Dogged by War, Burning with Ambition
Aug 02, 2013

Sixty years have passed since the start of the Korean War, but North Korea's sinking of the South Korean warship Cheonan on March 27 was a vivid reminder of the uneasy peace that has reigned over the Korean peninsula ever since. The incident brought the two antagonists to the brink of war, and even Taiwan, 1,500 kilometers away, felt the impact of the rising tensions.

The threat of a "New Korean War" immediately rattled stock markets in South Korea and throughout Asia.

According to Bloomberg figures, the average price/earnings ratio on the Korean stock exchange fell last week to half the level eight months earlier, leaving it ranked ahead of only Pakistan among Asian markets. South Korea's currency, the won, also lost 3 percent of its value.

At the same time, markets around Asia were pummeled. A day after South Korea's government cut off nearly all trade and threatened military action against North Korea on May 24, Taiwan's benchmark Taiex lost 3.2 percent, Japan's Nikkei 225 lost 3.1 percent, and Hong Kong's Hang Seng Index fell 3.5 percent. Even the Shanghai Composite Index, which had been relatively stable, lost nearly 2 percent on the day.

Most affected by the heightened tensions were the Korean people themselves, but they are not strangers to such setbacks, and one economist did not foresee the latest turmoil having serious consequences for South Korea's markets.

"We don't think the incident will have any substantial, lasting market fallout," says Goohoon Kwon, executive director of Asia Investment Research at the Seoul branch of Goldman Sachs (Asia).

From 1998 to 2009, there were eight skirmishes between North and South Korea, the one with the biggest impact on markets occurring in 2002 when an incident in the Yellow Sea led to the sinking of a South Korean warship and the KOSPI composite index fell 7.2 percent. But in all eight of the incidents, the market returned to normal within five days.

The Best Year in the Country's History

This time, however, there is more at stake than ever. In 2009, South Korea's economy and companies were in their strongest positions globally since the Korean peninsula was divided, and the country basked in the light of a stellar overall performance after President Lee Myung-bak was able to stabilize the economy in the wake of the global financial crisis.

From its position as one of Asia's four dragons (including Singapore, Taiwan and Hong Kong), South Korea has joined the ranks of the world's top economic powerhouses, becoming one of the world's top 10 exporters for the first time and ranking as the world's 11th biggest economy. In November, Lee will host the G20 summit and negotiate global financial guidelines on an equal footing with countries that account for 85 percent of the world's GDP.

At a time when much of the world was experiencing negative economic growth, South Korea's economy grew at a 0.2-percent clip and unemployment fell below 4 percent. It was the only Asian country other than China to see positive growth, and it ranked third in growth among the OECD's 30 member countries.

South Korea's four big "chaebols," or conglomerates, have also extended their reach. Samsung Electronics is now the world's biggest technology company, and Hyundai Motor Company has jumped to fourth among the world's biggest automakers. LG Electronics and steel giant POSCO (Pohang Iron & Steel Co.) have also expanded their global market share.

But these major achievements could be destroyed in even a brief military conflict.

Lee, a member of the conservative Grand National Party, has maintained a more hard-line stance toward North Korea than predecessors Kim Dae-jung and Roh Moo-hyun, one of the factors sparking heightened fears of a "New Korean War."

Lee believes that the "sunshine policies" of Kim and Roh were ineffective, and he has adopted a foreign policy line more aligned with that of Japan and the United States, while also engaging aggressively with ASEAN (Association of Southeast Asian Nations). Lee excels at handling "hostilities," having just recently finished a "war" to pull his country back from the brink of bankruptcy.

Economic ‘War Room'

During the global financial meltdown in 2008, speculation was rife that South Korea would go bankrupt again and was being described as a "second Iceland." The greatest danger came in the fourth quarter of 2008, when foreign investors pulled out of the country en masse in an extremely short period of time. The exodus led to financial turmoil and a heavy depreciation of the won, and the government's short-term debt ballooned to US$180 billion, while exports and the economy contracted.

