most of their revenues are earned from supplying larger Korean business or their affiliates.

In 2011, the latest data available, 22.1 percent of 2,000 start-ups with less than 100 employees were either affiliates of conglomerates or invested in by larger businesses. A further 19.8 percent were suppliers of conglomerates. Only 30.1 percent were totally independent start-up companies while less than 7 percent sold directly to consumers. Only 7 percent of the start-ups had some earnings from overseas.

These trends were true across industries.

In software start-ups, 30 percent are either conglomerate affiliates or invested in by large companies, while 13.7 percent supplied their software to conglomerates. Only 27.4 percent of software start-ups were totally independent.

As many of the start-ups are simply created to serve the domestic market, it isn’t easy for foreign companies to find out about Korea’s start-ups. Analysts say there is a need for more information resources so foreign investors can spot companies that have the potential to become bigger global players.

And the companies that have explored opportunities in the global market mostly concentrate on the Asian market rather than aggressively targeting advanced economies like North America or Europe.

Since launching in Japan in June 2011 - two months before the same service was offered in Korea - NHN’s app messenger Line has a dominant market share in the neighboring country. It has a strong presence in other Asian markets as well. But in North America and Europe, it barely has any market presence, unlike China’s WeChat.

Although some question the need for domestic start-ups with less than four employees to seek global attention, others say it is essential to stake out controlling rights in the global market.

“In the 1970s and ’80s, an export-centered strategy that focused on aggressive overseas expansion helped the economy to overcome its small domestic market and achieve high growth,” said Jeon Seong-woo, an LG Economic Research Institute researcher. “So-called hidden champion companies in Germany were able to succeed in the global market by developing advanced technologies and improving quality, and Taiwanese companies like Acer, Asus and HTC, which started off as small start-ups, aggressively sought overseas markets.

“Korean companies [since the late 1990s] were able to launch more innovative technologies and services - such as the MP3, Internet phones and social commerce - than any other part of the world. Yet due to their failure to expand to overseas markets, the lead in such technologies and businesses shifted to other countries.”

Professor Vogel said not only Korean companies but start-ups from many countries have trouble competing with American companies.

“The information revolution began in the United States, fostered by U.S. institutions,” Vogel said. “So some U.S. companies have first-mover advantages. And they dominate certain market segments like operating systems, search engines and some types of software.

“This makes it hard for companies from other countries to break into certain lines of businesses.”

“Large companies will also suffer if Korea’s start-ups and SMEs do not develop into world class innovative growth companies,” said Per Stenius, CEO of Reddal, a consulting firm in Finland, who visited Korea last month. “Koreans should watch out and recognize that although there is potential in its domestic market there is even bigger potential outside its borders.”

Some call for the need for an overall system in which society recognizes the value of the software industry and intellectual property. Although Korea has grown into a major IT powerhouse in the world, illegal downloads and unauthorized use of intellectual property are factors that have been devouring the industry from within as some innovative companies end up in debt or going under.

The Park Geun-hye government has been encouraging the expansion of innovative small companies.

Some analysts say that the competitiveness of Korea’s own unique content like games and Hallyu has already been proven.

“However, there should be more efforts to develop new businesses based on that uniqueness and creating value through independent branding and converging with existing industries,” said Lee Jeong-ah, a senior researcher at the Institute of Creative Economy.

BY LEE HO-JEONG [ojlee82@joognang.co.kr]