KOREA INSIGHT

KOREA ECONOMIC INSTITUTE OF AMERICA Volume 1, Number 9 December 1999

KOREA.COM: A NEW ENGINE FOR Qualcomm, Click-to-Asia are just a few of the companies that have entered the market, helping to established Internet Service GROWTH Providers (ISP) throughout Korea. On December 15th, Hyundai Electronics launched its first Internet phone. This digital phone, by R. Ben Weber with CDMA (code division multiple access) technology, is ex- pected to garner 12.5% of the global CDMA market. The com- Earlier this month, five hundred employees of bination of wireless technology with Internet access will no doubt marched into the street in front of their headquarters in down- provide a surge in Korea’s potential for e-commerce. town and with much fanfare, proclaimed Hanwha Group an Internet company. By investing over 300 billion won over Currently, Korea’s e-commerce is estimated at 200 billion won. the next three years, management hopes to generate more than It is expected to triple to 590 billion won by the end of 2000. 30 percent of its revenues via the Internet. Although it is limited to only consulting and EDI (electronic date interchange), the beginning of next year will be marked by Hanwha is not alone. Korean companies by the hundreds are a rapid expansion into the business-to-business commerce (B2B) looking at the Internet as their future. Internet usage in Korea by Korean businesses. Recently, E*Trade Group of Korea, a has increased from 1.6 million users in 1997 to an estimated United States joint venture in Korea, received preliminary 6.3 million by year’s end. It is expected that by the end of next approval to launch an online broker. In light of the dramatic year, the total will be in excess of 10 million users in Korea increase of stock ownership by the average Korean, E*Trade alone. This increase is due in part to a number of factors, two of executives state that they expect an impressive upside to their which are the government’s willingness to invest in Korea’s investment as Korea’s Internet market continues to expand. It is Internet market and impressive technology being produced by widely seen that KTNET, affiliated with the Korea International Korea’s telecommunications sectors. Both trends have created Trade Association, is one of the world’s forerunners in EDI- an ideal environment for Internet usage in Korea to expand based automated trading. With 17,500 companies listed in its dramatically over the next few years. directory, 8,600 of which are foreign, it is no wonder why they have an average of attracting 130,000 visitors per day to their Last September, the Ministry of Information & Communica- site. In addition to trading, customs clearance, logistics, and tions initiated a project to sell low-end multimedia PCs to the corporate information, all connect to 33 commercial banks al- general public with generous terms for payments. One obstacle lowing for much more user friendly trading environment. With to expanding Korea’s use of the Internet has been the cost of a regards to business-to-customer (B2C) commerce, the Korea computer. However, with the Ministry’s efforts, the cost of a Chamber of Commerce and Industry (KCCI) recently launched standard computer in Korea has dropped by as much as 50%, or a new portal site. The site features a total of 1,100 domestic and 1.5 million won. Since the program began, 150,000 people have foreign Internet shopping mall addresses and operational infor- begun payments, while 50,000 people have purchased comput- mation. Corporation has also had a cybermall open ers outright. Of those surveyed, 41% lived in farming and fish- for the past few months. Although the early results are mixed, a ing communities, an unexpected benefit of selling the computer recent rise in sale is evident as more users sign on to the Internet. via the post office. Korea’s Internet companies are also finding growth throughout Korea’s telecommunication sector is exploding with new ideas the world. Thrunet, one of many South Korean ISPs that pro- and creations. For years, the wireless community has fared quite vides high-speed access, recently went public on NASDAQ. With well. Any visitor to Korea can surely tell you of the vast number a debut price of $18 per share, it rose 195% to $53.18 by day’s of people that depend on their wireless phones, not just for work, end. Combined with its success on NASDAQ and Microsoft’s but for pleasure as well. The number of wireless subscribers has 10.5% stake, Thrunet is quickly expanding domestically where increased by 63% this year, 48.9% of the total population. With it counts; in Korea. Daum Communications, another leading the lifting of restrictions on foreign ownership, the telecommu- ISP, recently signed up more than 5 million subscribers, averag- nications sector has been inundated by foreign investors. The ing 22,000 new subscribers a day, the largest in Asia. This is a goal; to move telecom into the Internet. Yahoo, Motorola, clear indication of things to come in Korea in the 21st Century. - 2 -

