South Korea: new growth model emerging?

South Korea’s success in transforming itself in one generation from a foreign aid recipient to a high-tech manufacturing powerhouse and aid donor is legendary. While other industrialised nations crumbled under the weight of the recent global financial crisis, South Korea continued to show stable growth with low inflation and a healthy trade and current account surplus. To sustain this economic success, the country must now diversify its economy, economists say.

The ING office in Seoul focuses on supporting Korean companies expand overseas, which is one of the main pillars in the government’s three year development plan. ING has a presence in South Korea that goes back 20 years and it has built up a client base that includes virtually every large and many smaller Korean companies.

Jeroen Plag

“Having Hiddink definitely helped,” says Jeroen Plag, who ran the ING Seoul office from 2009 to 2012 and is now head of client coverage, Asia, Americas and UK at ING. The famous Dutch football manager Guus Hiddink was coach to the national South Korean team from 2000 to 2002 and became a hero overnight when Korea, which had not won a single game in five consecutive World Cup tournaments, made it to the semi-final in 2002 where they were beaten by Germany. “Koreans want to move forward, to improve, to better their lives,” says Plag. “Like Hiddink, they want to play at world-class level. They may have lost in the end, but he got them there.”

What Korea might still lack in terms of football field prowess it more than compensates for in business success, which can justifiably be described as “world class”. South Korean companies have become world famous for their nifty innovations at friendly prices and have rolled out their franchises with impressive speed. Korea produced its first export car in 1976 and the country is now the world’s fifth largest producer. With their fine design and manufacturing excellence, tenacity and practical business know-how, Korean companies have knocked many once leading Japanese, European and US companies off their pedestals.

'Koreans want to move forward, to improve, to better their lives'

“Korean companies excel in the logistics of business, in getting things done,” says Plag. Samsung and Hyundai, Korea’s two largest companies, have become household names world-wide. Hyundai is the fourth largest car producer. Samsung is the world’s biggest smartphone producer. Korea is world leader in displays, number two in shipbuilding, and leader in the flash memory market for consumer electronic applications. Who knows how many South Korean world-class companies there are in the production pipeline? The 2013 Forbes Global 2000 list included 64 South Korean companies, with a combined market value of US$684 billion, and which generate more than $60 billion in profits. Yet in global capital market value terms, South Korea’s stock market ranks only 11th, after India and Brazil, reflecting its main index’s relatively low price/earnings ratio of 11.5 times 2014 earnings.

'Korean companies excel in the logistics of business, in getting things done'

South Korea is a major exporter and has a relatively small domestic population (50 million). ING, in the recent economic report, expects South Korean exports to grow 11.5% per year, and to reach US$1070 billion in 2017. At that point Korea would be the fourth largest exporter worldwide. South Korea also has the advantage of being a convenient stepping stone towards China, the world’s second largest economy. Moreover, its company executives have a good grasp of how to do business throughout Asia.

 

Challenges and opportunities

While Korea has many world-class strengths, it also has home-based challenges. As ING notes in the recent economic report 'South Korea: new growth model emerging?', the population is shrinking faster than that of any other OECD country. Fertility in Korea has fallen to 1.19 children per woman, a rate which - if it continues - would mean the population would become extinct by 2750, according to official government projections. As a result of the population contraction, the Korean Development Institute forecasts a slowdown in GDP growth from the current level of around 4% to 2.75% in 2030. That means economic growth will largely depend on greater labour productivity, ING notes. Korea’s ageing population faces an uncertain financial future. The country provides few social services and pensions and wealth management are new concepts. Up until now in Korea the family has been the financial safety net.

But Korean society is changing. In the four decades to 2000 Korea lifted its income per capita from 10% to 60% of the U.S. level. And while incomes have increased, so has inequality and family units are becoming smaller. What’s more, the wealth that has been accumulated is too large for the local Korean financial markets to accommodate. Pension fund managers are therefore looking outside of Korea to invest.

Korea’s government is aware of its challenges and in its latest development plan sets out to diversify its industry and consumer electronics-heavy economy, using innovation as a key to unlocking growth. If we go by past performance, this would be a logical progression: “The Kia (Hyundai) plant in Slovakia is so advanced in terms of its robotics, Terminator 6 could have been filmed there,” says Plag. “The rest of the world can learn from this.” The plant, which ING helped to finance, opened in 2007 and is one of the few car factories in the world capable of building up to eight different models on the same line, with adjustable build ratios too. 

Innovation could transform other underdeveloped areas of the economy such as services, agriculture and water management, especially if supported by investment and technical assistance from overseas. To catalyse the process, says Plag, international companies wanting to expand in Asia should pair up with complementary Korean companies that are further down the road to expansion. “Koreans love it when you offer them something that enhances their capability.” Like Hiddink, who over years of ongoing assistance has elevated the already popular sport to a national passion and strengthened Korea’s football capability for the long term. “If foreign companies can offer some form of Hiddink factor, they can have a productive and successful business relationship,” says Plag. If things go really well, perhaps those companies’ directors, like Hiddink, can look forward to being invited back regularly for years to come as VIPs.

 

ING in South Korea: a gateway to North-East Asia

Taking advantage of South Korea’s strategic position in Asia, the ING office in Seoul focuses on assisting Korean companies in their international expansion. “Over the years ING has built up in-depth specific knowledge of the important Korean economy sectors and products,” says Plag. “We would like to help those companies realise their overseas growth ambitions.”

Korea is a key player in the energy and shipping markets. It is one of the major shipping hubs in the world, handling significant imports of natural resources such as liquefied natural gas. ING provides a range of trade and export-related financial services to companies operating in this area, notes Plag.

The local ING office is predominantly Korean and works closely with the Asian-staffed ING Asia Desk in Amsterdam, which provides practical services in Korean, Japanese, Mandarin and Hindi as well as English to Asian companies as they expand into Europe.