KWR Viewpoints

This article was originally published in the Korea Times on August 31, 2003

 

Despite its underlying attractiveness and reasonably strong macroeconomic fundamentals, international investors remain cautious about South Korea.

While the SK Global situation is largely resolved, and growth prospects and fiscal flexibility are high by regional standards, too many uncertainties prevail.

This is true both on the peninsula and in global markets as a whole.

South Korea suffers from a greater threat from the North, the effect of a strengthening China, a still weak Japan and an unclear economic outlook in the United States and Europe.

This is compounded by concerns over consumer debt, labor tensions, and worries over the sustainability of reform and the ability of the new government to operate in an effective manner.

Recent announcements that South Korea has entered a recession for the fourth time in history and that its fiscal surplus has dramatically declined only leads to further concern.

To reassure investors, many stress South Korea's ability to restore growth and momentum as a recovery takes shape in the U.S. While possible, this is dangerous as it presupposes there will be a U.S. recovery and creates a scenario where Seoul's success is dependent upon events beyond its control.

It also contributes to a perception of South Korea as a high beta economy, that is more a leveraged play on growth in the U.S. rather than a promising story in and of itself.

Therefore, in the present environment, where investors seek to lower their risk exposure, South Korea suffers in comparison with other investment destinations, including China, Japan, and even India, Russia and Thailand, which many believe offer better value as well as a lower dependence on U.S. markets.

To minimize this reliance on U.S. economic performance, Seoul needs both to focus on the development of value-oriented strategies and to explain these developments in an effective manner.

Business theory holds a competitive advantage is defined through lower cost or greater value, preferably both. Companies such as Samsung and LG Electronics and Hyundai Motor are learning this lesson.

They are building market share - irrespective of the underlying contraction and deflationary pricing trends troubling the global electronics, technology, auto and other industries.

For example, market research firm Display Research noted Samsung Electronics took a 30.2 percent market share in North America's LCD TV market and 34.3 percent of Europe's during the second quarter. It surpassed Japan's Sharp, estimated to have held 25.9 percent of the U.S. market and 17.5 percent of Europe's.

Samsung officials also express confidence the firm will soon beat Sharp in the Japanese LCD TV market.

Similarly, Hyundai Motor is also achieving success, recently announcing that rising exports had countered an 11 percent contraction in domestic sales, and its first-half net profit jumped 10.6 percent year-on-year to an all-time high of 988.5 billion won.

Korean firms are also gaining market share in cellular handsets at the expense of Nokia, Motorola and other long-established competitors.

In addition to a keen commitment to product development, it is no coincidence these firms are also among South Korea's savviest marketers. They devote large amounts of funding to building an extremely important intangible - brand image.

Their success is reflected in Interbrand and BusinessWeek magazinesrecent designation that Samsung Electronics possesses the fastest growing brand value in the world - rising about 30 percent over each of the past two years.

The long-term success of Korean firms will largely be determined by their ability to move beyond the tendency to base their competitiveness almost exclusively on cost-efficiency.

Enhanced brand value not only increases demand and economies of scale, but also leads to higher margins and profitability. Combined with additional attention to financial communications, investors are also more content to maintain a long-term commitment.

Once again, one can observe this phenomenon in the performance of Samsung Electronics. It reported a 41 percent decline in its second quarter earnings, yet continues to trade at an all-time high.

South Korea as a whole must also incorporate these lessons if it is to successfully reposition itself as the "Dynamic Hub of Asia" and to realize the vision of becoming an international service and logistics center.

The nation must do a much better job of defining and telling the "Korea Story" and the capabilities of individual firms and its population. This requires ongoing planning and outreach.

It will not be achieved by the occasional ad hoc announcement, advertisement, road show or short-term domestically-focused efforts that have been organized in the past when some emerging problem or issue was deemed worthy of an immediate response.

While many of these efforts have been well organized and well received by participants, they do little to create sustainable value.

Rather insufficient follow-up and thought has been allocated to the ongoing communications and interaction that is part of every successful public and investor relations initiative.

The fact is while the nation possesses a wealth of characteristics that makes it, and its individual firms, an attractive investment story, U.S. investors and opinion leaders - beyond the small, dedicated group of Korea watchers and members of the Korean-American community -remain largely unaware of its potential.

Therefore, while South Korea has done far more than most other Asian nations in implementing reforms and the measures to promote a more dynamic and competitive business environment, U.S. investors and businesses continue to view it as a difficult and unapproachable market that is extremely dependent on growth in the U.S.

Similarly, Korean firms possess real technological and other advantages in many industries, yet with few exceptions these achievements go unrecognized and the firms do not benefit from the additional market share, pricing power and valuation premium that should result.

Brand value and investment sentiment are not made, nor are major transactions contemplated, simply on the basis of one-day conferences or seminars. They require ongoing communications and interaction.

Just as a U.S. company would be unlikely to achieve success in South Korea through occasional visits to Seoul, it is not possible to communicate complex messages and to manage relationships in the U.S. simply on the basis of random, disconnected activities.

In spite of its underlying attractiveness, it is by no means clear why foreign investors, businesses and consumers should buy into the Korea story as a whole or, with a few notable exceptions, as individual firms.

It is therefore the challenge of every Korean company and government organization to invest in the activities needed to overcome this important obstacle.

Otherwise, while there will inevitably be cyclical upturns, South Korea's economic competitiveness will be eroded over the long-term in favor of lower-cost and more value-oriented competitors.