ECONOMIC TRENDS U.S. POLICY PERSPECTIVE by Florence Lowe-Lee by Caroline G. Cooper

Survey Finds Most Koreans Believe Crisis is Not Over Yet: Seattle Revisted: The Seattle WTO Ministerial is considered Despite the positive macroeconomic indicators, a survey con- by many to be a true debacle. Since the conclusion of the Minis- ducted by Taylor Nelson Sofres (TNS) revealed that 95% of terial, analysts have been considering not only the implications Koreans do not think the economy has completely pulled itself of the debacle, but where to go from here. out of the crisis. An official at TNS said a majority of Koreans feel somewhat disappointed and apparently had expected more All in all, it is conceded that the Ministerial failed to launch a personal benefit from the economic recovery than what they new round of trade talks for four main reasons: lack of U.S. actually received. This reality of a slower-than-expected return leadership; lack of preparedness, particularly by the Quad mem- of household financial wealth has depressed the public’s hopes bers; an inexperienced WTO Secretary-General; and too little for stronger economy in the future. The survey showed that the consideration for the interests of the developing countries. A percentage of Korean adults who believe the national economy new round is not expected to be launched until 2001 when the will get stronger over the next 12 months fell from 73% in Feb- United States has a new President and a new Congress. While ruary to just 57% in October this year. TNS added that after the the protestors in Seattle left their mark, their impact on future initial overreaction to the crisis, Korean consumers went from trade negotiations is uncertain. There is concern, however, that being “exceptionally naive” about the recovery to overly skepti- the new “anti-trade” coalition will adversely impact the impend- cal concerning the nation’s future economic health. ing permanent normal trade relations (PNTR) vote in the Congress next year. Won Soars Against U.S. Dollar: The Korean won jumped to a 2-year high against the dollar, breaking the 1,140 won per dol- Many consider the March vote on whether or not the United lar level, due to massive selling by local exporters and the in- States should stay in the WTO as a “test-case” for the China flux of foreign investment funds into the stock market. Express- PNTR vote. Republicans are confidant they can deliver the nec- ing concern over the won’s fast-paced rise, the Minister of essary votes to pass PNTR. Democrats, however, will be the Finance and Economy said the government will take steps to primary target of the anti-trade coalition. Those most at risk are slow the won’s surge in order to defend the competitiveness of the pro-trade members of the New Democrat Coalition, who Korean exporters. Aalysts said the won/dollar exchange rate is largely represent swing districts that can go to either Republi- expected to fall further for the time being, but it is expected to cans or Democrats in the next election. trade in the rage of 1,100-1,150 won next year on average. For the United States and Korea, the WTO aftermath will cause Four Products Lead Korea’s Export in 1999: Korea’s exports little disruption in current relations. The United States will con- are expected to total $143 billion, while imports are forecasted tinue to seek an expansion in agriculture trade in the WTO dur- to reach $119 billion by the end of this year, according to the ing the January negotiations on the built-in agenda. Korea will Minister of Commerce, Industry, and Energy. The ministry also not support U.S. agriculture trade objectives. Instead, Korea will said the trade surplus will surpass the government’s earlier goal continue to side with the European Union, insisting that agri- of $25 billion for this year. Korea’s brisk exports this year have culture should be regarded as multifunctional in trade agree- been spearheaded by four core products: semiconductors, cellu- ments. Korea may also pose obstacles for the advancement of lar phones, TFT-LCD, and computer units. The combined ex- trade in biotechnology by agreeing with the European Union ports of the four items between January and October this year that genetically modified organisms should require labeling. amounted to $21.7 billion, up 38.4% or $6 billion from the same period last year. Outside of agriculture, the biggest area of disagreement between the two countries will be antidumping. The United States will Government to Pursue Four Goals for 2000: The Ministry of continue to be adamant about not reopening negotiations on the Finance and Economy said the Korean government plans to WTO antidumping agreement, but Korea will continue to seek pursue four key elements in the economic plan in 2000. Korea changes in procedural aspects of the agreement. will focus on stable growth, completing reforms, improving in- come distribution and fostering a productive welfare system, Labor Unrest Increasing in Korea: In recent weeks, Korea and building a knowledge-based economic base. Although these has seen increased labor unrest. The countries’ top two labor four points still need to be discussed with related government union umbrella organizations have been stepping up efforts to ministries before becoming official, the sources said the key el- lower the work week to 40 hours, and stop a 1997 law from ement in the economic plan is to fully explore the potential of going into effect to prevent union members from receiving full- the county’s economic growth under low inflation. The govern- time wages. While unemployment has improved in recent ment official added that various reforms should be brought to a months, the protest does not come as a shock to many govern- successful conclusion next year, including the corporate and fi- ment officials. The Federation of Korean Trade Unions (FKTU) nancial sectors. In addition, the officials stressed the impor- and the Korea Confederation of Trade Unions (KCTU) are seek- tance of more equitable income distribution and building a ing greater rights for workers in view of increasing job loss and knowledge-based society. reductions in average wages due to corporate restructuring. - 3 -

