S. Korea Firms Hit Hard in Global Slowdown
Unix Electronics Co. Managing Director J.W. Seo said he was heading home from work listening to some music in light traffic a few weeks ago when his cell phone rang with the bad news. “You need to cut your price by 30%,” a major British importer told him. “Customers over here just aren’t in a buying mood, and we’re getting hammered by low-cost Chinese competitors.”
Seo felt trapped. Cutting the price of his electric foot massagers by 30% was not an option because he has only a 10% profit margin. “We’ll give as much as we can, since you never want to lose a good customer,” Seo said. “But we can only go so far.”
Companies and countries across Asia are feeling this double punch, but the export decline in South Korea has been particularly sharp. Exports contracted 20% in July, the largest tumble since 1967, led by shipments of semiconductors and telecommunications-related equipment. This followed declines of 13.4% in June, 7.7% in May and 10.2% in April.
“Our exports to the U.S. fell almost 90% this year,” said Koo Ja Kyong, president of Koni Machine Industrial Co., an auto parts supplier to General Motors Corp. and Daewoo Motor Co. “I’d wait out the situation, but I don’t think we’ll see much improvement in years. This is the worst I’ve seen it since we started in business 16 years ago.”
In response to cries like these, the South Korean government announced this month a series of measures designed to prop up exports and spur the domestic economy, including $7.8 billion in new government spending, an interest rate cut, more generous export guarantees and streamlined trade procedures.
The measures are welcome, analysts say. But they’re no substitute for what most of Asia hopes is just around the corner: a U.S. recovery. Even if the American economy does bounce back quickly, however, high-tech markets probably will take a while longer to recover given the magnitude of last year’s investment bubble. “The Korean government policy is a move in the right direction,” said Dick Lee, an economist with Goldman Sachs. “But the export slowdown is really substantial.”
Blaring headlines in local newspapers, meanwhile, over the trade shortfalls are sparking fears that consumers could lose confidence, thereby further undermining the economy. “The problem makes everyone worried because there’s less money around,” said Kim Tae Keun, the 45-year-old owner of a small Seoul-based advertising agency. “I’m cutting down on my own spending, eating out less and don’t expect to go away for vacation this year.”
Adding to the mix is a tendency among some large companies to focus more on market share targets than profit, analysts say. The result: Companies continue exporting widgets to their overseas subsidiaries well after customer orders dry up, adding to inventory woes and prolonging the downturn.
“It doesn’t help that the country keeps supporting overcapacity,” said Peter Vamverschaft, economist with Barclays Capital. “They need some creative destruction.”
In addition to the vagaries of the business cycle, South Korea is also feeling the heat as China becomes a more formidable competitor. The result for this mid-level economic power is that it increasingly finds itself squeezed between Japan, with its technological edge, and China, with its lower costs and wages.
That said, most analysts believe the solution is obvious. Essentially it must migrate out of industries in which profits are low--such as textiles, footwear and low-end electronics--and into more sophisticated products and services that play less to China’s strength. China’s entry into the World Trade Organization only makes that shift more urgent.
Migrating up this ladder is easier said than done, however, especially given that advanced countries such as Japan and the United States want to protect their own interests and are increasingly protective of their best technology.
South Korea is successfully making this upward mobility shift in certain markets, led by the giant conglomerates known as chaebol. Its shipbuilding is now world-class. It also enjoys certain strong niches within the electronics industry, and its auto industry seems to be on the ascent. But it still relies to a large extent on low-margin, commodity businesses, particularly among the smaller players.
“Many small and medium-sized Korean companies just aren’t competitive anymore,” said Unix Electronics’ Seo.
Unix has worked hard to avoid that fate, however, and its experience arguably provides an example of what is possible with a bit of foresight and a modicum of luck at a time housands of South Korean and Asian companies face painful adjustment pressures. The privately held maker of vacuum cleaners, blenders and other small household electronics, with 300 employees and annual sales of $23 million, expects to earn about a quarter of its revenue from exports this year.
During the depth of South Korea’s 1997 currency crisis, Unix found few U.S. buyers interested in its hair dryers amid the often blistering competition from other companies across Asia trying desperately to export their way back to prosperity.
It did notice, however, that many American importers at the time seemed to be looking for health-related devices, including do-it-yourself blood pressure and heart monitors. Sensing an opportunity, the company started steering its product line in that direction. It also was fortunate to have relatively little debt at a time short-term interest rates were hitting 30%.
Today, the British electric massager market is the exception, with a growing share of its profit coming from higher-tech, higher-margin exports. The focus on home-use health devices targeted at aging populations has not only left it better insulated from the recent downturn than many of its competitors, but it’s also given the company a cushion that has allowed it to adjust its strategy, shift production as needed or exit gracefully from certain markets.
Even among its low-end product lines, Unix has tried to distinguish itself from the crowd. It’s trying to get more productivity out of the 300 relatively high-wage workers at its nonunion plants, and it’s buying more components from abroad and finding ways to cut overhead. The company also hopes to open a factory in China within the next several months in a bid to maintain its nearly 50% share of the South Korean hair dryer market.
An earlier bid to manufacture in China failed because the partner it chose wasn’t very reliable. “It was a 50-50 joint venture, but their 50 always came first, so our shipments were often late,” Seo said. “Also, quality would pick up whenever we sent someone there but then fall down again as soon as they left.”
This time, Unix hopes to find a distressed factory, preferably around Shanghai, that it can buy outright, install its own managers and exert far greater control.
The company also is trying to find ways to distinguish even basic products from competitors. A line of hair dryers that put ions in the hair, an effective softening agent according to some researchers, is selling well in Japan and the U.S.
And it is borrowing from the Russian space industry to create an ultra-energy-efficient curling iron based on technology once used in satellites to dissipate heat quickly from sensitive instruments.
In the company boardroom, Seo whips out a pair of the copper-coated, foot-long Russian space rods and inserts one into a small paper cup full of hot water. Within 60 seconds, it’s too hot to touch. Even better from the standpoint of a hair-curler maker, the heat is evenly distributed.
“Everyone wants high quality at Chinese costs these days,” Seo said. “We’ve just got to keep searching for an edge.”
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Chi Jung Nam in The Times’ Seoul Bureau contributed to this report.
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ABOUT THIS SERIES
This is one of an occasional series on the impact of China’s entry into the World Trade Organization. It will examine social and political issues in California and China, as well as key industries such as agriculture and telecommunications.
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Previous: The telecommunications industry is like the canary in the mine shaft, an early-warning system for whether China can carry out changes the international community demands as the price of admission to the WTO.
Previous: Once gleeful about the profits to be made from helping feed 1.3 billion Chinese, farmers from California’s lush San Joaquin Valley to the apple orchards of eastern Washington now worry they will be overwhelmed by China’s growing power.
Today: South Korea is hurting because of the downturn in exports, but it also is feeling the heat as China becomes a more formidable competitor. The result for the mid-level economic power is that it increasingly finds itself squeezed between Japan, with its technological edge, and China, with its lower costs and wages.
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Declining Exports
South Korean exports, year-over-year percentage change:
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July: -20%
Source: Ministry of Commerce, Industry and Energy
