A Global Business Reports publication

A Global Business Reports publication, distributed with IHS Chemical Week

South ’s Chemical Sector: The Miracle on the Moves on This report has been researched and written by Pavlina Pavlova and Nathan Allen of Global Business Reports. For more information, contact [email protected] or follow us on Twitter: @GBReports

et-esque Heavy and Chemical Industrialization Five-year Plan, INTRODUCTION initiated by General Park Chung-Hee in 1973, sought to direct as many resources as possible towards boosting international A silent, shining monorail whisks recently arrived passengers competitiveness in electronics, machinery and, of course, chem- from the spotless arrivals terminal at Incheon airport to the equal- icals. The result of this first organized industrial drive was that ly unblemished passport-processing center and customs office. per capita income increased by more than five times between Travellers may then choose between taking the new high-speed 1972 and 1979. rail link to the city center or boarding one of the city’s sleek fleet The initial focus of the program was to establish Korea as of limousine buses. Whether by road or by rail, visitors to a major petrochemicals producer, an ambition that necessitat- will immediately be struck by two features: the modernity and ed the opening of two major petrochemical complexes at Ulsan cleanliness of the infrastructure, and the all-pervading presence and Yeosu, which catapulted the nascent industry onto the world of oversized LCD screens on buildings, attached to vehicles and stage. However, it was not until the 1990s that production really in the hands of other passengers. One is left in little doubt that took off and established itself as a net exporter, this is a country that lives by technology and one which is en- eventually becoming the world’s fourth largest producer of eth- joying the effects of a prolonged economic boom. In 1961 the ylene in 1995. Today the country has slipped into fifth place, average yearly income per person was just $82, yet today the having been overtaken by Saudi Arabia, but petrochemicals still country boasts the world’s 12th largest economy and GDP per constitute an important part of the export economy, generating a capita stands at $31,900. $22.4 billion trade surplus in 2012. This meteoric growth was made possible in the beginning In parallel, the have also built up a considerable lev- thanks to state sponsored nurturing of key industries. The Sovi- el of expertise and substantial production volumes in more basic

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spend up to $890 million on a new pro- vantages in order to remain competitive,” pylene plant by 2016, long-term pros- argues Jason-WooSung Shin, senior vice pects are less positive. It is expected that president and managing director for output will continue to increase, but there BASF Korea. will be no significant upturn in prices which plummeted during 2012, suggest- ing that overall profitability will remain Pitfalls and at low levels. Given that the petrochemical sec- tor now seems locked into an inevitable Perks for Foreign decline, chemical producers must adapt their strategy: “From now on the main Companies in Korea Jason-WooSung Shin, senior vice president and driving force for the industry must be managing director, BASF Korea the evolution towards producing high From the perspective of foreign multina- value specialty chemicals, particularly tionals, Korea has long been viewed as aspects of the specialty chemical field. for electronic and automotive applica- a tricky market to penetrate. Before the Today we are seeing a clear effort to pro- tions,” counsels Jong-Woo Park, CEO 1997-1998 Asian financial crisis, protec- mote more research-intensive, high-risk of specialist chemical industry consulting tionist policies made foreign direct in- areas such as biotechnology and pharma- firm CMRI. vestment difficult if not impossible. The ceuticals, nanotechnology and, perhaps Between 1960 and 1990, the Special- crisis brought opportunities for interna- most interestingly, electronic chemicals. ity sector grew at a fairly steady 7.5%, tional companies to enter through joint All of the 25 largest global chemical but between 2000 and 2010 this figure ventures as local producers looked for companies now operate at least one man- increased to 12.5% thanks to a sharp foreign capital to stay afloat. With a foot ufacturing base in the country, whilst lo- increase in domestic manufacture of in the door, they were then able to devel- cal giants such as LG Chemicals and SK paints, dyes and pigments. More recently, op their business further, incorporating Chemicals enjoy a dominant position in local heavyweights LG Chemical have new units and manufacturing capabilities the market. successfully diversified away from of their own. However, it has been far their petrochemical roots to become from an easy ride. very prominent in the manufacture of Multinationals operating in Korea A Fork in the Road chemicals for batteries, whilst OCI, have all made reference to the same litany a green energy and chemical producer, of complaints: high taxes, overly complex has been nurturing their polysilicones regulations, a tendency to favor domestic for Petrochemical business as a means of guaranteeing players over foreigners, and difficulties future profitability. sourcing skilled professionals. Whilst re- Producers This trend is bringing European and cent governments have worked to level American specialty producers into direct the playing field for foreign companies Despite having extremely limited reserves competition with domestic manufactur- and bring about more consistent regu- of oil and gas, South Korea has been able ers. “Korea has a large and well-qualified lations, stories still abound of investors to remain a cost-effective producer of up- workforce as well as proven expertise in being promised certain tax incentives, stream petrochemical products. This has operational excellence, so local chemical only to have them challenged at the end largely been thanks to an almost symbi- companies should capitalize on these ad- of the year. otic relationship with neighboring China, which consumes nearly one quarter of to- tal yearly petrochemical output. Recent- ly, as the Chinese approach self-sufficien- cy in petrochemical production, the tide is turning for Korea’s producers. It is no secret that 2012 and 2013 were difficult years for the sector on a global level. Although total production volumes continued to grow over these years in South Korea, total turnover only increased by 2% to 3%. Whilst investment forecasts for the sector are still relatively strong, with lo- cal energy providers SK Gas planning to Ulsan Plant. Photo courtesy of Evonik Korea Ltd.

