The Bank of Korea released its official data for GDP this week: Korea’s quarter-on-quarter GDP growth was the highest at 2.9% in more than seven years. This activity was largely due to a sharp rebound in exports: exports increased 5.1% in Q3 up from Q2.
According to the central bank of Korea, the overall consumer sentiment index rose to its highest level since Q! of 2002. According to the National Statistical Office on Friday, sales index by consumer goods rose by 6.7 percent last month from a year earlier mainly due to the increase in automobile sales. Production in the semiconductor and car sectors also grew by more than 20% YOY.
Capital investment at the private level begins to resume. For instance, Samsung that posted a record high quarterly operating profit of 30.3 billion USD in Q3 announced its plan to boost capital spending on semiconductors and displays next year to around 7.2 billion USD.
While these indicators seem upbeat, concerns remain as to whether the Korean economy will be continuously showing a fast recovery.
Korea has heavily depended on the export of manufactured goods. Korea has diversified its exports to the developing countries like China, India, and South America to compensate for some of the decline in exports to the U.S. and Europe. However, many parts of the global economy are contracting or operating on a reinflated economy propelled by the economic stimulus money to a large extent, which would dry up sooner or later.
In the meantime, unlike Japan, Korean household’s saving rate is low: they reduced their savings rate from 23% of disposable income in 1998 to only 3% in 2008. This means that a lower savings rate won’t serve as a buffer.
The unemployment situation remains grim. The unemployment rate fell to 3.4% for September. Korea face university glut of university graduates, although this situation is not limited to Korea. Moreover, there is a growing concern over rising income disparity.
Amid global coordinated stimulus package and the hot money flowing into Korea and BRICs, Korean has to see what that would do to the Korean economy.
Meanwhile, the Korean president, Lee promised full-fledged support for education and science and technology sectors. Of course, the devil is in the details. Korean firms in major industries have lamented the fact that there is a discrepancy between industry demands for high level technology skills and the qualification of engineering school graduates for some time.
Despite concerns, risks and challenges, there is plenty good that can come from the crisis if one can assess the lessons of various economies’ experiences and identify the right patterns to pursue.
Saturday, October 31, 2009
Wednesday, October 28, 2009
Korea Providing Developmental Support to its Asian Neighbors
Korea has strengthened its diplomatic tie with the Southeast Asian countries that are eager to improve their living standards through economic growth. Korea that has achieved rapid economic growth through technological innovation is promising to share its technology and infrastructure building knowhow in exchange for its access to their resources and further expansion of trade exchanges in terms of scope and volume.
In a summit with Cambodian prime minister Hun Sen this month, the Korean president Lee pledged to expand its technological assistance in Cambodia’s agricultural modernization. The two leaders also agreed to engage in joint feasibility studies on mineral development.
Furthermore, the Korean president held a summit with the Vietnamese president Nguyen Minh Triet agreeing to forge their strategic partnership. The Korean president pledged to help Vietnam’s economic growth while the Vietnamese president promised to let Korean firms involve in major infrastructure building projects to develop the Red River in Hanoi.
I hope that the developing countries in the Southeaster Asia take the right lessons away from the East (e.g., downsides of state-led economy) and West (e.g., consequences of corporatism). They may have to be beware of speculative capital inflows in the course of industrialization.
I also hope that they don’t lose sight of human values by building a productive economy, putting the interests of the common people first.
In a summit with Cambodian prime minister Hun Sen this month, the Korean president Lee pledged to expand its technological assistance in Cambodia’s agricultural modernization. The two leaders also agreed to engage in joint feasibility studies on mineral development.
Furthermore, the Korean president held a summit with the Vietnamese president Nguyen Minh Triet agreeing to forge their strategic partnership. The Korean president pledged to help Vietnam’s economic growth while the Vietnamese president promised to let Korean firms involve in major infrastructure building projects to develop the Red River in Hanoi.
I hope that the developing countries in the Southeaster Asia take the right lessons away from the East (e.g., downsides of state-led economy) and West (e.g., consequences of corporatism). They may have to be beware of speculative capital inflows in the course of industrialization.
I also hope that they don’t lose sight of human values by building a productive economy, putting the interests of the common people first.
BRICs Mulling Over the Idea of Decoupling from the Dollar Zone
According to the president of Brazil’s central bank, BRIC are talking about replacing the dollar with an alternative currency in their trade settlements.
More people are projecting the downward trend of the USD.
More people are projecting the downward trend of the USD.
Tuesday, October 27, 2009
The Asian Countries Looking Inward
The Asians economies have heavily depended on its export to the Western countries. Realizing the external demand is dwindling, they are facing the reality and making their moves accordingly.
The Japanese prime minister, Yukio Hatoyama proposed the formation of an East Asian community, an EU-style block to the Chinese president, Hu Jintao on the sidelines of the UN General Assembly last month.
The Korean president, Lee Myung-bak expressed support for the idea of forming the regional bloc pitched by the Japanese prime minister at a summit between the two leaders. They are entertaining the idea of establishing an Asian common currency (after all, they are in a dollar trap) and permanent regional security.
Meanwhile, at the recent Korea-ASEAN summit, the Korean president and leaders of the 10-member Association of Southeast Asian Nations have agreed to work more closely for economic cooperation: for example, establishing the emergency fund to be used in case of capital emergency through currency swap arrangements. They discussed other measures to deal with food supply in the region as well.
The Asian countries have got the message re: their export-led model wouldn’t work in the way they used to. Consequently, they have diversified away from the U.S. They are looking at each other as a customer, of course. While trying to boost domestic consumption, most of export-dependent Asian economies need buyers outside their own country to sustain employment and growth for the time being.
