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Korea’s Economy in Transition – a report from the recent evening at Asia House

Sometimes, when you go along to an evening talk, you are looking forward to the networking rather than the substance of what the speakers will be saying. Perhaps you think you won’t learn much, and you’re going along out of a vague sense of duty, because other people will expect you to be there.

Well, if you had gone to Asia House on Tuesday with that mindset, you will have been more than pleased that you went along. Every single one of the five speakers had interesting things to say, and there were plenty of penetrating questions from the floor. The evening was over far too quickly.

UK-Korea relations and the Korean ecomony

The theme of the evening was South Korea – An Economic Powerhouse in Transition. The South Korean ambassador, HE Sungnam Lim, started by giving a roundup of the UK-ROK relationship before moving on to the Korean economy.

HE Sungnam Lim, Ambassador of the Republic of Korea
HE Sungnam Lim, Ambassador of the Republic of Korea

During President Park’s state visit last year, explained the ambassador, 24 memoranda of understanding were signed between the ROK and the UK.  To summaries the activities on all fronts would take too long, so the ambassador focused on three areas of good news:

  • UK-Korea trade volumes would be up from $11bn in 2013 to $14bn in 2014. Last year the target was to double trade volumes by 2020, but this target was likely to be met much sooner.
  • In August 2014 a Korean warship – the Chungmugung Yi Sun-shin class destroyer ROKS Munmu the Great – evacuated 47 British nationals from the unrest in Libya.
  • The public unveiling later this year of the Korean War Memorial, for which the ground was broken during last year’s state visit. The UK is currently the only country who provided troops for the UN forces in the Korean War not to have a war memorial yet. The more than £1 million of funds required were secured from the Korean business community plus Standard Chartered.
ROKS Munmu the Great
ROKS Munmu the Great (DDH 976) (Source: Wikipedia / Rebecca J. Moat)

As the theme of the evening was “an economy in transition”, after a quick summary of how in the past 60 years Korea has gone from poverty to prosperity, from aid recipient to aid donor, the ambassador turned to some of Korea’s current challenges and initiatives.

Korea recognised that it needed a stronger service sector – including health, tourism, financial services and software – and to boost domestic demand. Priorities were the “Creative Economy” – intelligent semiconductors, “smart” cars and 5G mobile, to boost the SME sector, and to increase R&D to 5% of GDP by 2017.

Several risks overhang the economy: the huge amount of household debt, quantitative easing, yen depreciation and the slowdown of China; but with 3-4% growth rates, low unemployment (3.5%), low inflation (1.4%), a strong current account surplus, $360bn of foreign exchange reserves and government debt levels at only 34% of GDP Korea’s problems should be put in overall context of extremely strong fundamentals.

Korea’s plans to address the household debt burden – which is at 164% of household income – are to keep interest rates low (rates were recently cut by 25bp to 2%), and the launch of a $40bn stimulus package to boost household income and corporate investment. The target is to reduce household debt to 159% of household income by 2017.

Plans to address the problem of the ageing population included plans to increase the participation of women in the workforce and to launch more apprenticeships. The FTA currently under negotiation with China would also boost the economy.

Speed and flexibility – the Hyundai experience

Tony Whitehorn, President and CEO Hyundai Motor Limited
Tony Whitehorn, President and CEO Hyundai Motor Limited

Tony Whitehorn, president and CEO of Hyundai Motor UK, shared some of his perspectives on working for a Korean company, particularly in comparison with a Japanese company (he had formerly worked at Toyota). He started by sketching the structure of the Hyundai group, now split into four independent sections: Heavy Industries (building large ships and oil platforms); a group focusing on services such as tourism, logistics and financial services; the department store group; and the Motor group (which contained 86 companies ranging from Hyundai and Kia to companies which built factories (and, strangely, other engineering projects such as bridges) and manufactured the steel needed to make their cars.

He then moved on to give further background on Hyundai Motor itself – the 4th largest, and fastest-growing, car manufacturer in the world1.

Hyundai’s global expansion started with a factory in Turkey in 1997 – at the height of the Asian crisis – India in 1998 and China in 2002. Their US factory was opened in 2005.

Whitehorn stressed the speed and flexibility of Hyundai compared with Toyota. Whereas the Japanese way was to plan extensively and make sure that everything was in place prior to product launch, the Hyundai emphasis was to bring a product to market quickly. This often led to a stressful launch, with refinements having to be made post-launch, but it meant that products could be brought to market much more quickly. Responding to a question from the audience, Whitehorn said that in the enthusiasm to bring a product to market, any compromises were on the logistics side (not all the supply chain might be fully in place) rather than on quality. Hyundai were confident enough on quality to offer a 5 year unlimited mileage warranty.

