KWR International - KOCHAM Report

After preparing a questionnaire containing 17 questions and 28 sub-questions designed to evaluate a respondent's perceptions on a range of relevant issues, KWR targeted approximately 1000 select individuals from KWR’s internal database of opinion leaders. Candidates were forwarded questionnaires via e-mail on March 6, 2000 and given a deadline of March 16, 2000 in an effort to represent the views of business, government, academia, non-profit and financial institutions and media. Seventy four questionnaires were received, in addition to several additional responses from individuals who noted they did not have time or sufficient knowledge to provide an informed response. While 74 responses is not a large number, it does allow for the development of a representative sample of opinion leader sentiment. This will help KOCHAM/FKI and other Korea-related organizations to better understand the views of foreign opinion leaders and to provide data from which a number of conclusions can be made. Given the specialized selection process, detailed nature of the questionnaire, and composition of the sample audience, however, it is important to emphasize that the results generated should not be interpreted as an unbiased "snapshot" of U.S. public opinion, but rather as an informed overview of a select group of opinion leaders and participating individuals.

Following a tabulation process, means, medians and standard deviations were calculated for each question. Selected respondents were contacted over the next few weeks for follow-up interviews, giving rise to the more complex impressions reflected in the quotations included in this report. In addition to respondents who completed the questionnaire, interviews were also conducted with individuals who noted they did not have time to provide a written response, but would be willing to speak over the telephone. To encourage frank discussion, respondents were assured their identities would be kept confidential, and they would be identified only by profession and geographical location. >Respondents included executives (11% of group), journalists (22%), academics (5%), attorneys (14%), government (5%) and non-profit officials (3%), consultants (5%), financial professionals (16%), engineers (3%) and analysts (16%). Individuals were based in a variety of geographical locations, including 22% from the New York area, 22% from the Washington, D.C. metro area, 16% from California, 3% from the Midwest, 5% from New England, 3% from the South, 5% from Europe and 24% in Asia. All respondents were Americans working in the U.S., Asia or Europe or English-speaking foreigners working for U.S. companies. The first question asked respondents to rate their general knowledge of Korea. Of the 70 individuals who responded to this question, the mean rating was 7.1. There was a substantial deviation in ratings, ranging from 1 to 10, including respondents with little or no knowledge, and those who have extensive, ongoing experience dealing with Korea. A 7.1 rating, however, indicates a group with an above average knowledge of Korea. More knowledgeable respondents tend to be more aware and therefore more critical and extreme in their ratings. This needs to be taken into account when extrapolating any conclusions or recommendations from the data. The second question asked respondents whether economic growth in South Korea is being driven more by cyclical factors or by reform/structural change (1 indicating cyclical factors and 10 indicating reform/structural change). While a significant number of respondents believed that reform was the primary factor, as a group respondents were largely undecided. This was demonstrated in the mean response of 5.5 and a distribution that exhibited an above average deviation. Arguing in favor of reform, a Retired Vice President of Public Affairs-Asia for a Major U.S. Technology Firm noted " I am optimistic and have been for some time. The fundamentals are sound. Still lots of work to be done but they have come a long way, farther than other countries in the region." A Government Professor, however, leaned toward cyclical factors, stating "Reforms have been halting at best... The surge in the stock market reflects undue optimism, and doesn't reflect the underlying competitiveness of Korea's economy."

The third question was divided into two parts. Respondents were asked to evaluate the sustainability of economic growth in South Korea over the short (1-2 years) and longer (3-5 years) term (1 indicating extremely weak or negative growth and 10 indicating extremely strong/sustainable economic growth). Respondents expressed confidence in Korea over both periods, providing mean responses of 7.5 and 6.2 respectively, with an average deviation in both cases. While the lower mean reflected over the longer term period can be partially attributed to the greater uncertainty inherent in any long-term economic forecast, respondents also emphasized the need for Korea to maintain an ongoing commitment to economic reform. A Senior Editor of a National Business Magazine noted "… Sustainable, long-term growth heavily depends on continuing reforms". However, in some cases respondents were more positive than many Koreans, with a Sovereign Credit Analyst highlighting the progress that had been achieved in 1999, remarking "President KDJ has not been getting credit for the high growth and progress that has been achieved. It is almost as if Koreans expect 8-9% growth to occur naturally."