During the week of December 10, members from the two union BUSINESS UPDATE organizations staged some of the most violent protests in recent by R. Ben Weber history. 17,000 workers staged protest in Seoul’s business dis- trict, causing 160 protestors to be injured. Protestors also orga- nized a sit-in in the office of the National Congress for New Lowering their Debt Ratio: Under the current gov- Politics party, as well as the Federation of Korean Industry. More ernment mandate, chaebols were instructed to lower their debt protests are expected to take place in coming months in light of to equity ratio to under 200%. Although this still sounds high in the April National Assembly elections. respects to Western standards, this is a quarter of their former debt levels. Hyundai, Samsung, SK Group, and LG, four of the top five, are expected to reach this level by year’s end along with 28 second tier business groups. The top four are currently at NEWS HIGHLIGHTS 254.6%; and, with further improvements in corporate governance by Emily Bryant and the spinning-off of subsidiaries, they are expected to reach the government’s goal. Twelve of the twenty-eight second tier Korea Times “Foreign Creditors See as ‘Single Eco- business groups have already meet the goal. They include Lotte, nomic Entity’” (December 15): Still believing that the bor- Samyang, Hanil Cement, and Dacom, Korea’s largest Internet rower is a single economic entity, the Foreign Bank Steering Service Provider (ISP). However Daewoo Group, the last of the Committee has refused to accept the government’s proposal of five top chaebols, is noticeably absent. Daewoo is still working loss ratios ranging from 60–90 percent. The Steering Commit- on various avenues to reduce its debt, and is not expected to meet tee argued that the loss ratio must be the same for all of Daewoo’s the government’s mandate. $5 billion debt as the group has operated as a single economic unit. In a recent internal memorandum to all foreign banks, it Ford Courting Daewoo: In addition to General Motors, the Ford stated that denying Daewoo’s status as a single group is incon- Motor Company has also begun exploring options regarding the sistent with the reality concerning the management and opera- possible purchasing of Daewoo Motors, ’s number tion of and regulatory and accounting practices in Ko- two automaker. Although Ford representatives describe their re- rea. “Neither Daewoo workout plans nor the buyout proposal cent visit with Daewoo officials as “friendly,” it still has caused meet the standards (being a single economic entity),” the Steer- a number of rumors throughout the industry. Ten years ago, Gen- ing Committee said. eral Motors was planning on purchasing a 30% stake in Jaguar Cars, Ltd. of England. In a last minute deal, Ford purchased the Chosun Ilbo “KOSPI Soars Over 1,000 Points” (December entire company for $2.5 billion. A General Motors representa- 10): For the seventh time in history, KOSPI has broken through tive again stated that they are still very interested in Daewoo and the 1,000 point mark. The KOSDAQ index also peaked to a “look forward to working on an arrangement with them on an high. The KOSPI jumped 37.63 points over the previous day to economical basis.” Experts believe that with Samsung officially close at 1,018.17 points due largely to expectations that new dropping out of the bidding process for Daewoo Motors, that stock offerings for the year have virtually ended. Foreign inves- leaves Hyundai, Ford, and GM as the main contenders. tors helped boost the KOSPI by net-purchasing W54.4 billion despite local private investors’ net-sales of W31.8 billion. Moody’s Upgrades Samsung Electronics: Moody’s recently upgraded the electronics division of Samsung Group from a Ba1 JoongAng Ilbo “AmCham Postpones Market Survey Trip to rating (inappropriate for investment) to a Baa3 (appropriate for North Korea” (December 7): The American Chamber of Com- investment). Moody’s indicated that Samsung Electronics has merce in Korea (AmCham) is likely to send its market-research “increased its diversification of cash flow and its drive to main- delegation to North Korea in January next year. AmCham mem- tain its technological lead and low cost position in DRAM chips.” bers were initially supposed to go on December 15, but because Yet Moody’s warned that the volatility of the DRAM market of tight scheduling they have decided to delay the historic trip. could negatively affect Samsung Electronic’s DRAM business Chairman Jeffrey Jones stressed that there will be no problem as it accounts for 50% of its cash flow. in the dialogue with North Korea for the trip. Eight of the twelve participating companies are: Motorola, Purina, Proctor & Korea #1 in Shipbuilding: Korea is on top of the world with Gamble, Allied Signal, Goldman Sachs, GE Capital, Siemens regards to shipbuilding. Korean shipbuilders have received new Westinghouse, and BBMS. orders amounting to 7.97 million gross tons as of October, com- pared to ’s 7.19 million. Korea will account for 40% of the Korea Times, “Korea Decides Not to Withdraw Remaining world’s market. Japan has held the title of world largest ship- IMF Loan” (November 30): Korea has decided not to with- builder since 1956. However Korea has dramatically reduced that draw the remaining $1.5 billion in the International Monetary gap through the 90’s. Industry experts attribute Korea’s success Fund (IMF) loan, an official of the Ministry of Finance and to high Japanese wage levels and the yen’s appreciation. How- Economy (MOFE) said. Korea’s decision to stop drawing on ever, if the won’s value appreciates while the yen’s declines, the remaining IMF loan will signify the dwindling of the inter- Korea’s number one standing may be short lived. national lender’s say in the country’s on-going restructuring, likely touching off a debate on whether Korea has recovered Korea Insight is published monthly by the Korea Economic Institute. enough to “graduate from the IMF program.” Vice President Joseph A.B. Winder is the editor. ECONOMIC INDICATORS by Florence Lowe-Lee

