THE KOREAN TIGER IS OUT FOR BLOOD
Working in the hills of the South Korean township of Kihung, Samsung Group research engineers are engaged in a quiet battle to beat the Japanese to the punch. They are sinking huge sums into developing a digital videodisk player they hope will replace the traditional VCR just as the compact-disk player made the old turntable history. Although the prototype looks as big as a refrigerator,Samsung engineers expect to scale the size down to that of a regular VCR by 1995.
Samsung's competitive gamble is a clear sign that Korea's consumer electronics industry is going on the attack. Last year, worldwide recession and keen competition from developing countries cut Korea's consumer electronics exports by 2%. But now, Samsung and the two other major Korean electronics giants--Goldstar Co. and Daewoo Electronics Co.--are looking strong. They are benefiting from Japan's muscular yen, new markets, and the startup of production facilities in Europe and Mexico. To top it off, the Korean market, which accounts for 40% of their sales, has improved dramatically.
It also doesn't hurt that Japan, Korea's chief competitor, is in a slump. A 10% increase in the yen's value boosts Korean exports by 8%, according to a government forecast. And persistent quality problems have hamstrung a Japanese strategy to grab global market share through Southeast Asian transplants. In fact, the Koreans are even starting to make headway in the Japanese market. Exports by the three Korean companies to Japan rose by 40%, to $156 million in this year's first quarter.
TAPING POWER. Buoyed by the good news, Korea's electronics companies are scheming to take the Japanese on in risky, cutting-edge products. One example is the Samsung digital videodisk player, which has twice the capacity of existing disk players and can record. Japanese and European companies are racing to develop the same types of products, but Samsung is banking on a technological head start, as well as manufacturing and pricing advantages. "We will be in a position to compete if and when the Japanese makers begin marketing one," says a Samsung executive.
Developing such sophisticated products can be exorbitantly expensive--up to $50 million for the digital disk player. To improve their cash flow, Samsung and the other Korean companies want to grab footholds in growing markets of the former Soviet Union, Pakistan, and China, where their lower-priced products are popular. Eastern Europe, for example, is emerging as a major market for the Koreans. Their exports there rose by 200%, to $197 million in the first quarter of 1993. The Koreans are expanding in other new markets, such as Uzbekistan, Russia, Thailand, and Vietnam.
The Koreans expect offshore production facilities to pay off handsomely. In Europe alone, they have invested about $600 million to avoid antidumping actions that have hurt exports. Daewoo spent more than $197 million in France to make color TVs and microwave ovens. Samsung has expanded production in Britain and Spain, and Goldstar has a facility in Germany. All three also have set up plants in Mexico to take advantage of the North American Free Trade Agreement. "Through exports alone, we cannot gain a sizable market share," says Kim Hun, executive managing director of Samsung Electronics Co.
The Koreans also have seen dramatic improvement in their domestic market. And to beef up Korea's research and development, the government is offering subsidies. Seoul has kicked in, for example, to help three Korean electronics companies develop high-definition TV tubes. It's paying off. In April, the companies unveiled a prototype picture tube that may give the Koreans a promising start in HDTV.
But they have a long way to go. They still are dependent on Japan for many high-tech parts. A study by the Hana Research Institute in Seoul concludes that Korea has attained only 80% of Japan's technology level in electronics.
Many analysts believe Korea's electronics industry is at a critical juncture. Since it accounts for nearly 30% of manufactured exports and employs more than 10% of the nation's factory workers, the industry is simply too important and too powerful for the government not to support it. The Koreans will need all the help they can get if they are to top the Japanese in the high-stakes game of consumer electronics.Laxmi Nakarmi in Seoul, with Patrick Oster in Brussels