A forced reinvention
The external horizon on the business front has gone from bad to worse. Perils are everywhere. But we cannot let ourselves simply sink in tumultuous waters. In the post-war days, Koreans sold everything to survive, from women’s hair to urine. One of Asia’s economic basket cases turned itself into an industry powerhouse in the 1970s, when the rest of the world was stunned by a series of oil shocks from the Middle East. A petrochemical industrial complex opened up in Ulsan in 1972, Pohang Iron and Steel was created in the following year and Hyundai Heavy Industries unveiled the world’s largest shipyard in 1974. Hyundai Motor rolled out its first batch of home-grown Pony cars in 1976. TBC board director Lee Kun-hee used his personal savings to buy Korea Semiconductor in 1974. While a stunned Germany and Japan backtracked in the wake of the oil shocks, Korea moved forward.
Korea Inc. suffered a setback in the 1980s due to excess investment in heavy industries. But a windfall soon came along. The United States, European nations and Japan reached the Plaza Accord in 1985 to devalue the U.S. dollar and make the Japanese yen stronger. Struggling with twin deficits in its fiscal and trade accounts, Washington joined forces with other global powers to constrain trade powerhouses Japan and Germany. Korean exports benefited from skyrocketing prices of Japanese and German products. Plunges in oil prices and interest rates helped even more. But without aggressive investment in heavy industry in the 1970s and pre-emptive restructuring in the 1980s, Korea would not have enjoyed the boom from the triple blessings of low oil prices, lower interest rates and the weaker U.S. dollar.
Korea was again pushed to the cliff in the late 1990s amid the Asian financial crisis. But the government of President Kim Dae-jung showed daring resolve and quickly restructured, paying off the country’s international debt within two years. Korea was fast to forge free trade agreements, striking deals with 49 countries starting with Chile in 1999. Korean manufacturers rode on the back of the galloping Chinese economy by supplying intermediary parts. When global demand declined, Korean exports remained strong thanks to the benefits of free trade agreements.
Then Korea came to a full stop after per capita income reached $20,000. Korean companies fell into the “Innovators’ Dilemma,” with Chinese competitors breathing down their neck. While Samsung Electronics was struggling to maintain the top slot in the smartphone market amid a dearth of new ideas, Chinese newcomer Xiaomi grew with cheaper high-spec products.
Korea Inc. found itself in the same place as its Japanese counterparts during the oil crises of the 1970s. One U.S. market researcher predicted Samsung Electronics would give up the smartphone business entirely within the next five years.
China’s policy shift to emphasize domestic demand instead of promoting growth through exports has dealt a heavy blow to Korea, which profits from selling intermediary goods that go into Chinese industrial products. The slowdown in China has translated into a plunge in Korean exports. Without changes to our export strategy, we may see more of big collapses like Daewoo Shipbuilding & Marine Engineering, the world’s biggest shipbuilder that is now calling for a public bailout to survive.
We can no longer rely on the United States for relief. The U.S. avoided the worst from its twin deficits in the 1980s at the expense of Japan and Germany. It needed a new scapegoat after the financial meltdown in 2008. China became its new target. The Trans-Pacific Partnership (TPP), the world’s largest free trade deal led by the United States and Japan, is a good example. Its members are 12 Pacific Rim countries. They do not include China. The TPP has a provision that bans government subsidies to public enterprises. China’s exports are led by state enterprises. Chinese business cannot run without government funding. Although the provision was aimed to exclude Beijing, Seoul cannot help but worry. The announcement by the U.S. Treasury Secretary that TPP members agreed not to manipulate foreign exchange rates will also be a setback as Seoul prepares to join the TPP.
China is catching up, and the United States and Japan are ganging up on Korea. We can no longer expect growth from manufacturing. We must reinvent ourselves. Shutting down a few zombie companies won’t do. The country needs a breakup of its unproductive education system, rigid wage structure, regulations that choke innovation and oppressive bureaucratic system. A new Korea must be born.
JoongAng Ilbo, Nov. 9, Page 34
The author is the business news editor of the JoongAng Ilbo.
by Jung Kyung-min