As an example of the flexibility of Korean companies, Whitehorn noted that when issues were noted with the parcel rack of the Hyundai Tucson, within three months the company had re-tooled their factory without stopping the production lines to install a new design in future vehicles.

He also highlighted the appetite for hard work: Hyundai relished the challenge of competition, investing EUR1.26bn in a factory in Czechoslovakia in order to target Europe, the most mature car market in the world, and relishing the competition back in Korea now EU-ROK import tariffs on motor vehicles are a thing of the past. In addition, Whitehorn highlighted the Korean saying 고생 끝에 낙이 온다  “At the end of hardship comes happiness”, which in Hyundai’s case was illustrated by the strong growth in sales in Europe that followed the decline in the mid-noughties. A final example of the Korean mentality is that whereas in the West if a business exceeds its targets by 10%, if such a thing happens in Korea the attitude is that the target was set too low in the first place.

Hyundai, being new to the market, has no legacy of out-of-date plant, and unlike some of the European competition was able to build state-of-the-art factories which enabled higher productivity. Hyundai is the fastest growing car manufacturer in the world, with a focus on being in the top 5 in the growing emerging markets of China, Brazil, Russia, Turkey and India.

Among Hyundai’s biggest challenges in the Korea is the unionisation, where because demand for their cars has exceeded supply (Hyundai and Kia together have 75% of the domestic market) the unions have a strong hand. As a globalising strategy Hyundai have minimised their dependence on Korean factories by building factories in their target markets. 94% of the Hyundai vehicles sold in the UK, for example, are made in Europe.

Whereas Hyundai used to sell in Europe because of their cheap price, they now sell, according to Whitehorn, because of their style. And Hyundai are also at the forefront of automotive technology, with six hydrogen fuel cell vehicles recently sold in the UK, though Whitehorn acknowledged that it would be a while before fuel cells (which he sees as where motor technology will be in 40 years time) catch on. The important thing, in the Hyundai philosophy, was to get them to market as soon as possible so that people can get used to them. He also recommended that we search for “Genesis Driverless Car” on YouTube for an impressive demonstration video. And here it is:

A couple of probing questions from the floor were answered with a very straight bat.

  • Hyundai’s recent $10bn purchase of the land occupied by KEPCO’s headquarters in Gangnam at three times its market value – which had sent Hyundai’s share price into a 14% decline. Whitehorn noted the upcoming penal tax on companies’ surplus cash, and this purchase was a way of reducing cash balances while securing a prime site for their own headquarters.
  • Hyundai’s governance and succession planning – in which the third generation of Chung was being groomed to take over the company. Whitehorn regarded the strong family heritage as a ensuring Hyundai’s solidity and longevity, and a smooth transition of executive power to the next generation ensured continuity.

“Haemorrhaging money” – the bankers’ experience

The Asia House panel
The panel, L to R: Aidan Foster-Carter, Honorary Senior Research Fellow in Sociology and Modern Korea at Leeds University, Sir Thomas Harris, Vice Chairman at Standard Chartered Bank, Michael Lawrence, CEO of Asia House and Professor Keun-Wook Paik, Senior Research Fellow at the Oxford Institute for Energy Studies

After these good news stories, it was up to a strong panel to examine some of the claims and provide perspective. Aidan Foster Carter had already started the process from the floor with his questions about Hyundai’s governance and the Gangnam land acquisition; Sir Thomas Harris started with the very low-hanging fruit of pointing out that when Hyundai complained that their sales had only benefited 4% as a result of the EU-ROK FTA, while the likes of Jaguar, Land Rover and BMW had seen increases of over 40% – it obviously doesn’t take much of an increase in units sold to produce big percentage increases when you start from a low base.

But Harris had a more interesting story to tell in respect of his own experiences of conducting financial services in Korea.

Since the Lehman financial crisis, doing banking business in Korea had got more difficult, he argued. Recognising the high levels of household debt, the government had launched its Personal Debt Rehabilitation Plan, which encouraged borrowers to seek rescheduling or write-off of their debts. In a general atmosphere of banker-bashing, consumer protection issues were being emphasised through tough product regulation, and the government is directly intervening in the level of fees levied by banks, with the result that fee income in Korea is very low as a percentage of total income compared with other markets. In a separate development, the equity warrant market slumped by 92% in 2013 in volume terms.