Yoon Jong-won, the director general of the Economic Policy Bureau of the Ministry of Strategy and Finance, told CommonWealth Magazine that throughout 2009, Lee held a weekly "war room policy meeting" at the presidential office (Cheong Wa Dae) from 7:30 a.m. to 9:30 a.m. with all ministers and council chairmen in attendance. The meeting helped Lee's administration respond quickly to changing situations.

"South Korea learned from the Asian Financial Crisis of 1997 that the government not only has to pay attention to economic growth, it also must have the crisis management capability of reducing economic volatility," said Yoon, a regular in Lee's war room. Before being brought home to South Korea in 2008, he served as the Korean representative at the International Monetary Fund, and he is considered to have one of the brightest futures of any government official.

Yoon, who calls the president "MB," said South Korea's CEO president has a thorough understanding of economic trends and operations and reacts quickly in emergencies. In only three quarters, the country's economic growth returned to positive territory.

Faced with a financial crisis, Lee's economic management strategy began with a three-year stimulus package amounting to 6 percent of the country's economic output. The cost of the stimulus measure as a percentage of GDP was the second highest of any country in the world along with China, trailing only Saudi Arabia. Second, the stimulus package primarily invested in a "Green New Deal" that also adjusted the country's industrial structure. The government introduced 10 "green" growth measures in 2008, and the progress of each one continues to be monitored to this day by Prime Minister Chung Un-chan.

"In fact, all countries launched major financial stimulus packages, which were generally similar, but the effectiveness of South Korea's plan came from being carried out rapidly," says former WTO deputy director general Chulsu Kim, recognized in his country for his international economic vision.

Aside from the government, the chaebols have also contributed significantly to the country's recovery. The conglomerates that survived in the aftermath of the 1997 Asian Financial Crisis recovered more quickly from the depths of the meltdown than companies from other countries, and have single-mindedly pursued market dominance ever since.

On May 17, Samsung Electronics chairman Lee Kun-hee announced that the company would increase its capital expenditure this year to US$16 billion, the highest ever in the high-tech sector. Taiwan's DRAM manufacturers, who have yet to fully recover from the economic meltdown that nearly put some of them out of business, suddenly faced another severe threat, and the news sent their shares plummeting

In National Taiwan University's EMBA management games, Samsung is always the most classic case to analyze: how it takes advantage of rivals when they are weak by intimidating them with massive investment, and how it devotes a higher percentage of its resources to R&D than companies in advanced countries, enhancing its technical capabilities and raising competitive barriers.

In terms of sales, Samsung surpassed perennial rival Sony in 2006 and shot ahead of U.S.-based Hewlett-Packard and Germany's Siemens in 2009 to emerge as the world's biggest company in the technology sector. Samsung's rise is a classic case from the past decade of a company from a less technologically advanced country catapulting to the top of its industry.

High-ranking members of South Korea's two biggest business associations – Korea Chamber of Commerce & Industry chairman Kyung-shik Sohn and Federation of Korean Industries vice chairman Byung-Chul Jung – served on the president's 20-member "national competitiveness committee." Jung once served as the CEO of LG Electronics. When the two analyze the competitive strengths of the chaebols, they point to three main advantages.

First, their diversified structure is already competitive on an international level. Taiwan's biggest companies generally focus on IT and electronics, but the South Korean giants rank among the world's best in shipbuilding, electronics, steel, automobiles, and heavy industry.

Second, the financial structures of these chaebols have vastly improved since the 1997 Asian Financial Crisis. Before that crisis hit, their debt ratio averaged more than 420 percent but now it is down to 112 percent, leaving them in a position to cope with constantly changing financial risks and even able to increase their investment.

Third, they have aggressively invested in R&D and technology to narrow the technological gap with advanced countries.

Based on a study by management consultant McKinsey & Company, R&D ranged between 2.5 percent and 3 percent of GDP from 2001 to 2006, higher than in the United States, Germany, and Britain.(See Table) According to World Intellectual Property Organization statistics, South Korea ranked fourth in the world in the number of patents for which it applied in 2006.