The fourth question rated the progress of South Korea’s economic recovery efforts in comparison to other Asian economies and Latin America. Respondents were highly positive, providing mean responses of 8 and 8.3 respectively, with the uniformity of opinion expressed in a below average deviation. Several respondents, however, emphasized that their rating was more of a comment on the inadequacy of efforts in these other economies than an endorsement of South Korea, which they believe needs to meet a higher standard. A Seoul-based financial consultant noted "What is so great about other Asian economies? Indonesia will be a basket case for a long time. Malaysia is only moderately interesting, Singapore is too small even if it does everything right, Taiwan is under a much more serious military threat than Korea, and China has many huge, inefficient and bankrupt state-owned enterprises. …. Korea can still look better than most of Asia even if it does slip into a slow growth phase over the next few years".

The fifth question asked respondents whether large South Korean conglomerates (chaebol) had seriously begun to restructure and rationalize their business operations, (1 indicating no real progress & 10 indicating significant progress). While the group as a whole expressed a neutral opinion, reflected in the mean response of 4.8, there was an above average deviation in response, indicating a wide diversity of opinion. In their comments, respondents emphasized: 1) the importance of evaluating each conglomerate individually (e.g. the words of a Senior Editor of National Business Magazine who stated "Some chaebol appear more serious about restructuring than others" ; 2) that conglomerates were generally aware of the need for change (e.g., a Retired VP, Public Affairs-Asia for a Major U.S. Technology Firm who noted "…. the chaebols are under a great deal of strain and government pressure. They realize they need to restructure and are proceeding hesitantly, but know they have to do so. As they get healthier, will they slack off? I don’t think so. They need to get their financial house in order to compete in the international market"; and 3) that even cases that had sometimes been characterized as failures had served to strengthen the reform process ( e.g., a Ret. Bureau Chief, National Business Newspaper who pointed out "Does the dismantling of Daewoo constitute restructuring? I guess in a way it does.")

The sixth question asked respondents to rate the potential effectiveness of "government directives", "self regulation" and "market reform" as policy prescriptions to promote corporate-level reform among Korean conglomerates (1 indicating not effective and 10 indicating extremely effective). Market Reform generated the highest mean of 7.8 with a below average deviation, followed by Government Directives with 6.4 (though the deviation was very high), and Self Regulation, coming in a distant third at 3.9, also showing an above average deviation (though not as high as for government directives). Respondents highlighted the interrelated nature of these policy measures in their comments. For example, a Corporate Attorney from Los Angeles stated his belief that "Market reform will not occur unless there are institutional structures in place that will facilitate the working of market forces. … The Korean government's role should be to put into place a framework that will facilitate the proper working of market forces." In addition, many respondents, particularly those who were most knowledgeable about Korea, believed that one could not rely upon self regulation alone -- emphasizing that market reforms, promoted through directives and initiatives driven by the Korean government were essential. As a Washington-based Think Tank Analyst noted "The best motivation for reform probably has been the willingness of the government to allow certain groups to fail. However, this has been marred by the propensity for the resolution of bankruptcy to fester for excessively long."

The seventh question asked respondents whether South Korean assets were currently undervalued, fairly valued or overvalued (1 indicating overvalued, 5 fairly valued and 10 undervalued). Respondents believed that assets as a whole were fairly valued, expressing a mean response of 5.2, with slightly less than average deviation. Respondents noted, however, the need to distinguish between asset classes and firms. A Portfolio Manager, who is heavily invested in Korea noted "We are finding many good values, with the exception of internet and telephony." Respondents also expressed concern about the current turmoil in the NASDAQ market as well as the uncertainty surrounding Korea’s local elections. A New York-based Senior Attorney commented "Korea has a relatively liquid market that has successfully attracted a lot of foreign investment. What will send it on the next leg up? That depends on the April 13^th election and the U.S. stock market. It is difficult to get anyone to say something bad about the Korean economy at the moment. I expect it to do relatively well over the next year or two."

The eighth question asked respondents to rate the competitiveness of South Korean companies in Manufacturing, Cost Competitiveness, R&D, Marketing, Finance and Management (1 being noncompetitive and 10 being highly competitive). Respondents provided responses with an average to below average deviation and mean responses of 7.4, 6.6, 5.2, 4.6, 4, and 3.9 respectively. Several respondents suggested that Korean firms need to re-evaluate their business practices. A New York-based Senior Attorney highlighted the challenge that lays ahead noting "As Korea and Asia have been struggling …. to emerge from their financial crisis, there has been a wave of global consolidation. The chaebols must decide how to advance beyond a strategy that seeks to do business globally from a Korean base to make the concerted global acquisitions of financial, human and other resources needed to become competitive multinational corporations." Nevertheless, respondents did recognize the underlying strength of Korean firms. As a Washington-based Trade Attorney stated "Korean firms are highly competitive manufacturers, but management still has weaknesses. …. But Koreans have met many challenges, emerging stronger each time. Their production is very efficient. Look at their experience in d-rams, etc. They had a near death experience, but were able to recover and prosper once again."