They seem to be also trying not to be shaken by the Wall Street wise guys. For instance, the Chinese government has declared that its institutions won’t be disadvantaged by financial products sold to them by Wall Street under false pretenses.
Amid the current downturn, yes, they have problems of their own such as unemployment and demographic concerns, risks (e.g., quantitative easing and stock market and property bubbles), and geopolitical issues.
And yet, they have maintained a manufacturing-driven economy, not financial engineering-driven one, and have their way of dealing with corporatism, people, savings and momentum.
Interesting times, indeed.
The Japanese prime minister, Yukio Hatoyama proposed the formation of an East Asian community, an EU-style block to the Chinese president, Hu Jintao on the sidelines of the UN General Assembly last month.
The Korean president, Lee Myung-bak expressed support for the idea of forming the regional bloc pitched by the Japanese prime minister at a summit between the two leaders. They are entertaining the idea of establishing an Asian common currency (after all, they are in a dollar trap) and permanent regional security.
Meanwhile, at the recent Korea-ASEAN summit, the Korean president and leaders of the 10-member Association of Southeast Asian Nations have agreed to work more closely for economic cooperation: for example, establishing the emergency fund to be used in case of capital emergency through currency swap arrangements. They discussed other measures to deal with food supply in the region as well.
The Asian countries have got the message re: their export-led model wouldn’t work in the way they used to. Consequently, they have diversified away from the U.S. They are looking at each other as a customer, of course. While trying to boost domestic consumption, most of export-dependent Asian economies need buyers outside their own country to sustain employment and growth for the time being.
They seem to be also trying not to be shaken by the Wall Street wise guys. For instance, the Chinese government has declared that its institutions won’t be disadvantaged by financial products sold to them by Wall Street under false pretenses.
Amid the current downturn, yes, they have problems of their own such as unemployment and demographic concerns, risks (e.g., quantitative easing and stock market and property bubbles), and geopolitical issues.
And yet, they have maintained a manufacturing-driven economy, not financial engineering-driven one, and have their way of dealing with corporatism, people, savings and momentum.
Interesting times, indeed.
Monday, October 26, 2009
Justification and Perils of Outsourcing: the Cases of Korea and the U.S.
The 1997 Asian financial crisis had fundamental impact on many parts of Korean society and industries. Korean SMEs were one of those hit hard by the crisis. Many of them were low-value added suppliers to chaebols. During and after the Asian crisis, they either went bankrupt or moved their manufacturing operations to China due to cost-competitiveness. In consequence, much of small or medium-scale manufacturing operation which holds up a good part of the Korean manufacturing sector was lost, leading to job losses among the middle class.
Although Korean chaebols have turned around after the crisis and have been able to build the stronger globally competitive manufacturing base, outsourcing to China or other Southeast Asian countries caused domestic manufacturing job erosion. Some Korean high-tech firms prefer to locate their production facilities in the region where they sell their products for several reasons (e.g., better serving the local needs, reducing transportation cost, and using local tax break and exchange rates). Outsourcing trend has been confined not only to chaebols and but to mid-size business survived from the Asian financial crisis, as mentioned. Rising wages and hostile labor relationship were the major driving forces behind outsourcing abroad.
In the case of the U.S., the reason behind the U.S. firms’ massive outsourcing to China in particular is appalling, since it entails the consequences of the U.S. policies. In exchange for purchasing U.S. securities, China has had access to the U.S. market with their manufacturing goods. The U.S. firms were given tax incentives to outsource their manufacturing operations abroad. This demonstrates how bad policies could affect the overall health of the economy. The U.S. firms have also been willing to outsource their operations to China for the very practical reasons: they couldn’t be cost-competitive in the U.S. In essence, the U.S. has born consequences of globa wagel arbitrage. Coupled with overconsumption driven by easy credit, outsourcing has imposed a significant impact on its competitiveness by letting the U.S. lose a good portion of production capacity of the economy and income base for the middle class.
There has always been (and will be) a contention between the national interest and corporate interest as free flow of capital, talent, and technology intensifies across the globe. Outsourcing is no exception. Some questions arise as to: whose interests are best served by outsourcing?; what are the ultimate consequences of outsourcing? These questions may have to be addressed in pursuit of a balance between social interests and corporate interests, which is not an easy undertaking, of course.
At the public level, some policies should be crafted to reduce the dissonance between national interests and home grown corporations’ interests. Any government may have to provide incentives and a good support environment (e.g., reducing unnecessary red tapes and providing social infrastructure) where home grown firms can maintain their facilities domestically and foreign corporations are willing to locate their manufacturing operations. If necessary, educating the ordinary people and labor union leaders about the perils of outsourcing and offshoring. It is important to remember that when there is enough purchasing power at home, MNCs and home grown companies would be more likely to run their manufacturing operations in the region. At the corporate level, short-term profit oriented mindset shouldn’t dictate outsourcing decisions; more long-term benefits of operating manufacturing facilities at home need to be factored in.
The manufacturing sectors have been the backbone of the Korean economy. When this base deteriorates, the entire economy would be in trouble. This is one of the biggest lessons from the 1997 financial crisis. While Korea has to continuously upgrade its process and product technologies, close the technology gap with advanced economies, and develop cutting edge technologies in the upstream sectors like it has done in some areas such as flat panel display, it shouldn’t lose its manufacturing operation at home not only for the sake of further technological progress, but for the sake of the expansion of the middle class.
