Embracing the new China

Korea ships 30 percent of its industrial products to China. Exports to China last year fell for the first time since 2009. Reduced shipment to China has led to worsening profits among Korean conglomerates and falls in their share prices - not to mention the lackluster performance of the Korean stock market.

Maybe it’s like a duel between a master of the sword and a switchblade artist. Korea jumped into what it knew would be a long-running contest with the world’s mightiest industrial powerhouse with proven strength and flexibility. In just five years, Korea was beaten in both speed and output in terms of manufacturing capacity. China started moving onto the services sector from 2012 having won the crown of the world’s biggest factory. But the world’s biggest factory still needs parts and components, and that where Korea stands now. Korean manufacturers are still highly focused on exports to China.

Korea exported $80.7 billion worth of goods to China last year, almost double Korea’s total trade surplus of $47.5 billion. Korea weathered the global financial crisis of 2008 thanks to China. Most of its growth over the last five years stemmed from China. But the boom years may be over due to shift in China’s economic focus. China has become too big. Unless Korea becomes bigger, it cannot compete.

Korea Inc. became successful because of its skill in emulating American and Japanese innovations. But it is being squeezed out by China Inc., which has a copycat prowess beyond our own. It can not only turn out cheaper replicas of Korean products but it knows how to add features. While Samsung Electronics chased after Apple in the smartphone business, China’s Xiaomi studied both Apple and Google and sold mobile apps on top of smartphone hardware. Xiaomi does export, but cares little about overseas performance because the Chinese market, with mobile phone users numbering 1.28 billion, is bigger than the combined markets of the United States, Europe, and Japan.

Korea should become serious about the deteriorating situation in trade with China. The Korean market is tiny and does not take long to reach a saturation point. During rush hour, it takes nearly two hours for a car trip between the financial district of Yeouido and Bundang on the southern outskirts of Seoul. By plane, it takes about an hour and half to arrive in Beijing from Seoul. China is that close. With a population of 1.37 billion, it’s a bigger market than the United States, Europe, and Japan combined. Korea cannot give it up.

But the immense neighborhood is inaccessible because of the language barrier. There are many among Koreans with MBA degrees from American schools, but few with expertise in the Chinese language. All Korean schools have business management courses, but none on Chinese business. A tiger in Shandong cannot beat a cat in Zhejiang. The regional difference is that stark in China. American business practices cannot win in China. A new model is needed.

Korean companies rushed to China in search of a gold mine. But American-style Korean businessmen returned empty-handed. To succeed in China, Korean businessmen must utterly forget the American standard and learn China’s. Otherwise, no business can make it in China. Korean companies wonder why they don’t do well in China while sending an expat with just six months of elementary language skills. When it comes to the United States, Europe, and Japan, they wouldn’t dream of sending someone with no experience studying in the country.

At high tide, anyone can catch fish with a net. The real test of fishing skills is at low tide. A first-timer will most likely go home with an empty basket. That is what is happening to Korean businessmen in China. Like it or not, exports are the main drivers of the Korean economy. If they fare poorly, the stock market will lose ground, corporate profitability will plummet and consumer spending will be depressed. Hiring will trail off. Silicon Valley became a hotbed of innovation and IT research and development because the United States was the biggest IT market. But today’s biggest market in IT is China.

Korea snubs China as a second-rate manufacturer of mobile gadgets and cars. In reality, it can turn out airplanes, warships and spaceships. Korea must forget the old China. Chinese tourists are VIP clients in duty free shops and department stores in Korea. China is synonymous with cash. Its people spend more on their vacations than the Japanese, the enviably rich Asians of a bygone era. How Korea can use the Chinese factor will determine Korea’s growth. If Korea can draw in 30 million Chinese tourists, the country’s growth rate can be augmented by 3 percentage points that year.

Korea made money selling intermediary goods to China when it built roads and bridges. Under the fifth-generation leadership, China has restructured its traditional industries to boost local demand and the services sector. In that area it has no room for Korean manufacturers. All the industrial commodities being sold in Korea have lost their appeal in China. Korean companies must study what Chinese people need and will buy if they want to stay in the market.

Translation by the Korea JoongAng Daily staff. JoongAng Sunday, Feb. 1, Page 19

*The author is the director of China Economy and Finance Research Institute.

by Jeon Byeong-seo