In the ninth question, respondents were asked to rate the relative attractiveness of South Korean corporations as potential partners in areas including Manufacturing Source, Entry into Korean Market, Joint Venture Partners, Marketing/Licensing, Entry into Emerging Markets and as Financial Partner (1 being highly unattractive & 10 being highly attractive), exhibiting means of 7, 5.9, 5.3, 4.7. 4.6 and 3.7 respectively. With the notable exception of Manufacturing in which their sentiment was relatively uniform, respondents were far less certain as a group in their ratings, demonstrating the uncertainty reflected in a higher than average deviation. Aside from recognizing Korean manufacturing prowess, respondents seemed to believe the primary appeal of partnering with Korean firms was to assist in gaining entry to Korea’s attractive domestic market. A Retired VP, Public Affairs-Asia, Major U.S. Technology Firm commented "A local partner can really help you to succeed in the Korean market. Based on our own example, we had lots of regulatory problems in manufacturing there, but finally entered into a JV with a chaebol and applied their logo on our product. We then received instant access to the market."

Respondents were less sure about partnering with Korean firms in emerging markets and third countries. The Ret. VP, Public Affairs previously quoted went on to state "…. you have enough problems working with Koreans firms in Korea or the U.S. To throw a third country into the mix is very problematic. In China you want a Chinese partner." Nevertheless, many respondents noted that while the attraction and desire may be there -- it is not always easy to work with Korean firms. A Seoul-based Financial Consultant stated "In many cases Korean-foreign joint ventures have failed. It is not easy here. To be fair there have been a number of successful ventures as well. While we do point to some of the difficulties, when potential clients inquire, we encourage them to come in on an informed basis and work with us to find solid partners so that the prospect of failure is much reduced and a good outcome much more likely." A New York-based Senior Corporate Attorney stressed the need for information and made a distinction between partnering and mergers and acquisitions noting "Foreign companies tend to view the quality of Korean firms as having been tarnished by the financial crisis. Many offer good value if you want to acquire them, but they are not necessarily the best partners. One of the reason foreign investment has not been as high as it might have been is that large companies do not have full financial information and there are lots of black holes in the due diligence process. Korean companies have suffered in the past from the perception that they were hard to partner with. That has only increased over the past few years. None of our clients or attorneys has talked in the last year or so about partnering with a Korean firm outside of Korea except in the semiconductor sector." A Sovereign Credit Analyst, however, noted that the attraction is there in spite of any perceived difficulties, emphasizing "If you are an American company looking to penetrate Asian markets, either in Korea or as an export platform, Korea would be a place to look ahead of other Asian countries. For an Asian entry strategy they would be high on my list."?

The tenth question asked respondents to rate South Korean products in terms of Price, Quality and Technology, as well as Design and Brand Name. The first three factors generated mean responses of 7.3, 6.3 and 6.3 respectively, with far lower than average deviation. Respondents were less certain when it came to Design (5.4) and Brand Name (4.5), expressing a greater diversity of opinion and slightly higher than average deviation in both cases. Respondent concerns were illustrated in the comment of a Washington-based Trade Attorney who noted "Koreans have enjoyed great success as manufacturers, but now they need to compete against the world’s best marketers. They have a tough road to hoe. Building brands is a long hard process, but the fact they came back from a near death experience in autos is very encouraging. Look at Hyundai. They failed, and unlike Volkswagon, who took a long time, they did not give up and learned from their mistakes. Their extended warranty program is a great marketing tool, and they have kept prices low. The cars are not on a par with most U.S. or Japanese cars, but they are not bad and very competitive on price."