1997 1998 1999 Jun Dec Jun Dec Mar Jun Jul Aug Sep Oct Nov FX Reserves ($ billion) 8.9 37.0 48.5 54.5 60.4 64.0 64.8 65.5 66.2 70.0 Exchange Rate won/$ (end of month) 888 1415 1385 1208 1225 1156 1207 1185 1219 1201 1158 Stock Price Index (1980=100) 765 390 313 525 586 841 971 933 927 829 950 Interest Rate (3 year Bonds) 11.7 24.3 16.6 8.3 8.6 8.1 8.6 9.9 10.4 9.1 9.7 Industrial Production (1995=100) 116 116 99 122 125 130 131 126 134 146 n.a. Unemployment Rate (%) 2.3 3.1 7.0 7.9 8.1 6.2 6.2 5.7 4.8 4.6 4.4 Source: Bank of Korea

1998 1999 1996 1997 1998 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1st Qtr 2nd Qtr 3rd Qtr GDP Growth (%) 7.1 5.5 -5.8 -3.6 -7.2 -7.1 -5.3 4.5 9.9 12.3 Consumption Growth (%) 7.2 3.3 -8.2 -8.4 -9.7 -8.9 -5.8 5.0 7.3 8.4 Domestic Investment Growth (%) 7.3 -2.2 -21.1 -20.6 -23.7 -22.2 -17.9 -4.3 4.9 6.9 Trade Account ($billions) -15.0 -3.2 41.6 9.8 11.4 10.2 9.7 4.8 7.2 5.5 Current Account ($billions) -23.0 -8.2 40.0 10.9 10.9 9.6 8.7 7.1 6.5 6.6 FDI Inflows ($billions) 3.2 7.0 8.9 0.6 1.9 2.2 4.2 2.0 2.5 4.0

Source: Bank of Korea, Ministry of Finance, and Economy and Ministry of Commerce, Industry and Energy

Stock Exchange Composit Price Index 1980=100 1000

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0 97 Jun Nov 98 Jan Mar May Jul Sep Nov 99 Jan Mar ISSN 1061-3803 Monthly Average ALL RIGHTS RESERVED. Sources: Bank of Korea

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