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FT SPECIAL REPORT South Korea Wednesday November 6 2013 www.ft.com/reports | @ftreports Technology Inside » Foreign stage and domestic drama Generous political identified as promises prove difficult to keep Page 2 the key to Culture club Games, films and comics enjoy record rejuvenation growth in exports Page 2 Banking Government urged As big manufacturers’ contribution falls, the to step back to emphasis is on innovation and start-ups to let the sector flourish boost growth, writes Simon Mundy Signs of the times: South Korea has closed the gap with the rich world but it is under pressure to build new industries Alamy Page 3 ome 65 years after the it is gripped by a nervous debate over groups have fallen by the wayside as it consolidates its position as the Microsoft’s Bill Gates, Facebook’s Republic of Korea was born its path to continued economic devel- over the years, but the strongest have world’s fifth-biggest carmaker by Mark Zuckerberg and Google’s Larry Relations with amid a landscape of desper- opment. grown to rank among the global lead- sales. Posco continues to expand its Page have been summoned to the ate poverty, its armed forces As South Korea has closed the gap ers in their fields. Samsung has shed global operations as one of the world’s presidential Blue House this year to Pyongyang recently brought central with the rich world, its growth has its image as a low-budget electronics leading steelmakers. advise on the drive. Rapprochement SSeoul to a standstill with a huge anni- slowed. A rise in GDP last year of brand to outstrip Apple as the leading Yet, there is growing concern in Policies have included tax incen- versary parade. As tanks, missiles and 2 per cent is expected to be followed manufacturer of smartphones by South Korea about the ebbing mar- tives to encourage equity rather than with the north thousands of troops coursed through this year by 2.8 per cent growth, sales. Samsung and LG dominate the ginal returns of this manufacturing- debt investment in new technology still out of reach the streets of the capital, the gleaming though well down on the average of global market for televisions. driven growth model. The big manu- businesses, in the hope of encourag- office buildings and trendy coffee more than 5 per cent in the decade Hyundai Motor Group has under- facturers’ contribution to national ing more stable, long-term funding Page 3 shops surrounding them bore testa- leading to the 2008 financial crisis. taken a similar metamorphosis, build- employment has steadily declined that will enable start-ups to flourish. ment to one of the past century’s most “Korea has come a long way by fast- ing a growing reputation for quality over the past few years as production A new stock exchange, Konex, has stunning economic success stories. following, imitating what has been moves offshore, and the government – been established to cater specifically Education rethink Yet, amid the flag-waving children done by advanced nations,” says Choi now led by Park Chung-hee’s daugh- for fast-growing new businesses. A and the confetti, last month’s display Byung-il, president of the Korea Eco- ter, Park Geun-hye – is under pres- Won500bn ($470m) “Future Creation Rote learning and reflected the military tensions that nomic Research Institute. “But that Bill Gates, Larry Page and sure to build new growth industries. Fund” has been set up to provide cramming are not continue to haunt the Korean penin- road is coming to an end.” Mark Zuckerberg are Ms Park has based her response to state financial support. sula and which have been unresolved Five decades ago, the military ruler this problem on the slogan “creative Such measures are welcome and enough to meet since its formal division in 1948. And Park Chung-hee set about transform- among those summoned economy”, with an emphasis on pro- overdue, says Jimmy Kim, co-founder modern challenges while South Korea’s annual output ing a poor, agrarian economy by fos- moting technological innovation and of SparkLabs, a start-up accelerator has grown since then from an esti- tering a group of export-led conglom- this year to give advice start-up businesses. Page 3 mated $86 a head to $22,590 last year, erates: the chaebol. Many of these US technology leaders, including Continued on Page 2 Small businesses battle to make mark alongside conglomerates development and raise “It is time to move into President Park Geun-hye is Chaebol companies incomes is running out of higher-valued industries on trying to create an eco- steam,” McKinsey said in a the back of stronger R&D system where venture firms The official shift of recent report. efforts.” can flourish, by expanding focus will take a “The growth of the con- It is not easy to move up financial support for glomerates that drove the the value chain, however, start-up companies with while to bear fruit, economy in the past should