The eleventh question asked respondents whether Korea can successfully generate the intellectual capital, entrepreneurial mindset and flexible business structures that have driven technological growth and innovation in the U.S. over the past decade? (1 being incapable & 10 being highly capable). With a higher than average deviation expressing a diversity of opinion, respondents generated a mean response of 5.9. Respondents did not appear to question the underlying entrepreneurial ability of Koreans but rather whether this translated into an enabling environment. These thoughts are highlighted in the comments of two respondents, including a New York-based Senior Corporate Attorney who noted "I just visited Japan, where I was invited to a meeting of ‘Bit Valley’ firms. About 40% of the participants were Japanese-born Koreans. This tells you something about the entrepreneurial spirit of Koreans and their potential to thrive in this sector;" and a Government Professor who stated "We're seeing startups in internet and technology. So there's potential. But isolated success stories are different than an environment that fosters these things. Overall, Korean educational, corporate, and governmental structures still favor those who are not innovative or daring." Several respondents, however, expressed other perspectives as well. For example, a Tokyo-based Financial Correspondent noted "Can any other Asian country, and not just South Korea, emulate the U.S.? Do they want to? Probably not. Asia will only try and take the good points of capitalism and remold it so their own society and people can accept it. I don't think Asia will ever accept U.S. style capitalism and it shouldn't. There will be more stock market millionaires and 26 year olds with their own company in Korea but not as much as in the U.S." Additionally, a Washington-based Trade Attorney provided the following words of encouragement " Clearly the U.S. is dominant in venture capital and high-tech start-ups, though it is also clear that Koreans are doing a lot of groundbreaking things in that area and these firms are unencumbered by the anachronistic management structure of the chaebol. Younger people are very entrepreneurial. Korea’s economy is more sophisticated than other places in Asia. They have a very good chance." In contrast, however, a Senior Editor of a National Business Magazine cautioned "Just because you have a local market listing these companies does not mean you have a new economy. You must come up with something unique that adds value in a global context. Not just the Korean version of this or that. Is the present trend much more than just jumping on the bandwagon? I am not aware of many ideas emanating from Korea that cause me to wonder, now why didn’t I think of that…."

The twelfth question asked respondents to rate the investment potential of Korean start-up and high-tech firms compared to similar entities in the U.S., Europe, Other Asian economies and Latin America (with 1 being inferior investments & 10 being superior investments). Respondents perceived Korean firms to be inferior to those in the U.S. (mean of 3.3), about equal to Europe (mean of 5.2) and superior to other Asian Economies (6.3) and Latin America (6.9). Interestingly, respondents emphasized the need to evaluate technology investments from the perspective of both the potential of Korea’s domestic market as well as from the ability of the firm to compete in the global economy. A New York-based Senior Corporate Attorney noted "Any economy growing at 10% or more has to be attractive to investors. The growth of the KOSDAQ has been amazing. Korea is a leading market in terms of internet penetration and e-commerce. Whether Korean net companies will succeed as global players, I am not sure. However, too many people focus on the .com and .kr sites. I see far more potential in internet infrastructure and engineering applications. I do not know how many there are of these companies in Korea, but judging from their success in semiconductors and technology manufacturing, the potential should not be underestimated." A Sovereign Credit Analyst made a similar point stating "If you are a venture capitalist, you have to make a play for the local market that will get you the return you are looking for. There are partnering opportunities, but I don’t know if there are Korean firms out there with the potential to become a Nokia or AOL." Additionally, several respondents cautioned about the dangers of worshipping smallness for its own sake. A Senior Editor of a National Business Magazine emphasized "Small nimble companies are good, but simply avoiding the worse problems of large companies is not enough. This is just neutralizing a negative. The problem is my expectations are very high when it comes to Korea. Probably if the country hadn’t traditionally been such a great performer, I would not expect such great things."

The thirteenth question asked respondents to rate the relative attractiveness of Corporate/M&A, Portfolio and Other Fixed Investment (1 being highly unattractive and 10 being highly attractive). Respondents provided mean responses of 6, 5.6 and 5.4 respectively. Deviations ranged from slightly higher, to lower, than average. A Portfolio Manager with substantial Korean exposure stated "I am very bullish on the Korean market overall, as reforms, especially in the financial sector, have been significant, even though many companies still seem to be dragging their feet into this new deregulated environment. My fund can buy assets anywhere in the world. As recently as last summer, we were 60% weighted toward Korea. Had a huge run and some stocks appeared fully valued so we cut back to 40%. Many old economy stocks appear cheap. I think the KOPSI will rise to 1200+ over the next couple of years, possibly this year." Another indicative comment was made by a Financial Industry Professional who noted "Korea is definitely a buy over the long term, but I am not so sure in the near future. When the KOPSI was 300, the decision to invest was a lot easier. Korea was not going to disappear off the map. Now, however, we have a globally inflated technology sector and we will have to see whether the reform process really takes hold. Meanwhile the KOPSI dances between 8-900. Ultimately, it will rise substantially, but will we first revisit some lower numbers?" A slightly different perspective was offered by a Washington-based Trade Attorney who commented "It is hard to make informed decisions, especially in respect to fixed investment. There is too much uncertainty over the future of the Korean economy and the sustainability of the reform process. This is slightly less of a concern when it comes to portfolio investment, given the greater liquidity and ability to implement an exit strategy. The problem of corporate debt is very troubling. Lots of balance sheet debt and technically insolvent firms, that are not turned into bankruptcy, but saved by marginal foreign investment. Their current health is born out by people who are ignoring the debt --- pretending it isn’t there. Can these enterprises be rebuilt both financially and in terms of product development and marketing? That is an open question. Most large foreign investors have not invested enough to hurt them if they fail, while reserving a big upside."

