Vulnerable miracle

Times Staff Writer

Hyundai Heavy Industries Co. launches one of its new ships about every five days -- some towering 15 stories high and stretching the length of three football fields.

A highly efficient, super-sized version of an automobile factory, the world's largest shipyard has 25 massive vessels under construction at any given time, a feat no other country has been able to achieve.

To many South Koreans, the shipyard in this once-quaint fishing village is a symbol of the dramatic resurgence from the devastation of the Korean War.

But it also is emblematic of what's at stake economically, given the increased tensions with North Korea after the communist nation's recent nuclear test. Barely an hour's flight away across the demilitarized zone, the North's army has 8,000 artillery barrels pointed at its neighbor, ready to wipe out much of the economic miracle in the South as well as many lives.

"It's really remarkable how important the South Korean economy has become," said Richard J. Ellings, president of the National Bureau of Asian Research in Seattle. "Whether it be cars or mobile phones, there would be serious disruptions. Any conflict would be catastrophic for global trade."

Two generations ago, living standards in South Korea were among the worst in the world, with workers earning about $70 a year.

South Korea has risen from that humble station to become the third-largest economy in Asia, trailing only Japan and China, and the 10th-largest in the world, according to the International Monetary Fund. The average annual income now: $16,000.

Tensions have eased somewhat since the Oct. 9 nuclear test, but the North's saber rattling has raised fears about the broader fallout should conflict derail the industrial engine of the South.

It would be felt far beyond the Korean peninsula. In addition to producing 44% of the world's commercial ships, South Korea is the largest maker of computer memory chips and flat-panel liquid-crystal-display screens.

The country, the world's seventh-largest exporter, makes a quarter of all cellphones and supplies more than 10% of the world's steel. Hyundai Motor Co., which has rapidly gained share in the hypercompetitive U.S. market, has grown to become the world's No. 7 automaker.

South Korea ranks first in global market share for nearly 60 lesser-known products -- a diverse list that includes hairpins, inner tubes and ginseng.

Some experts believe that economic globalization, which has enabled South Korea and other East Asian countries to win so much business abroad, has made the region more vulnerable.

Military action could disrupt the economies of China and Japan. Moreover, both could face unpredictable social and economic pressure from an influx of refugees, possibly on a scale unseen in recent history.

No one knows how China, a communist country that has provided vital support to the North Korean regime of Kim Jong Il, would respond. Although Beijing is politically aligned with the North, some of the largest investments in China are being made by South Koreans.

Japan could be prompted to undertake an extensive military buildup that could alter the economy there. The consequences would be far different from those of the Korean War. Japan, itself still recovering from World War II, got a big boost from helping supply U.S. forces on the peninsula during the 1950-53 conflict.

"But the opposite would happen today because all these trade links would be severed," Ellings said, pointing out that South Korea, Japan and China together produce about 90% of commercial ships.

"The center of world production today is not the Atlantic, but the Pacific," he said. U.S. trade with Asia, which accounted for $820 billion in 2005, according to the Commerce Department, is expected to grow this year to double the volume with the European Union.

Despite such dire talk, other economists contend the dislocation could be limited because many goods that South Korea produces can be made elsewhere.

They note that although the country is the leading source for scores of products, it doesn't dominate any category. Depending on the scale and complexity of the industry, competitors elsewhere may pick up production to make up for shortages.

To these economists, globalization represents the solution, not the problem.

William Overholt, chairman of the Center for Asia Pacific Policy at Santa Monica-based Rand Corp., said the global supply chain had diversified enough to limit the effect of economic disruptions on the peninsula.

"It's amazing how fast things would pick up. In textiles, the adjustment would be days," he said. "Globalization really has made the world much less dependent on any given supplier."

In addition, some experts note, South Korea has shown an ability to prosper in times of political stress. Today a modern democracy with presidential elections every six years, the country generated much of its growth during decades of autocratic military rule.

After the Korean War ended in an uneasy truce, infighting eventually led to a dark era in South Korea's political history. From 1961 to 1992, with the military in control, the government imprisoned opponents, regularly changed the country's constitution and censored the media.

But the government also focused on the economy. It developed targeted industries, such as auto making, by giving financial assistance to domestic companies while imposing restrictions on competing imports.

Such close ties between government and business spurred the rise of chaebol, the handful of conglomerates that came to dominate South Korea's economy and have built global brands -- Hyundai, Samsung, LG and others.

Few places better illustrate South Korea's economic resurgence -- and its sense of normalcy in an uncertain environment -- than Hyundai's sprawling shipyard here on the southeast coast.

In 1972, when South Korea did virtually no shipbuilding, the government viewed it as an industry that could drive its economic engine. With merely an aerial photograph of the fishing village and future shipyard, Hyundai founder Chung Ju-yung persuaded a Greek ship operator to buy two cargo vessels. Two years later, a port city rose from the sand.

Since then, Hyundai has built more than 1,000 ships at the 1,200-acre site. With demand booming, it expects to complete 74 ships this year, an industry record. Hyundai has enough orders -- 260 in all -- to build ships for nearly four years without winning another contract.

South Korea's three major shipbuilders -- Hyundai, Samsung and Daewoo -- expect to finish the year with $40 billion in new orders for the year, almost double last year's total.

Han Dae-yun, chief operating officer of shipbuilding for Hyundai Heavy Industries, said in an interview at the company's headquarters here that the escalation of tensions on the peninsula had not affected the volume of orders.

"At the moment there is no noticeable impact," Han said, overlooking a bustling courtyard surrounded by a hotel and department store owned and operated by the company. "No client has raised any serious concerns."

peter.pae@latimes.com

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(BEGIN TEXT OF INFOBOX)

Industrial strength

South Korea, the world's seventh-largest exporter, has developed into an industrial powerhouse, expanding its domestic economy while becoming a key supplier for countries around the globe.

S. Korea ranks first in share of the global market for:

Refrigerator-freezers

Hairpins

Metronomes

Headbands

Inner tubes

Oysters

Benzene

Ginseng

Tinted glass

Copper chains

Rope-making machines

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Data for 2006 and 2007 are estimates

Sources: International Monetary Fund, Korea International Trade Assn.

For The Record Los Angeles Times Tuesday December 05, 2006 Home Edition Main News Part A Page 2 National Desk 1 inches; 36 words Type of Material: Correction South Korean economy: An article in Sunday's Business section about the importance of South Korea in the global economy incorrectly stated that the country held presidential elections every six years. It does so every five years.
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