because of the country’s innovative ideas. says Song Jung-a be balanced with growth technological weakness in Developing SMEs has among SMEs and service producing precision compo- become increasingly impor- industries to write another nents and key materials. tant for the South Korean South Korea is a nation of success story for South Although Samsung and LG economy as they provide exporters. The manufactur- Korea.” are pulverising their Japa- jobs for 90 per cent of the ing-driven conglomerates A handful of Korean man- nese rivals in the technol- population. Chaebol compa- such as Samsung, Hyundai ufacturers such as Samsung ogy sector, most South nies now produce more and LG have been at the and Hyundai continue to abroad, rather than create heart of rapid economic post robust profits as their quality employment oppor- development over the past mobile phones and cars tunities at home. half century, but the coun- gain increasing popularity ‘It is time to move “The growth story driven try faces growing questions in global markets. into higher-valued by big conglomerates seems over whether a handful of Experts caution, however, to have reached its limit as so-called chaebol companies that manufacturing overall industries on the the increasingly automated can continue to drive its is losing its strength as manufacturing sector is not growth amid increasing shipbuilders, petrochemical back of stronger creating as many jobs as it competition from China. and steel producers concede R&D efforts’ used to,” says Mr Kim. The government’s policy market share to low-cost “High-tech venture firms of favouring the chaebol Chinese competitors. should be nurtured to add over smaller, domestically “A couple of sectors such Korean companies heavily vitality to the slowing man- focused businesses has as information technology depend on parts from ufacturing sector.” made South Korea the glo- and autos are supporting Japan’s specialist engineer- But it will take a long bal leader in sectors like our economy, but many tra- ing companies. Last year, time for the government’s shipbuilding, flat screens, ditional heavy industries South Korea suffered a shift of focus from chaebol mobile phones and memory seem to have hit the wall $25.5bn trade deficit with its to SMEs to bear fruit. Small chips. The country has also amid growing challenges old colonial overlord. businesses have struggled become a serious contender from China and other devel- Mindful of this problem, to grow as chaebol compa- in areas such as refinery, oping countries,“ says Kim Korean policy makers are nies have spread across auto and steel production. Joo-han, researcher at the keen to nurture the high- many unrelated domestic Chaebol companies con- Korea Institute for Indus- quality small and midsized markets – including food tinue to grow rapidly but trial Economics and Trade. manufacturers that serve and retail – encroaching their growth is fastest out- “It is hard to expect a few both Japan and Germany so upon business areas tradi- side South Korea, with com- capital-intensive industries well. tionally reserved for SMEs. panies like Samsung and to continue to drive Under the slogan of mak- Chaebol groups are Hyundai building their fac- growth,” adds Mr Kim. ing a “creative economy”, accused of choking smaller tories overseas for cost sav- businesses, by pushing ings and better access to them too hard to cut prices bigger markets. According and buying out promising to McKinsey, the consul- ones to strip assets and tancy, South Korea’s top 10 repress competition. conglomerates have grown “Our domestic economy by 13 per cent annually has been monopolised by a since 2000, on the back of handful of chaebol groups, strong overseas sales. so SMEs with no business However, small and mid- relationship with them can- sized companies (SMEs) not survive,” says Kim remain far weaker, over- Sang-jo, economics profes- shadowed by the chaebol’s sor at Hansung university. economic dominance at “Chaebol squeeze profits home. out of their parts suppliers Although the perform- so their SME partners have ance of a dozen large manu- no room for R&D invest- facturers remains critical to ment.” economic growth in the There are many in the near future, experts say country who say that the South Korea should build conglomerates’ influence more vibrant small and should be checked. medium-sized companies to Experts stress that the add vitality, while develop- chaebol should accelerate ing the inefficient service their move into higher, val- sector to create more jobs. ue-added products, and “It is increasingly appar- strengthen their push into ent that the export-oriented new overseas markets growth formula that helped rather than wasting their the large Korean conglom- energy on competing with erates drive economic Driven abroad: a Hyundai car plant in southern India Reuters SMEs at home.

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