Question fourteen asked respondents to rate the relative attractiveness of investments in Manufacturing, Technology, Tourism, Retail, Financial Sector and Real Estate in Korea (1 being highly unattractive & 10 being highly attractive). This generated mean responses of 6.8, 6.7, 5.6, 5.1, 4.6 and 4.4 respectively. Again, respondents were most unified in their opinion of Manufacturing, which generated a below average deviation, followed by Tourism, which also possessed a below average deviation, and the other sectors which exhibited an average distribution. Typical comments included those of a Government Professor "There is so much deadwood that if you can buy a Korean company it has great and enormous potential. But I'd be careful risking my money on some indexed fund to the KOSPI, because Korea is still vulnerable (though not as much as 97) to the same shocks that sent 97 into a tailspin." Another perspective was offered by a Retired VP, Public Affairs-Asia, Major U.S. Technology Firm who noted "While manufacturing has been a traditional strength of Korea, services and IT will be a growth area. This has taken off worldwide, and Asia has been behind the curve. The potential growth is dramatic." A similar view was reflected by a New York-based Senior Attorney who stated "Manufacturing has traditionally been the most attractive and important sector for Korea, but moving forward I am not sure if this will continue to be the case. With the market opening for real estate activity there should be a lot more activity in this sector as well. There is a lot of deregulation going on in the financial area and many opportunities are emerging in banking, consumer finance and non-bank commercial lending. Technology is also another area in which Korea’s reputation is quite strong." Finally, a Washington- based Trade Attorney commented "Korea is an interesting place and its tourism potential is highly underrated. I always take some time to do something interesting when I visit, there is also great shopping. Culturally, you need to scratch the surface, but there is something very interesting there. It is also the gateway to North Korea, a highly interesting destination. There will be heavy curiosity factor, though the industry needs to be developed and promoted more effectively to foreign audiences." ?

While the development of detailed conclusions and recommendations are beyond the scope of this report, and might be prepared in a more comprehensive follow-up analysis, it is clear that respondents have positive, but mixed sentiments concerning Korea. In short, respondents recognize Korea’s economic achievements and its extraordinary recovery from the Asian financial crisis, yet they clearly believe that much more needs to be done if the nation is to sustain its economic promise and potential.

Respondents continually emphasized the need for Korean firms and organizations to maintain their dedication to economic restructuring and reform — both on the firm as well as the macro level. As an International Corporate Governance Analyst commented "Korea is an OECD country and needs to be compared to other OECD economies. In respect to Asia, …. practices have been improving, but they are not the best…." A Corporate Executive developed this thought further emphasizing "Korea must acknowledge the higher benchmark it has set for itself. It is no longer appropriate to measure its achievements and capabilities against developing countries -- but rather against the world’s most advanced nations. Whether it will continue to initiate the reforms and corporate practices needed to achieve this standard will be critical moving forward."

The Korean Chamber of Commerce and Industry in USA, Inc. (KOCHAM): KOCHAM is a not-for-profit private business organization headquartered in New York City. Founded in 1992, KOCHAM is comprised of over 400 of Korea's leading firms, operating throughout the United States in sectors ranging from import-export, banking, transportation, securities, insurance and construction companies.

By establishing a network of Korean businesses, KOCHAM seeks to foster "corporate diplomacy" and goodwill between the people and the business communities of the United States and Korea. KOCHAM represents and expresses the views of its members on issues relating to trade, commerce and other related matters.

The Federation of Korean Industries (FKI): Founded in 1961, FKI is a private, non-profit organization pursuing Korea's economic development and international cooperation based on the principles of free enterprise.

Representing Korea's largest businesses and business groups such as Hyundai, Samsung, Daewoo, LG and the SK Group, it has emerged as the central forum and the most influential voice of the private business community in Korea.

KWR International, Inc. (KWR): KWR is a specialized consultancy firm which utilizes expertise in research, communications, consulting and advisory services in order to introduce a strategic perspective into the public and investor relations and business development process. Serving a wide range of public- and private- sector clients, KWR has extensive working experience with Korea, Japan and other economies in the Asia-Pacific region.