Since the global economic conditions are getting tough, there are signs that the Korean union leaders seem to accept the reality, taking more a moderate position. For instance, the labor union leaders of Hyundai had been regarded as hard-liners, but the newly elected union leader is known as being moderate. There are some good things to come out of the economic debacle.
Although Korean chaebols have turned around after the crisis and have been able to build the stronger globally competitive manufacturing base, outsourcing to China or other Southeast Asian countries caused domestic manufacturing job erosion. Some Korean high-tech firms prefer to locate their production facilities in the region where they sell their products for several reasons (e.g., better serving the local needs, reducing transportation cost, and using local tax break and exchange rates). Outsourcing trend has been confined not only to chaebols and but to mid-size business survived from the Asian financial crisis, as mentioned. Rising wages and hostile labor relationship were the major driving forces behind outsourcing abroad.
In the case of the U.S., the reason behind the U.S. firms’ massive outsourcing to China in particular is appalling, since it entails the consequences of the U.S. policies. In exchange for purchasing U.S. securities, China has had access to the U.S. market with their manufacturing goods. The U.S. firms were given tax incentives to outsource their manufacturing operations abroad. This demonstrates how bad policies could affect the overall health of the economy. The U.S. firms have also been willing to outsource their operations to China for the very practical reasons: they couldn’t be cost-competitive in the U.S. In essence, the U.S. has born consequences of globa wagel arbitrage. Coupled with overconsumption driven by easy credit, outsourcing has imposed a significant impact on its competitiveness by letting the U.S. lose a good portion of production capacity of the economy and income base for the middle class.
There has always been (and will be) a contention between the national interest and corporate interest as free flow of capital, talent, and technology intensifies across the globe. Outsourcing is no exception. Some questions arise as to: whose interests are best served by outsourcing?; what are the ultimate consequences of outsourcing? These questions may have to be addressed in pursuit of a balance between social interests and corporate interests, which is not an easy undertaking, of course.
At the public level, some policies should be crafted to reduce the dissonance between national interests and home grown corporations’ interests. Any government may have to provide incentives and a good support environment (e.g., reducing unnecessary red tapes and providing social infrastructure) where home grown firms can maintain their facilities domestically and foreign corporations are willing to locate their manufacturing operations. If necessary, educating the ordinary people and labor union leaders about the perils of outsourcing and offshoring. It is important to remember that when there is enough purchasing power at home, MNCs and home grown companies would be more likely to run their manufacturing operations in the region. At the corporate level, short-term profit oriented mindset shouldn’t dictate outsourcing decisions; more long-term benefits of operating manufacturing facilities at home need to be factored in.
The manufacturing sectors have been the backbone of the Korean economy. When this base deteriorates, the entire economy would be in trouble. This is one of the biggest lessons from the 1997 financial crisis. While Korea has to continuously upgrade its process and product technologies, close the technology gap with advanced economies, and develop cutting edge technologies in the upstream sectors like it has done in some areas such as flat panel display, it shouldn’t lose its manufacturing operation at home not only for the sake of further technological progress, but for the sake of the expansion of the middle class.
Since the global economic conditions are getting tough, there are signs that the Korean union leaders seem to accept the reality, taking more a moderate position. For instance, the labor union leaders of Hyundai had been regarded as hard-liners, but the newly elected union leader is known as being moderate. There are some good things to come out of the economic debacle.
Wednesday, October 14, 2009
Building Competitive Edge Based on Manufacturing and Design Technology: Success Lessons from Korean High-Tech Businesses and Their Challenges
There are many factors that have contributed to Korea’s rise as a high-tech powerhouse. Among them, manufacturing has been an integral part of Korea’s rapid economic development and its brisk manufacturing sector has kept its economy going during this economic downturn.
Korean high-tech firms acquired mature technology, or assembly-type production technology from advanced countries in the early stage of industrialization. The Korean government started to launch the technology development initiatives and build a technology infrastructure. Korean high-tech firms were able to move on to the next level of technology value chain like more advanced production process technology and product design. Since the early 1980s Korean firms have increased their R&D endeavor. The direction of technology policy was centered on strengthening indigenous base for R&D. Korean firms have focused their R&D efforts on applied technology, improving upon imported basic technology. They have been able to fuse process improvement and product innovation, which has become the base for their product competitiveness in their global leading products such as LCD TVs and mobile phones.
When Korean high tech firms got into the semiconductor business, many at home and abroad were skeptical about their success for many reasons. They have beaten the odds. It is doubtful that without manufacturing excellence in semiconductors, they could accomplish such a success in mobile phones and LCD TVs and panels.
Korean display makers have made technological progress including a larger size substrate to reduce cost and improved resolution. This effort has enabled them to produce a variety of panels for new applications including large-screen laptops and desktop monitors for the first time. They have been nimble to invest on the next substrate generations to fabricate large LCD panels and thus took advantage of the upcoming market opportunities. In doing so, they have utilized process technology capacity accumulated and marketing prowess to foresee next applications being formed. The two Korean display makers, Samsung and LG Display have competed against each other in terms of setting up new fab lines to stay ahead and occupying a top contender position.
While Korea has successfully climbed the technology ladder and reached the technology frontier in some areas, they face many challenges. Korean high-tech firms have felt squeezed between technologically competitive forerunners from advanced economies and cost-competitive followers like China. They have accumulated a solid manufacturing foundation and high-tech design capacity through applied research. And yet, they know they need to crack cutting-edge technologies on their own. For example, although it is true that some Korean high-tech firms became top leaders in DRAMs, Korea has imported more chips than they have exported since they can’t design many specialty logic chips to be run on the gadgets they make. Furthermore, they lag behind in software, materials and capital goods, as I have pointed out on several occasions. They are catching up in some fields, but they have a long way to go.
