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Cover Story


When K.C. Park worked at IBM in the early 1980s trying to develop liquid-crystal-display technologies, he grew frustrated by how slowly the U.S. giant invested in the new field compared with its Japanese rivals. Later, as head of its multimedia unit in 1993, he again became disillusioned at IBM's timidity in betting on the future. So two years ago, Park, at 58, packed in his 27-year IBM career and returned to his native South Korea to become executive vice-president of LG Electronics Inc., a $6.5 billion unit of the group formerly called Lucky-Goldstar.

Suddenly, it's a new world. The Korean company is establishing itself in memory chips, liquid-crystal-display screens, and high-speed CD-ROMS. It is discussing partnerships with AT&T and Motorola, and Microsoft founder William H. Gates III and Oracle CEO Lawrence W. Ellison have visited in recent months. On July 17, the company said it would take control of Zenith Electronics Corp. at a cost of $350 million, giving it important new HDTV and multimedia technology.

That's just the start. Over the next five years, LG is planning to spend a total of $2.5 billion to invest in multimedia, display-screen, and information-delivery technologies. Park can hardly contain his excitement. "If we decide we need it, bang!--we go in," he says in an LG dining room high above Seoul. "That's the way it has to be. No nonsense. That's what excites me about Korea."

Korea is revving up. Having moved years ago from a low-wage economy where workers churned out shoes, textiles, small TVs, and cheap cars, Korea is bidding to become one of the world's leading producers of high-tech goods. As it approaches that goal, Korea could become the first nation to truly establish itself as an advanced industrial power since the emergence of Japan. Says Citibank's Korea manager John M. Beeman: "This country has achieved more economically in a shorter period of time than any other country in modern history."

But there's far more at stake than just business. The Koreans are driven by a fierce desire to beat Japan, which colonized the Korean peninsula until 1945. Although the new Korean business and technology push is led by big conglomerates such as Samsung, Hyundai, LG, and Daewoo, the urge to assert Korea's role as a first-tier power is shared by virtually the entire society, from government ministers and CEOs to auto workers and construction supervisors. With Japan suffering from a high yen, Koreans perceive a historic opportunity to move forward.

Their economic drive already is helping to raise the level of competition throughout Asia, as Korean companies rapidly establish manufacturing bases in China, Vietnam, and Indonesia. U.S. and European companies that are able to ride on Korea's ambitions will prosper. For Hewlett-Packard Co., sales in Korea, expected to hit $600 million this year, now exceed its sales in Italy. But others will feel new competitive heat as Hyundai Motor, for example, bids to be one of the world's top 10 auto makers and Samsung Electronics one of the top five electronics giants.

Korea's emergence is all the more remarkable because it is unfolding within rocket range of North Korea's 1 million- man army. The tops of some buildings in Seoul, just 30 miles from a heavily fortified demilitarized zone, host anti-aircraft guns. But the Koreans are increasingly optimistic that they can gradually knit together a pattern of intra-Korean economics that will make both military confrontation and chaos in the North unlikely. Indeed, maps on sale in Seoul already show a united Korea.

Buoyed by that confidence, Korean companies will spend $48 billion on capital investment in 1995, 56.6% more than last year, according to the Korea Development Bank. Some of that is spilling over into the U.S. In addition to LG's purchase of control in Zenith and Samsung's 40% stake in PC maker AST Research, Hyundai Electronics and Samsung Electronics are spending more than $1 billion a pop on semiconductor facilities in the U.S.

With per capita income crossing the $10,000 level and total GNP of $440 billion, the Koreans will join the Paris-based Organization of Economic Cooperation & Development, the rich man's club, by next year, ranking 11th among the world's top economic powers. They will still be well behind the U.S., Japan, and the largest European economies, but ahead of such countries as Sweden, Australia, and the Netherlands. "By the beginning of the 21st century, our per capita income will have risen to $20,000, with a gross domestic product surpassing $1 trillion," predicts President Kim Young Sam, who visits Washington July 25 to 28. "We have had to strive very hard" (page 64).

STARK REALITIES. As Korea grows up, the very structure of its society and economy are shifting. With wealth filtering into broader segments of the population, the middle class is buying cars, clothes, houses, and appliances. Koreans in their 20s and 30s are spending with abandon, thinking nothing of blowing $700 on a night out at Pharaoh's, a new disco at the Seoul Hilton Hotel. Young families, meanwhile, shell out $100 or more for a day of thrills at the huge indoor Lotte Adventure World. At the same time, environmental, consumer, and women's issues are appearing on the national agenda.