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Although Korea may have the high- Guen-hye’s stated ambition to lessen The attraction of Korea lies elsewhere: est college graduation rate in the OECD, South Korea’s reliance on exports and “It is important to maintain a permanent foreign companies find it difficult to cap- reduce the country’s vulnerability to presence in South Korea, partly to cater italize on this talent pool as the – fluctuations in foreign markets, the fact to the local demand, but also because it is South Korea’s gargantuan conglomerates remains that Korea does not constitute a a good base for innovation and a crucial – absorb vast quantities of new graduates, large internal market. Moreover, given reference point to build relationships with playing on the domestic strength of their the substantially lower labor costs and increasingly globalized Korean compa- brands and the promise of extremely high the greater availability of cheap raw ma- nies,” says Denis Tual, president and rep- wages. In fact, elevated salaries are be- terials in South East Asian nations, these resentative director of Arkema Korea. coming increasingly problematic for the would seem like more logical destina- Although the Korean conglomerates Korean economy: “The average wage in tions for newHP韩国广告120x180.pdf investments. 1 14-2-28 下午3:09 may be competitors when it comes to the Korea is already quite high but it contin- ues to grow at a rate of 5% or more every year. This is possible in a country that is still developing and undergoing rapid societal transformation, but in an already like Korea this is not sustainable,” explains Toni Schreibweiss, president of Evonik Korea. However, despite all the above set- backs, many foreign chemical compa- nies continue to invest in Korea. Foreign direct investment (FDI) inflows to the country remain amongst the lowest in the OECD, but a recent report from the organization shows that Korea was the biggest reformer of its policies towards FDI between 1997 and 2010. Between 2003 and 2013, the chemical sector re- ceived approximately $7.5 billion inC FDI, making it the Korean economy’s M second highest recipient of foreign in- vestment. Even more encouraging areY figures from the Ministry of Trade,CM

Industry & Energy (MOTIE), whichMY show that investment pledges rose by CY 18.9% in 2012, with chemical companies making up a significant proportion CMYof this new activity. K The reasons for this are not obvious at first glance: in spite of President Park

Toni Schreibweiss, president of Evonik Korea Ltd.

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labor market (and also for the production of certain chemicals), their size makes them important clients. Given the high speed of technological change in Korea’s principal industries of consumer electron- ics and automobile production, the need for a close customer-supplier relationship is crucial. In order to fit in with the hec- tic pace of Korean product development, many European chemical companies grant their Korean offices a greater de- gree autonomy than is normally the case. Manufacturing facilities must also be built with flexibility in mind: “We always look at technologies and processes that are easier to adapt, and machines that will be able to move on as the end products become more advanced,” explains André Nothomb, Special Chemicals executive Dow Seoul Technology Center - Dow EM global R&D center in Korea. Photo courtesy of Dow Chemical Korea vice president for Solvay Korea. Both Dow and BASF have relocated been in development since early 2011 and also keen to promote tougher environ- their regional HQ for their respective is scheduled to come into force on Jan- mental laws. Today companies can attain electronics businesses to Seoul and both uary 1, 2015. This is in keeping with a a green accreditation at their plants by operate substantial research facilities in trend that has developed in recent years “meeting a range of criteria across di- this area. Belgian specialty chemical pro- for Korea to adopt European industrial verse metrics such as environmental ducer Solvay has recently opened a state- regulations and then modify them to fit management systems, resource and en- of-the-art research center in collaboration their purposes. In their current format, the ergy conservation, pollution reduction, with Seoul’s Ewha Women’s University, requirements are considerably more strin- safety improvement and community en- thus allying themselves with a constant gent than those in Europe, and certain el- gagement,” said Jason- WooSung Shin of source of newly graduated scientists. ements seem highly impractical at first BASF Korea, whose facilities at Yeosu “There is great potential for synergies to glance. “Under the proposed regulations and Ulsan were among the first to receive be developed between our commercial it is necessary to report the exact quan- this recognition. pursuits and the university’s teaching tities of all existing chemical substances However, industry experts still com- faculty and Solvay will be able to offer of the imported materials in quantities of plain that there is a real need for more internships across several different areas over 1 mt/y. This may seem reasonable on investment in developing environmental to students,” claims Nothomb. the surface, but the issue of intellectual chemical technology and the production Additionally, Korea boasts a high property arises when you consider that of more eco-friendly materials in order number of start-ups carrying out pioneer- this would require companies to compre- to bring the sector in line with other ad- ing work in fast-growing fields which hensively list the ingredients of their pat- vanced chemical producers such as the have caught the attention of foreign ven- ented compounds,” warns Toni Schreib- USA and Germany. To this end, the gov- ture capital funds run by European and weiss of Evonik. ernment has embarked on an ambitious American chemical firms. Ongoing discussions between industry plan to develop ten new green composite representatives and regulators regarding materials with the goal of claiming 30% the fine print of the legislation, mean that of world market share by 2018. K – REACH – there is still some time for these issues This is a welcome directive, for al- to be ironed out before the law is imple- though Korea is consistently ranked mented. Even so, the additional reporting among the top five most innovative na- Regulations requirements will generate a substantial tions in terms of patents granted by the cost increase for both domestic produc- US Patent and Trademark Office, rela- Tighten Up ers and importers. “It is possible that cer- tively few of these are filed by chemical tain companies will see their profitability companies. Local businesses must now On April 31, 2013, Korea became the first drop by over 30% if they are forced to look to increase their spending on R&D country in Asia to pass European Union comply with these laws,” suggests Jong- or seek out more opportunities to collab- style regulations on chemical reporting. Woo Park, CEO of CMRI. orate with their international peers if they The Act on Registration and Evaluation After a series of serious environmen- wish to reap the full benefits of Korean of Chemicals of Korea (K-REACH) has tal accidents, the Korean government is technology’s continued growth.

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