Another challenge might be that technology being transferred to Korea has mostly been absorbed by Korean chaebols, which may cause serious side-effects if one takes the long view.
As I’ve mentioned, public policies like industrial and monetary policy and other industrial and social infrastructure including high-quality higher education have played a part in accumulating and sustaining technological excellence.
Moreover, as I have argued, technological competence should be coupled with market sensing capability. Hence, strengthening the overall indigenous innovation capacity is critical.
Perhaps one of the greatest lessons one can take away from Korea’s high-tech experience – often overlooked -- is that although technological competence has been the backbone of national economic development, technological progress alone won’t determine the overall health of the economy. Sustaining competitiveness through technological advancement is interwoven with the financial wellbeing of a country. Such is the case in advanced economies like Japan and the U.S.
Korean high-tech firms acquired mature technology, or assembly-type production technology from advanced countries in the early stage of industrialization. The Korean government started to launch the technology development initiatives and build a technology infrastructure. Korean high-tech firms were able to move on to the next level of technology value chain like more advanced production process technology and product design. Since the early 1980s Korean firms have increased their R&D endeavor. The direction of technology policy was centered on strengthening indigenous base for R&D. Korean firms have focused their R&D efforts on applied technology, improving upon imported basic technology. They have been able to fuse process improvement and product innovation, which has become the base for their product competitiveness in their global leading products such as LCD TVs and mobile phones.
When Korean high tech firms got into the semiconductor business, many at home and abroad were skeptical about their success for many reasons. They have beaten the odds. It is doubtful that without manufacturing excellence in semiconductors, they could accomplish such a success in mobile phones and LCD TVs and panels.
Korean display makers have made technological progress including a larger size substrate to reduce cost and improved resolution. This effort has enabled them to produce a variety of panels for new applications including large-screen laptops and desktop monitors for the first time. They have been nimble to invest on the next substrate generations to fabricate large LCD panels and thus took advantage of the upcoming market opportunities. In doing so, they have utilized process technology capacity accumulated and marketing prowess to foresee next applications being formed. The two Korean display makers, Samsung and LG Display have competed against each other in terms of setting up new fab lines to stay ahead and occupying a top contender position.
While Korea has successfully climbed the technology ladder and reached the technology frontier in some areas, they face many challenges. Korean high-tech firms have felt squeezed between technologically competitive forerunners from advanced economies and cost-competitive followers like China. They have accumulated a solid manufacturing foundation and high-tech design capacity through applied research. And yet, they know they need to crack cutting-edge technologies on their own. For example, although it is true that some Korean high-tech firms became top leaders in DRAMs, Korea has imported more chips than they have exported since they can’t design many specialty logic chips to be run on the gadgets they make. Furthermore, they lag behind in software, materials and capital goods, as I have pointed out on several occasions. They are catching up in some fields, but they have a long way to go.
Another challenge might be that technology being transferred to Korea has mostly been absorbed by Korean chaebols, which may cause serious side-effects if one takes the long view.
As I’ve mentioned, public policies like industrial and monetary policy and other industrial and social infrastructure including high-quality higher education have played a part in accumulating and sustaining technological excellence.
Moreover, as I have argued, technological competence should be coupled with market sensing capability. Hence, strengthening the overall indigenous innovation capacity is critical.
Perhaps one of the greatest lessons one can take away from Korea’s high-tech experience – often overlooked -- is that although technological competence has been the backbone of national economic development, technological progress alone won’t determine the overall health of the economy. Sustaining competitiveness through technological advancement is interwoven with the financial wellbeing of a country. Such is the case in advanced economies like Japan and the U.S.
Saturday, October 10, 2009
Has Wall Street Really Changed?: Bill Moyers' Interview
Bill Moyers on PBS interviewed former International Monetary Fund chief economist Simon Johnson and US Rep. Marcy Kaptur (D-OH) on the state of the economy.
From the Transcript:
MARCY KAPTUR: And you know, looking at it from the heartland, when I look at Wall Street and all their connections into Washington, and I've been at it a while now, it's very disheartening to me, because I know they don't care about us out there. We're flyover country for them. And they're just out to make money...
BILL MOYERS: So, Simon, what happens now? If we're going to avert a depression and the next calamity, what needs to be done?
SIMON JOHNSON: Well, I think you have to keep at it, Bill. I mean, that's the lesson from previous generations of Americans, who have really confronted entrenched power like this. You have to keep at it. And you mustn't be satisfied. When the Administration says, 'Okay, we fixed it. Don't worry. We did some technical tweaking on capital requirements, for example, in the banks.' You have to say, 'No, that's not true. Let's look at what's happening, let's follow it through.'
The muckrakers of today are absolutely essential, I think, to really pushing these banks. And revealing what they're doing. And by the way, Bill, it's going to I think it's going to be a long haul. I think that the economy will start to recover. We'll get some jobs back. It's going to be very painful for a lot of people. But other people's attention is going to drift. It's a three, five, seven, maybe twelve year cycle. But when it comes back, it will come back with a vengeance. And it will be even, I think, even more devastating, in all likelihood, than what we just saw...
