HOMEWARD BOUND : S. Korea’s export-oriented firms are targeting a newly affluent domestic market that’s now the key prop in the nation’s economy.
Until this year, Namil Metal Co. sold all $38 million of its stainless steel cookware overseas, 40% of it in the United States.
But now Namil is gearing up to enter the fastest-growing market in sight: the one at home.
In July, the firm launched its first sales program in South Korea--with an electric coffee percolator and a stainless steel toaster that does not get hot on the outside. In November, it will start marketing its pots and pans here.
“Korean wives won’t buy one pot or pan. They want a whole set,” said Cho Gyu Gon, the firm’s export manager. “A five- or 10-piece set costs between $150 and $300,” and, until recently, most Korean housewives could not afford such a purchase.
But now that families with annual incomes of around $18,000 are becoming more common in South Korea, Namil feels that a market for its products has developed at home. By 1993, Cho said, the firm expects to sell $40 million in products--about 40% of its projected sales--in South Korea.
However, the country as a whole is undergoing a transformation even faster than the one that Namil plans.
This year, for the first time since South Korea began to shake off the yoke of grinding poverty in the mid-1960s, demand at home will replace exports as the major prop of economic growth. And this historical transformation promises to be permanent.
Wage increases of more than 60% since late 1987, labor disruptions and the increased value of the won currency have spurred a major and sudden decline in the growth of exports. Cries of alarm have arisen from government and business. But also emerging, virtually unnoticed, is a new picture of the nation’s 42 million people--not as mouths to feed but as consumers armed with soaring buying power.
Domestic demand will support 85% of the growth in the gross national product this year--a complete reversal of the past--said Ro Sung Tae, director of research coordination at the government-funded Korea Development Institute. Between 1981 and 1988, increases in exports provided 75% to 80% of growth, according to the Bank of Korea.
Even with an expected recovery in exports, demand at home will support about 65% of GNP growth next year and will continue to provide more than 50% of growth into the future, Ro added.
“The days when you could look at the Korean trade balance and tell whether the Korean economy was doing well or not are over,” said a Western diplomat, who asked not to be identified.
In an annual white paper on trade, Japan’s Ministry of International Trade and Industry declared that South Korea--and Taiwan, as well--were “restructuring” to become “domestic-driven” economies.
Buying Better Products
Already, the United States is reaping gains from the change. Aided partly by South Korean government efforts to divert sourcing of machinery from Japan to the United States, U.S. exports to this country soared 46% last year and are increasing by more than 20% this year. By comparison, from 1982 to 1986, U.S. sales to South Korea never grew by more than 9.6% a year.
Richer Korean consumers are buying upgrade food and beverage products--like fruit, beef, almonds and wine--as Seoul carries out pledges to gradually open its agricultural markets. Imported furniture, too, has suddenly become a hit product.
Service industries, such as advertising, banking and insurance--in which the United States is interested--are also growing.
Signs of change are emerging everywhere.
Domestic car sales are expected to increase by at least 40% this year--and, if auto makers can produce the vehicles, demand could rise by as much as 60%. With its sales in the United States down sharply this year, Hyundai Motors, the top exporter, expects to sell more cars at home than abroad for the first time since 1984.
Air conditioners, color television sets, refrigerators and washing machines are so much in demand in South Korea that electronics firms have stopped offering discounts and, instead, have raised prices by about 10%.
Construction contracts, in terms of floor space planned in new buildings, are up 36.8%. Hyundai Construction & Engineering Co., which only a few years got 90% of its orders overseas, is now conducting 70% of its business at home, said Chung Hoon Mok, the firm’s president.
So strong is the domestic construction boom that the government has started curtailing exports of steel bars, cement and glass to keep projects running.
Household consumption of electricity is rising by 18.5% compared to last year, dwarfing a 1.9% increase in factory consumption of electricity.
In the first half of the year, not only had the number of South Koreans traveling overseas soared 74% but spending by each had also doubled, compared to last year, to $2,320, the Transportation Ministry said. By comparison, visitors to South Korea spent only $1,355 per trip, the ministry said.
“For years, Korean leaders have been telling the people to live frugally and sacrifice for the future,” the Western diplomat said. But for the average Korean whose disposable income has increased in the past two years, “the future is now.”
Firms mainly engaged in domestic business scored double-digit growth in sales and profits, while export-oriented companies were doing only half as well, the Bank of Korea reported. Domestic-oriented firms were also accumulating assets faster and raising productivity by bigger margins, the bank added.
Already, the overall business of the Hyundai conglomerate of companies, one of South Korea’s most export-oriented business groups, is divided almost equally between the domestic market and overseas activities, Chung said. At its peak, he said, the group did 87% of its business overseas.
