KWR Viewpoints
Creating
Value Key to Korea's Long-Term Success
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.