SIMON JOHNSON: Louis the Fourteenth of France, a very powerful monarch, was famous for having many bad things, you know, happen under his rule. And people would always say, 'If only Louis the Fourteenth knew. I'm sure he doesn't know. If we could just tell him, he'd sort it out.' You know. I'm skeptical.
www.pbs.org/moyers/journal/10092009/watch.html
On a personal note, I lived and worked for a manufacturing firm in a small town of the Midwest. I remember that manufacturing plant jobs were supporting the local economy. Now many are losing their jobs and homes. I concur with Marcy Kaptur’s view on American towns suffering.
I visit Simon Johnson’s blog on a daily basis and hope he is wrong with being skeptical.
On another note, journalism is close to my heart and I commend Bill Moyers for his journalistic integrity (I posted another link of his interview before).
From the Transcript:
MARCY KAPTUR: And you know, looking at it from the heartland, when I look at Wall Street and all their connections into Washington, and I've been at it a while now, it's very disheartening to me, because I know they don't care about us out there. We're flyover country for them. And they're just out to make money...
BILL MOYERS: So, Simon, what happens now? If we're going to avert a depression and the next calamity, what needs to be done?
SIMON JOHNSON: Well, I think you have to keep at it, Bill. I mean, that's the lesson from previous generations of Americans, who have really confronted entrenched power like this. You have to keep at it. And you mustn't be satisfied. When the Administration says, 'Okay, we fixed it. Don't worry. We did some technical tweaking on capital requirements, for example, in the banks.' You have to say, 'No, that's not true. Let's look at what's happening, let's follow it through.'
The muckrakers of today are absolutely essential, I think, to really pushing these banks. And revealing what they're doing. And by the way, Bill, it's going to I think it's going to be a long haul. I think that the economy will start to recover. We'll get some jobs back. It's going to be very painful for a lot of people. But other people's attention is going to drift. It's a three, five, seven, maybe twelve year cycle. But when it comes back, it will come back with a vengeance. And it will be even, I think, even more devastating, in all likelihood, than what we just saw...
SIMON JOHNSON: Louis the Fourteenth of France, a very powerful monarch, was famous for having many bad things, you know, happen under his rule. And people would always say, 'If only Louis the Fourteenth knew. I'm sure he doesn't know. If we could just tell him, he'd sort it out.' You know. I'm skeptical.
www.pbs.org/moyers/journal/10092009/watch.html
On a personal note, I lived and worked for a manufacturing firm in a small town of the Midwest. I remember that manufacturing plant jobs were supporting the local economy. Now many are losing their jobs and homes. I concur with Marcy Kaptur’s view on American towns suffering.
I visit Simon Johnson’s blog on a daily basis and hope he is wrong with being skeptical.
On another note, journalism is close to my heart and I commend Bill Moyers for his journalistic integrity (I posted another link of his interview before).
Friday, October 9, 2009
Exploiting Opportunities through Product Strategy during a Recession and Beyond
Some Korean high-tech firms’ product strategy has been one of the key factors behind their robust performance during (or after) recessionary times. For instance, since the current global recession hit, Samsung and LG have adjusted their product mix in TV sector, increasing low-end TV sets, although Samsung has become a leader in the high-end LCD TV sector by making high-risk bet on premium LED TV segment. Samsung is the world’s biggest maker of LCD TV sets and panels.
Samsung’s strategic bet during the industry slumps have paid off well, as I have recently pointed out. Samsung’s recent better-than-expected profit guidance seems to stem from their aggressive investment in the next product lines and production technologies during an industry downturn cycle.
Samsung has done very well in LCD panels and TVs owing to its strong LCD TV sales in China and North America and double-digit price gains in LCD panels for monitors and notebooks in 3Q. Korean LCD screen makers could become a world leader by massively investing in the next generation fab lines by anticipating and finding emerging applications for LCD panels from PCs and mobile devices to TVs.
The fact that Korean electronics firms produce its own end products as a set maker has helped to make its strategic decision by seeing new applications being evolved. Even so, making a high-risk bet on emerging products is not easy since a company needs to assemble the required capital, technology, and markets in time to beat competitors. Samsung has done it in its major businesses of memory chips, LCD panels, TVs, and mobile phones over time. Its superb product mix is attributable to its enhanced market sensing capability coupled with its capacity to read technological trajectories and estimate their likely impact.
I understand that this may not be the typical business cycle recession. And yet, my point is that there are opportunities for growth even in the worst of times. Whether some economies are in an inflationary bubble or not, businesses should take advantage of that. This entails a complex set of skills from production and product technology to strategic bet on products.
Samsung’s strategic bet during the industry slumps have paid off well, as I have recently pointed out. Samsung’s recent better-than-expected profit guidance seems to stem from their aggressive investment in the next product lines and production technologies during an industry downturn cycle.
Samsung has done very well in LCD panels and TVs owing to its strong LCD TV sales in China and North America and double-digit price gains in LCD panels for monitors and notebooks in 3Q. Korean LCD screen makers could become a world leader by massively investing in the next generation fab lines by anticipating and finding emerging applications for LCD panels from PCs and mobile devices to TVs.
The fact that Korean electronics firms produce its own end products as a set maker has helped to make its strategic decision by seeing new applications being evolved. Even so, making a high-risk bet on emerging products is not easy since a company needs to assemble the required capital, technology, and markets in time to beat competitors. Samsung has done it in its major businesses of memory chips, LCD panels, TVs, and mobile phones over time. Its superb product mix is attributable to its enhanced market sensing capability coupled with its capacity to read technological trajectories and estimate their likely impact.
I understand that this may not be the typical business cycle recession. And yet, my point is that there are opportunities for growth even in the worst of times. Whether some economies are in an inflationary bubble or not, businesses should take advantage of that. This entails a complex set of skills from production and product technology to strategic bet on products.