Chung also said rising protectionist sentiment in the United States, South Korea’s main market, is adding a coercive element to the transformation. “For protection against the protectionists, we’re going to have to look inward for the first time in the country’s economic development,” he said.
Major new projects planned by the government promise to provide an even greater stimulus to growth at home in the coming years. Among them are plans to build two major satellite cities of Seoul, to construct 2 million housing units by 1992, to expand subways in Seoul and to develop industrial complexes on the country’s west coast.
Low Export Growth
Growth in consumption that has exceeded 10% so far this year, however, has not replaced the decline in the growth of exports. In the first half of the year, overseas shipments increased 6.7%, compared to a 29% spurt last year, and the trade surplus fell to $2 billion, only 44% of the black ink in the same period in 1988.
This year, Ro predicted, exports will grow by only 3%.
And with the GNP expected to increase by no more than 7.5% after three straight years of 12%-plus growth, almost no one is happy about the transformation of the economy--although the government of President Roh Tae Woo prescribed just such a change last fall in a new five-year development plan.
So far, Roh and business leaders have devoted all of their attention to the negatives of the economic transformation.
On June 19, the president declared war on spiraling wages, announcing his intention to hold future pay raises to less than 10% a year. Painting the country as if it were on the brink of economic collapse, officials released a spate of statistics purporting to show that South Korea was pricing itself out of competition in international markets and announced new policies to promote exports.
Businessmen warned that exorbitant wage increases would increase unemployment and cause a cost-push inflation.
Leaders of the ruling party have even started calling for a reversal of the won’s appreciation to promote exports, saying the South Korean currency, which rose 16% in value last year, should now be devalued by 3%.
The Korea Herald, in an editorial, condemned the domestic spending spree as “overindulgence in a quest for luxury” and “decadent commercialism.”
Some Real Problems
Hyundai Construction’s Chung also viewed it as an unhealthy development. “Rapid wage increases,” he complained, “are not turning into savings and new production facilities but are going into private consumption.”
Experts agree that some aspects of the boom constitute real problems. Land and stock transactions--which brought speculators windfall capital gains equal to 35% of the GNP in 1987, according to Ro--are one such problem.
“In 1988 and 1989, the gains will be even bigger,” the Korea Development Institute analyst added. This “asset effect,” along with wage increases, he said, is contributing to greater consumption.
Plummeting investment in new factory equipment to increase productive capacity is another worry, Chung insisted. “There’s a rush to grab what you can grab right now,” Ro complained.
What Deputy Prime Minister Cho Soon called widespread inequities in wealth contribute to that mentality. Cho said in a speech in June that a majority of the people feel that they live in relative poverty while the rich keep accumulating ever-greater wealth.
While 20% of the people receive 43.7% of the national income, the poorest 40% get only 17.7%, Cho said. The inequity in land ownership, however, is far greater: The richest 5% of the population possesses 65.2% of the privately owned land, he said.
Workers have refused to heed calls for moderation, Ro said, because “they don’t believe the statistics the government and management provide. Even more, they believe they can demand more because the government has been accommodating their demands. They believe they have been sacrificed in the process of economic growth and deserve rapid wage increases.”
Indeed, even the underworld is becoming more assertive.
A thief who broke into a home in an upper-class section of Seoul in June started sending extortion letters to his victim demanding compensation when he discovered that the jewelry that he had stolen consisted entirely of imitations.
Then there was the knife-wielding man who broke into the home of a former defense minister and demanded cash. Offered the equivalent of $1,050, he threatened the retired general with bodily injury and said the sum should have been beneath the dignity of a former Cabinet official. After the victim promised to hand over an extra $3,000 the next day, the robber left. But when he came back to collect, police were on hand to greet him.
“If you’re looking for a docile, well-disciplined, cheap work force, you’re no longer thinking of Korea,” the Western diplomat said. Korean workers, he added, are convinced that “we’ve got to get as much as we can as soon as we can because this (situation) can’t go on for long.”
Businessmen, however, are quietly making adjustments to the new era in South Korea, producing more high value-added products such as videocassette recorders, sophisticated computer-controlled machine tools and semiconductors.
South Korea, as Japan’s Ministry of International Trade and Industry noted, has already surpassed France and West Germany in its semiconductor production.
Korean manufacturers are also carrying out automation programs to reduce labor costs.
Namil’s Cho, for example, said his firm plans to nearly triple its annual sales to $100 million in five years without adding to its present labor force of 600 employees. And textile makers and footwear manufacturers are moving some of their operations out of the country, mainly to Southeast Asia.