Other problems faced by the industry is the heavy unionisation and “antiquated” labour laws – which for Standard Chartered meant difficulty in implementing performance-related pay structures and 9 weeks of strikes; and regulation that impacts foreign banks specifically is the need to retain on Korean IT servers the data relating to Korean activities (preventing efficiencies in data processing through regional or global hubs) and informal restrictions on repatriation of profits.

Banking is treated like a utility, argued Harris, and not as a profit-making growth activity in its own right. There had been a catastrophic collapse in banking return on equity, from 18.4% in 2005 to 2.7% in 2013 – far lower than the cost of capital.2 It is no surprise, then, that HSBC has exited Korean retail banking, that Citibank announced in April that it will close 56 branches and only serve six major cities in Korea; that Aviva agreed to sell its Korean joint venture (Aviva press release) ; and that Standard Chartered has written off $1bn of its investment, has sold its savings bank and consumer finance operations and plans to close 73 of its 350 branches (FT article). “The industry is haemorrhaging money”.

After such a blistering attack on the financial sector environment in Korea, a representative from the embassy suggested that government action on banking could be expected. He also suggested that many of the issues were specific to Standard Chartered, a claim disputed from the panel. Businessweek suggests that foreign banks such has SC and Citi have been more impacted by government intervention as they are more exposed to lending to individuals, but Harris argued that the local banks too are facing similarly disastrous returns on their retail activity.

Energy and Politics

It was time to move on. Professor Paik Keun-wook at the Oxford Institute for Energy Studies, talked about the potential impact on the global energy market of the huge gas deal between Russia and China, and offered up the potential for cooperation between East and West on the huge energy discoveries off the East coast of Africa. He also noted the huge boost to KNOC’s performance as a result of its acquisition of the UK’s Dana Petroleum.

Aidan Foster-Carter threw in some statistics from the recently published World Economic Forum Global Competitiveness Report 2013–2014 (published 3 September 2014):

In terms of “Financial market development”, Korea ranks 81st, even behind Cambodia. In terms of overall competitiveness, Korea is 25th. “However, Korea’s assessment is considerably weakened by the average quality of its public and private institutions (74th, down 12 positions), the extreme rigidity and the inefficiencies of its labor market (78th), and its poorly functioning financial market (81st). Korea falls sharply in those three areas, and without tackling these issues decisively, the country will not be able to close the competitiveness gap with the three other Asian Tigers.”3

Foster-Carter then moved on to a political overview, commending Korea’s simultaneous economic growth and democratisation. He argued that there was a pressing need for constitutional reform, with a president restricted to a single 5-year term, but with National Assembly elections being on a 4 year cycle. For President Park, the next 18 months would be crucial, as she could be expected to lose her majority in the National Assembly in the first half of 2016.

He suggested that the 58 different sections of the “4-7-4 vision” amounted to a wishlist rather than a programme, but highlighted the government’s focus on welfare, and in particular childcare to encourage women to enter the workforce and encourage an increase to the birthrate.

Thanks to Asia House for hosting, and to David Clive Price for sponsoring, such a fascinating session.

Further reading:

  1. In terms of global sales, GM leads, followed by Toyota, VW, then Hyundai []
  2. Independent verification of these numbers as follows. According to official regulatory data, “return on equity in the South Korean banking sector fell from 17.6 per cent that year to just 3.6 per cent in the first quarter of this year, having slipped into negative territory in the previous quarter.” Per the FT []
  3. World Economic Forum, The Global Competitiveness Report 2013–2014, page 34. []

3 thoughts on “Korea’s Economy in Transition – a report from the recent evening at Asia House

  1. “There’s an equally detailed write-up of the event, with rather better pictures, on the Asia House website.”

    Too modest, Philip. AH’s own write-up only reports three of the five speeches. So some of us are especially grateful for your greater comprehensiveness…

  2. Me again, sorry. Philip asked for my source re the 474 vison’s 58 components. First up: I erred, sorry. There are actually 59, the last being unification – which I think makes my point about this being more a wishlist than a coherent policy programme.
    You can find this on MOSF’s website, but not easily: the link to the full list is within a pop-up. Here it is:

    Final autotrumpetblow: In case of interest, I commented on 474 soon after it came out, here:

  3. Aaargh! The MOSF link I gave doesn’t work. So, tiresomely, this must be done by degrees:

    1. Go to

    2. Under Policy Focus, on left, click 4. This opens a summary pop-up called ‘3 Year Plan for Economic Innovation.’

    3. Click on the middle button of 3 near the top, ‘Strategies and Tasks’

    4. At the foot of the page that then opens, press button ‘For detailed tasks and timetable’

    5. And then, 36 pages of detail will open up. Couldn’t be simpler, could it?

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