Thursday, October 8, 2009
How to Become Top Players by Profiting from a Crisis: the Case of Korea’s LCD Sector
Enterprises are the driving forces of an economy. Korea is one of a few newly industrialized countries that have had the high tech sectors as the major industries in the course of its rapid economic growth. The Korean economy has thrived on high-tech firms.
These are not normal times. Amid concerns over the governments’ expansionary measures, currency devaluation, oil exporters demanding new reserve currency, some corporations are faring relatively well. After all, businesses are central to job creation and income generation which hold up the economy. In this context, how some firms have taken profit greatly from the downturn by making the right moves is worth discussing. Hence, I’ll share some of my analysis on Korea’s success in the LCD sector.
The Korean LCD makers, Samsung and LG Display, are dominant players in display markets, occupying 54% of the global LCD market in Q2. Samsung is the world’s largest LCD maker and is expecting to see the sharp increase in operating profits for Q3, topping one trillion won.
There are several reasons behind their success. Among them, they made very astute strategic decisions during industry downturns. The Korean LCD makers entered the LCD business during industry downturns and took advantage of resource availability during this period.
Samsung and LG effected the entry during the second downturn in 1995-1996. Both Samsung and LG enabled to acquire the needed technology to build panels in the first downturn in the FPD industry in 1993-94 without licensing. Samsung set up an overseas R&D lab in Japan since Japanese engineers became available due to industry contraction. Samsung was capable of building Generation-2 pilot fab lines by incorporating the transferred knowledge into its DRAM technology base accumulated.
As was the case in the semiconductor sector, timing in terms of entering business or investing was very critical in the LCD industry. Whereas other incumbents were cutting back on investment due to falling prices, Samsung made bold countercyclical investment in 1995-96 before the upswing arrived in 1996-97.
During 1997-1998, due to the LCD market downfall and price fall again, the leading Japanese screen makers reduced their investment. However, Samsung foresaw a growing market demand for TFT-LCD panels and invested accordingly to target the major flat panel market. Thanks to this investment, Samsung occupied the Number One market share with 12.1 inch panels for the notebook computer in 1998. Samsung’s strategic bet is not limited to the LCD business. Samsung has been one generation ahead of other global contenders in the U.S., Japan, and Taiwan in the memory sector during an industry down.
Although Samsung did not own proprietary technology and was behind from Japan when it started the TFT-LCD business, it adopted and utilized the technology developed elsewhere to exploit the emerging opportunity in the sector. Samsung’s success demonstrates that with keen insight into competitive dynamics around volatile industry cycle, competitor’s move, technological possibility, and emerging applications for the panels, high-tech firms can become the market leader within a short timeframe.
These are not normal times. Amid concerns over the governments’ expansionary measures, currency devaluation, oil exporters demanding new reserve currency, some corporations are faring relatively well. After all, businesses are central to job creation and income generation which hold up the economy. In this context, how some firms have taken profit greatly from the downturn by making the right moves is worth discussing. Hence, I’ll share some of my analysis on Korea’s success in the LCD sector.
The Korean LCD makers, Samsung and LG Display, are dominant players in display markets, occupying 54% of the global LCD market in Q2. Samsung is the world’s largest LCD maker and is expecting to see the sharp increase in operating profits for Q3, topping one trillion won.
There are several reasons behind their success. Among them, they made very astute strategic decisions during industry downturns. The Korean LCD makers entered the LCD business during industry downturns and took advantage of resource availability during this period.
Samsung and LG effected the entry during the second downturn in 1995-1996. Both Samsung and LG enabled to acquire the needed technology to build panels in the first downturn in the FPD industry in 1993-94 without licensing. Samsung set up an overseas R&D lab in Japan since Japanese engineers became available due to industry contraction. Samsung was capable of building Generation-2 pilot fab lines by incorporating the transferred knowledge into its DRAM technology base accumulated.
As was the case in the semiconductor sector, timing in terms of entering business or investing was very critical in the LCD industry. Whereas other incumbents were cutting back on investment due to falling prices, Samsung made bold countercyclical investment in 1995-96 before the upswing arrived in 1996-97.
During 1997-1998, due to the LCD market downfall and price fall again, the leading Japanese screen makers reduced their investment. However, Samsung foresaw a growing market demand for TFT-LCD panels and invested accordingly to target the major flat panel market. Thanks to this investment, Samsung occupied the Number One market share with 12.1 inch panels for the notebook computer in 1998. Samsung’s strategic bet is not limited to the LCD business. Samsung has been one generation ahead of other global contenders in the U.S., Japan, and Taiwan in the memory sector during an industry down.
Although Samsung did not own proprietary technology and was behind from Japan when it started the TFT-LCD business, it adopted and utilized the technology developed elsewhere to exploit the emerging opportunity in the sector. Samsung’s success demonstrates that with keen insight into competitive dynamics around volatile industry cycle, competitor’s move, technological possibility, and emerging applications for the panels, high-tech firms can become the market leader within a short timeframe.
Tuesday, October 6, 2009
Samsung’s Record Quarterly Operating Profit and Its Strategic Moves
Samsung announced that its 3rd-quarter operating profit (domestic and overseas markets combined) is expected to reach a record high operating profit of 3.5 billion USD, owing to strong performance in its 4 major business sectors (chips, LCD panels, TVs and mobile phones).
From AFP:
“The company, the world's top maker of memory chips and flat TV screens, said in a statement it estimates consolidated operating profit for the third quarter at 4.1 trillion won (3.5 billion dollars).