Lee Kyung-tae, the president of South Korea's Institute for International Trade, said that in 2009, the country's companies also took advantage of the falls and slip-ups of rivals to rapidly increase market share around the globe. This strategy helped South Korea crack the list of the world's top-10 exporters for the first time to rank ninth, and its share of global exports rose above 3 percent, also a new first.

Influence vs. Resentment

South Korean brands are rapidly ascending around the world, particularly in Asia and emerging countries. Stephen S. Roach, Morgan Stanley Asia's chairman, wrote that the depreciation of the won contributed to the country's ability to withstand the global economic meltdown but was not the deciding factor in its competitiveness. The keys, he contended, were South Korea's high proportion of spending on R&D over the past decade, a focus on improving product design and quality, and efforts to enhance the country's brands. All of these factors have gradually led to greater South Korean influence around the world.

An example of this "Korean wave" is the huge fan base South Korean television serial dramas have in Taiwan. "Every year a hundred Korean drama series are broadcast in Taiwan," says Yang Keun Koo, South Korea's representative to Taiwan.

Korea fever has even affected the life choices of some young Taiwanese. Four years ago, for example, Tainan native Chen Yu-tien decided to go to South Korea to study after graduating from Kaohsiung Municipal Girls Senior High School despite the objections of her father.

"After seeing the Korean TV dramas, I wanted to more deeply understand that society," says Chen, who is now studying in Hanyang University's Department of Journalism and Mass Communication in Seoul.

Walking around a glitzy commercial district catering to younger shoppers, she points out a number of shops considered "must-visit" by Taiwanese travelers, selling the latest in music, clothing, food, skin care cream, and Korean pop merchandise.

Even Korean-style beauty has created a new trend. The country's biggest cosmetics group, Amore Pacific Corp., has followed in the footsteps of TV series, pop music, and Korean celebrities in extending its presence throughout Asia. The company now sells perfume in France and has 30 stores in the United States, and one of its main brands, Laneige, has 400 sales outlets around Asia. The company had sales of NT$49 billion last year, and its share price is higher than that of Samsung Electronics.

On the other hand, South Korea's desire to be No. 1 in everything from sports to business, backed by forceful and extremely aggressive means, often stirs controversy.

South Korea is the closest rival of Taiwan's high-tech companies, competing in everything from semiconductors to LCD monitors, DRAMs, and consumer electronics.

"Korea and Taiwan are two countries with an extremely high degree of overlap in their exports," says Kung Ming-hsin, the vice president of Taiwan Institute of Economic Research. "Whether you like Korea or not is one thing, but you have to study it."

Taiwan's "godfather" of semiconductors, Taiwan Semiconductor Manufacturing Co. (TSMC) chairman & CEO Morris Chang, calls South Korean companies "everybody's rivals," because they insist on controlling every product themselves and are hard to cooperate with.

AU Optronics chairman K.Y. Lee sees South Koreans as rivals who use unfair means in the pursuit of victory. "Competing with a nearly 50-percent depreciation of the Korean won, Korean companies immediately had gross margins that were 6 percent higher than those of Taiwan's enterprises," says an unhappy Lee. But he also recognizes the boldness of the country's major investment in technology and branding.

Emerging from the ranks of the world's weaker countries to push its way onto the world stage, South Korea believes that striving for victory and being tenacious are no longer enough.

Sohn Jie-ae, the spokesperson for the Presidential Committee for the G20 Summit and a former CNN correspondent, recognizes that South Korea has entered a new era.

"We are not the emerging economy anymore. We don't have as much experience in dealing with advanced countries as we do with developing countries. So the G20 is very important for Korea. You need that experience to become a rule setter," she says.

In an interview with the Washington Post in April, President Lee agreed that his country's greater presence in the world will require a change in outlook and heightened maturity.

"Now Korea is at a point where we must do all we can to become a more mature and more responsible member of the international community," he said.

"And I consider my tenure as the president of the Republic of Korea, as a time to lay the foundation for future generations so they can live in a country that is more mature and advanced in all aspects."

Translated from the Chinese by Luke Sabatier