S. Korea Carving a Niche in Japan

Koreans were astonished to learn last December that Nissho Iwai, a large Japanese trading company, had given a Korean shipyard an $88-million order for four ships of 30,000 tons each.

Since the mid-1950s, Japan had led the world in shipbuilding and never before had any Japanese company ordered a ship built in South Korea.

Japanese shipbuilding firms, which are awash in red ink and have dropped 14,000 people from their payrolls in the past year, “are very angry” at Nissho Iwai, a Japanese diplomat here said, asking not to be further identified.

No less significant than the ship order was the export to Japan last year of 1 million tons of Korean cement. The exporter, Ssangyong, hopes to send 2 million tons of cement to Japan this year.

Such changes are just beginning to appear, but they seem to be part of a trend brought on by the steep appreciation of the yen, the Japanese currency.

There has been no change in South Korea’s fondness for imports from Japan, which rose 44% last year despite the higher cost of Japanese goods. Indeed, South Korea’s chronic deficit with its neighbor increased by 80% to a record $5.4 billion in 1986.

Also, there has been no significant Japanese investment in South Korea. In the past two years, only two Japanese companies have invested more than $5 million in manufacturing here.

Exploring the Market

But late last summer, South Korean exports to Japan started picking up, and by year-end they were showing monthly increases as high as 47% compared to a year earlier. And now even exports of chemical products are up by 49%; steel, 22%; electronics products, 39%.

South Korean government officials have set a target of increasing exports to Japan by nearly 30% this year, and that may prove to be a modest goal. According to the Japanese diplomat, the increase might reach 40%, as indicated by monthly gains in late 1986.

Sales would increase even more rapidly, the diplomat said, if Koreans designed products to meet Japanese tastes and made more effort to market their goods in Japan. Only recently, he complained, have “the Koreans begun to explore the Japanese market.”

“Until the yen appreciation,” he said, “they held a fixed idea that Japan was a country they import from.”

Suh Sang Mok, vice president of the government’s Korea Development Institute, agreed. To most Koreans, he said, “Japan is where we import; the United States is where we export.”

The Japanese diplomat said that, “contrary to the expectations of many people,” there has been no boom in Japanese investment in South Korea. On the contrary, manufacturing investment in recent years has actually declined, mainly as a result of the bitter experience that Japanese firms have had in South Korea, where resentment runs deep over Japan’s colonial rule from 1910 to 1945.

Even among Japanese firms operating here, the diplomat said, sour labor relations prevail. Investment “is not just a matter of economics,” he said, adding that it also involves “technology transfer, labor relations and the social environment. Not many Japanese are willing to come to Korea to invest their money.”

Still, there was one eye-opening investment, in January. Toshiba, the electronics giant, set up a $4.6-million joint venture with Kumho Electric and Kumdong Electric to make fluorescent lamps for export to Southeast Asia, the Middle East and Latin America. It was the first new investment that Toshiba had made in South Korea in nine years.

The long hiatus was the result of Toshiba having been forced by the Korean government to reduce to 6.09% from 70% its equity in its biggest Korean joint venture, Korea Electronics Co. This experience, the diplomat said, “sent out a message to all Japanese companies--stay out.”

Toshiba’s decision to invest again has “great psychological significance,” he said, for Toshiba also owns shares in three other Korean electronics firms.

Jin Nyum, the Economic Planning Board official, said he is now optimistic about prospects for Japanese manufacturers to procure Korean parts for products they make in Japan, even if they do not invest here.

He said Japanese manufacturers, after years of holding back technology for fear that the Koreans would use it to compete with them, are now “very positive in their attitude about providing technology--depending on the product.”

“If they still have competitiveness,” he went on, “they are reluctant to provide up-to-date technology. But if not, they are willing to give even first-class technology.”

Still, deals lag far behind talks about ordering components or licensing their manufacture. And so far there has been no trace at all of Japanese transferring manufacturing operations here in sharp contrast with rising numbers of American firms setting up production facilities in Korea.

Toshiba’s investment, like two $5-million-plus equity investments of the past two years--Mitsubishi Motors’ increase in its equity holding in Hyundai Motor Co. and Mazda’s purchase of shares in Kia Motors--was made to underwrite exports to third-country markets, not to Japan.

Rha Woong Bae, the minister of trade and industry, announced in January a five-year plan to reduce the trade deficit with Japan to around $1.5 billion by 1991, largely through measures to persuade Korean companies to find new sources for parts and machinery.

Even without government intervention, however, the Japanese diplomat predicted that based on long-range trends the deficit will disappear in the 1990s.