This would exceed its previous record quarterly operating profit of 4.0 trillion won in the first quarter in 2004. It compares with 1.48 trillion in the third quarter of 2008.
Consolidated sales for the third quarter are estimated at 36 trillion won, up from 30.27 trillion a year earlier, the company said in a statement.”
From AP:
“…Samsung could not comment on reasons behind the expected third-quarter performance.
Analysts cited improving business conditions such as rising prices for memory chips and liquid crystal displays, and weakness in the Korean won against the Japanese yen as positive factors.
"Market share really jumped on all fronts — DRAM, flash, handsets, TVs, LCD panels," said Jay Kim, who follows Samsung for Hyundai Securities in Seoul.
Samsung is the world's largest manufacturer of DRAM, or dynamic random access memory, chips, NAND flash memory chips, flat screen televisions and liquid crystal displays. The company is the world's second-largest maker of mobile phone handsets behind Finland's Nokia Corp...
Samsung recorded its first ever net loss in the fourth quarter of 2008 as the global economic slump hit prices and demand. The company returned to profit in the first quarter of this year, though it was down sharply from the year before.”
Although I would be cautious about Samsung’s outlook due to sluggish spending around globe, there are definitely positive signs. What stands out from this quarterly forecast is that Samsung estimates strong operating profit in system LSI that has been a weak area Samsung has been dying to improve. Samsung is reportedly forging strategic alliance with a small bio startup to develop promising anti-cancer drugs together. Samsung has been greatly interested in health care fields. Samsung is also aggressively launching new projects including solar batteries.
From AFP:
“The company, the world's top maker of memory chips and flat TV screens, said in a statement it estimates consolidated operating profit for the third quarter at 4.1 trillion won (3.5 billion dollars).
This would exceed its previous record quarterly operating profit of 4.0 trillion won in the first quarter in 2004. It compares with 1.48 trillion in the third quarter of 2008.
Consolidated sales for the third quarter are estimated at 36 trillion won, up from 30.27 trillion a year earlier, the company said in a statement.”
From AP:
“…Samsung could not comment on reasons behind the expected third-quarter performance.
Analysts cited improving business conditions such as rising prices for memory chips and liquid crystal displays, and weakness in the Korean won against the Japanese yen as positive factors.
"Market share really jumped on all fronts — DRAM, flash, handsets, TVs, LCD panels," said Jay Kim, who follows Samsung for Hyundai Securities in Seoul.
Samsung is the world's largest manufacturer of DRAM, or dynamic random access memory, chips, NAND flash memory chips, flat screen televisions and liquid crystal displays. The company is the world's second-largest maker of mobile phone handsets behind Finland's Nokia Corp...
Samsung recorded its first ever net loss in the fourth quarter of 2008 as the global economic slump hit prices and demand. The company returned to profit in the first quarter of this year, though it was down sharply from the year before.”
Although I would be cautious about Samsung’s outlook due to sluggish spending around globe, there are definitely positive signs. What stands out from this quarterly forecast is that Samsung estimates strong operating profit in system LSI that has been a weak area Samsung has been dying to improve. Samsung is reportedly forging strategic alliance with a small bio startup to develop promising anti-cancer drugs together. Samsung has been greatly interested in health care fields. Samsung is also aggressively launching new projects including solar batteries.
Monday, October 5, 2009
Sustaining Competitiveness and Technonationalism: the Global Financial Crisis and Beyond
The speed of the Asian economic recovery has stirred some debate over “decoupling.” It is interesting to point out that many Asian economies have propelled its economic growth through technological development. Many Western MNCs have outsourced their manufacturing in the Asian region. With China rising, many companies including Korean chaebols have set up new plants in China to use their cheap resources and exploit the market opportunities there. Whether the ailing U.S. economy would rebound and growth in Asian economies is becoming decoupled with that of the West would depend on many factors. Among them, sustaining competitiveness through innovation and production is the greatest factor in the mix for a solid recovery.
In the midst of a severe recession, retaining or restoring competitiveness through technological innovation centers on R&D and manufacturing capabilities. In terms of R&D, economic/industry downturns or financial crisis can be a golden opportunity to make a leap in R&D capacity and advance in emerging sectors. Korean high tech firms have done so in several industries including LCD panels and TVs and mobile phones, as explained in prior posts. They were able to obtain the necessary technology during the economic downturns and foresaw the potential of the emerging technology and invested in it accordingly.
Korea has made enormous strides in the high-tech sectors starting from the low-cost OEM vendor for Western MNCs to top-tier high-tech powerhouse. It acquired the production process technology, and then used its manufacturing foundation for design and R&D. In doing so, it has employed the various modes of technology transfer from abroad: reverse brain drain, reverse engineering, buying the Western high-tech companies, strategic alliance with foreign firms, and so on. China has followed suit, rapidly accumulating technology capacity. For instance, the Chinese bought out financially-distressed Korean high tech firms such as Hynix Semiconductors’ TFT-LCD unit. As the Korean have done so, the Chinese would use its manufacturing capacity as a stepping stone to move up the economic food chain.
One of the underlying issues in high tech sectors has been whether and how much to outsource their operations worldwide. Global electronic firms including Korean firms have expanded their manufacturing and R&D offshoring around the globe. This is not limited to high-tech sectors. For example, Hyundai has built their plants in the U.S., Europe, and Asia.
Outsourcing decisions have been predicated on a confluence of many factors. For one, there are strategic considerations to save the cost in terms of raw materials and labor, to have easy access to the necessary technology, and to meet the needs of the local customers better. Of course, this strategic move is coupled with favorable local business conditions including taxes, labor union relations, and other regulations.
