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New growth engine is key

Published: 08 Jul. 2014, 19:24

Samsung Electronics’ economic performance in the second quarter of the year has fallen short of our expectations. Its operating profits of 7.2 trillion won ($7.12 billion) is 15 percent lower than in the first quarter and 24.4 percent less than in the same period of last year. Its sales also plunged by 3.13 percent compared to the first quarter and 9.5 percent compared to the same period last year. That represents a sharp reduction in overall revenues as well as an alarming deterioration in profitability. Despite this “earnings shock,” however, the company’s stock price rose, which means the shock was not felt too strongly in the equity market. Nonetheless, Samsung’s lackluster performance must be taken seriously because it exposes a structural vulnerability of our economy.

The company’s surprising underperformance mostly stemmed from a steep rise in the Korean won and a slump in smartphone sales, the electronics giant’s flagship product. That means even Korea’s top company is having trouble finding a new growth engine. The ramifications of a stronger won have also adversely affected Korea’s other global companies like Hyundai Motor and Kia Motors, not to mention affecting small and midsize companies. That has laid bare our economy’s innate vulnerability to fluctuations in exchange rates.

Samsung’s sluggish sales of smartphones owes much to the stagnant market for high-end products around the globe and China’s production of price-competitive smartphones. Korea is losing its leverage in IT areas such as semiconductors, smartphones and displays due to ever-fiercer competition from Chinese companies, and yet it hasn’t fully closed the technology gap with advanced countries like the United States, Germany and Japan when it comes to the development of new technology and products. That forces Korea into the so-called “nutcracker” situation. Samsung expects its economic performance will rebound from the third quarter when it releases tablet PCs and wearable mobile gadgets, although groundbreaking new products can hardly be expected.

Korea’s economy has not found a new growth engine strong enough to change its export-led industrial structure and its overreliance on a handful of large companies. If even those companies are shaken, that’s a crisis for all of us. Of course, Samsung Electronics will not collapse from lower-than-expected profits in a single quarter. But if it fails to demonstrate innovation to lead the market, one can hardly expect continued robust growth. The Korean economy will not collapse. But if it cannot find a new growth engine, it will not ever be able to get out of a low-growth cycle.

JoongAng Ilbo, July 9, Page 30