On the macro side, currency rates have been an important factor for outsourcing/offshoring decisions so as not to be affected by currency depreciation. This is one of the crucial factors Korean firms have considered. Further, corporations won’t set up their operations in an economy where the middle class with purchasing power is disappearing due to rising unemployment and dwindling income. In essence, outsourcing decisions have been closely intertwined with the financial reality.
We live in a borderless world where not only capitals and products but also technologies flow freely. Who will benefit more from this free flow of capital, knowhow and talent? Therein lies a contention between national interests and corporate interests, or a conflict between technonationalist goal and its firms’ overseas expansions. Reflecting these opposing forces in government policies or corporate strategies has been neither straightforward nor easy. Governments may need to deal with this issue with long time horizons. In order to retain the top-notch engineers, R&D centers and manufacturing operations within a country, appropriate government interventions are needed to grow the overall health of the economy and the necessary social/industrial/technology infrastructure such as a solid higher education system and balanced industrial structure (In Asian countries, the dominance of big businesses has served as advantages as well as disadvantages of their economies, which is another story). It may be also important to recognize the limited roles of the government by restricting its roles in building a stable platform and conditions in which firms can grow and prosper through fair competition.
Global high tech firms are busy planning forward-looking R&D projects and investments. For instance, as I’ve recently mentioned, Korean high tech firms have announced to set up manufacturing facilities for LCD panels and semiconductors in China. In LCD TVs, Samsung has done better in Q2 than the Japanese makers including Sony that has been the dominant player in the U.S. TV market for a long time, which is remarkable given their humble beginning as an imitator a few decades back, yet the Korean and the Japanese firms are now in race for LED TVs.
While the U.S. are much concerned about losing their technological excellence as R&D and manufacturing capabilities have migrated to Asia, the challenges are equally daunting on the Asian side. Who will come out ahead would require a systemic approach at both national and corporate levels.
In the midst of a severe recession, retaining or restoring competitiveness through technological innovation centers on R&D and manufacturing capabilities. In terms of R&D, economic/industry downturns or financial crisis can be a golden opportunity to make a leap in R&D capacity and advance in emerging sectors. Korean high tech firms have done so in several industries including LCD panels and TVs and mobile phones, as explained in prior posts. They were able to obtain the necessary technology during the economic downturns and foresaw the potential of the emerging technology and invested in it accordingly.
Korea has made enormous strides in the high-tech sectors starting from the low-cost OEM vendor for Western MNCs to top-tier high-tech powerhouse. It acquired the production process technology, and then used its manufacturing foundation for design and R&D. In doing so, it has employed the various modes of technology transfer from abroad: reverse brain drain, reverse engineering, buying the Western high-tech companies, strategic alliance with foreign firms, and so on. China has followed suit, rapidly accumulating technology capacity. For instance, the Chinese bought out financially-distressed Korean high tech firms such as Hynix Semiconductors’ TFT-LCD unit. As the Korean have done so, the Chinese would use its manufacturing capacity as a stepping stone to move up the economic food chain.
One of the underlying issues in high tech sectors has been whether and how much to outsource their operations worldwide. Global electronic firms including Korean firms have expanded their manufacturing and R&D offshoring around the globe. This is not limited to high-tech sectors. For example, Hyundai has built their plants in the U.S., Europe, and Asia.
Outsourcing decisions have been predicated on a confluence of many factors. For one, there are strategic considerations to save the cost in terms of raw materials and labor, to have easy access to the necessary technology, and to meet the needs of the local customers better. Of course, this strategic move is coupled with favorable local business conditions including taxes, labor union relations, and other regulations.
On the macro side, currency rates have been an important factor for outsourcing/offshoring decisions so as not to be affected by currency depreciation. This is one of the crucial factors Korean firms have considered. Further, corporations won’t set up their operations in an economy where the middle class with purchasing power is disappearing due to rising unemployment and dwindling income. In essence, outsourcing decisions have been closely intertwined with the financial reality.
We live in a borderless world where not only capitals and products but also technologies flow freely. Who will benefit more from this free flow of capital, knowhow and talent? Therein lies a contention between national interests and corporate interests, or a conflict between technonationalist goal and its firms’ overseas expansions. Reflecting these opposing forces in government policies or corporate strategies has been neither straightforward nor easy. Governments may need to deal with this issue with long time horizons. In order to retain the top-notch engineers, R&D centers and manufacturing operations within a country, appropriate government interventions are needed to grow the overall health of the economy and the necessary social/industrial/technology infrastructure such as a solid higher education system and balanced industrial structure (In Asian countries, the dominance of big businesses has served as advantages as well as disadvantages of their economies, which is another story). It may be also important to recognize the limited roles of the government by restricting its roles in building a stable platform and conditions in which firms can grow and prosper through fair competition.
Global high tech firms are busy planning forward-looking R&D projects and investments. For instance, as I’ve recently mentioned, Korean high tech firms have announced to set up manufacturing facilities for LCD panels and semiconductors in China. In LCD TVs, Samsung has done better in Q2 than the Japanese makers including Sony that has been the dominant player in the U.S. TV market for a long time, which is remarkable given their humble beginning as an imitator a few decades back, yet the Korean and the Japanese firms are now in race for LED TVs.
While the U.S. are much concerned about losing their technological excellence as R&D and manufacturing capabilities have migrated to Asia, the challenges are equally daunting on the Asian side. Who will come out ahead would require a systemic approach at both national and corporate levels.
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