The Korean economic system itself is evolving from an old model characterized by tight collusion between military governments and big industrial conglomerates called chaebol. Although the system has been in many ways patterned on Japan's, the government is moving ahead with deregulation of the nation's financial, auto, and telecommunications markets. It is privatizing Korea Telecom and Korea Electric Power Co., while retaining controlling stakes. As the chaebol increasingly raise capital offshore and continue to expand internationally, the government's grip on their decisions is also easing. So Korean elites argue that their country will approach a balance between government and the private sector on par with Germany or France. "The real power of government is declining quite visibly," says Kyung Tae Lee, vice-president of the influential Korea Institute for Industrial Economics & Trade.

To be sure, Korea's first-world yearnings must confront some stark realities. The collapse of a fancy Seoul department store, as well as recent disasters with a bridge and pipeline, illustrate the difficulties the nation's infrastructure is having keeping pace with breakneck growth. The dominance of the chaebol means small and midsize companies remain thirsty for cash and are not as competitive as their counterparts in, say, Taiwan. Partly as a result, Korea's large manufacturers must turn to the U.S. and Japan for capital goods and components, creating a $5 billion trade deficit this year.

Introspective and self-critical, Koreans are intensely aware of their shortcomings. Some of their new investments, particularly in the overheated auto industry, are likely to fail. But on balance, most foreign analysts, bankers, and executives in Seoul argue that the Koreans can stay on course. Despite the infrastructure disasters, cranes are erecting towering new buildings throughout Seoul, and satellite cities of 500,000 people each are springing up outside the capital in former rice paddies. Huge projects, such as a high-speed train linking Seoul with Pusan, are proceeding.

NEW WAVE. Important for continued economic progress, Korea's nascent democracy appears to have crossed the point of no return from military influence. The student radicalism so common on campuses in the 1970s and 1980s has given way to the pursuit of advanced degrees, new cars, and good jobs. Thanks to rapidly increasing wages, militant unions also have lost much of their appeal, leaving only small pockets of radicalism.

Greatly accelerating the push toward a New Korea is a wave of Koreans with PhDs from U.S. and European universities. They are returning to key positions in companies, financial institutions, universities, and think tanks. Family members who have dominated the top management ranks of the chaebol are being replaced by seasoned executives with international experience. Meanwhile, Korean companies, longtime laggards at research and development spending, are boosting their budgets and setting up institutes and labs aimed at spurring genuine innovation. Koreans also are making strides in applying technology in their society. Use of the Internet is expanding quickly, and Koreans are absorbing everything from 24-hour automated teller machines to video on demand.

Korea's current sizzling annual growth rate of 9.9% is expected to ease. But economists believe the country will maintain an average of 7% growth for the next five years. That should put Korea within striking distance of leadership in many global industries, including autos. Hyundai Motor, Kia Motors, Ssangyong Motor, and Daewoo Motor continue to gear up aggressively, but now a powerful new player, Samsung, is plunking down $5 billion to enter the industry. It will build a state-of-the-art assembly plant with technical help from Nissan Motor Co. The reason the government allowed a new entrant into a crowded field, President Kim says, is "for the sake of quality and technology development" aimed at world markets. At the same time, the auto makers are engaged in major new deals with the likes of Mercedes-Benz and Bosch, and TRW. The U.S. company has recently agreed to transfer 100% of its air-bag technology, including the technically difficult sensor, to Hyundai Motor in return for 50% of the profits derived.

TWO-WAY STREET. The Koreans also are reaching world-class levels in areas of nuclear energy, telecommunications, and aerospace (table, page 57). In each case, the Koreans acquired crucial technologies from the West or Japan and adapted them. Despite the threat of potential Korean competitors, U.S. companies continue to be interested in technology alliances with Korean companies because the Koreans increasingly have something to offer in return. That includes production technology, supplies of DRAM chips and display screens, interesting technology in some niches, and plenty of capital. "In the old days, it was a one-way flow," says Samsung Electronics Vice-Chairman and CEO Kim Kwang-Ho, whose company is at the heart of Korea's high-tech push. "Now it is a two-way street. We have something to give back."

Is Korea's emergence a threat to Japan? The upstarts have inflicted real pain in industries such as steel and shipbuilding. And the Koreans are fast moving up the technology chain to strong positions in DRAM chips and, most recently, CD-ROM drives and liquid-crystal displays. "Japanese companies have had to eat crow on their prediction that the Koreans would never master semiconductor technology," says American Electronics Assn. Tokyo representative John Stern. "They've gone from 0% to 4% of this market."

But the Koreans--with a smaller industrial base--are not competing against the full range of Japan's economic power. And ironically, the Japanese gain in some sense from Korea's burning ambition. The reason is that the Koreans are still dependent on Japanese capital equipment and components, creating a lopsided trading relationship in Japan's favor. "The higher Korea's income level, the better," says a senior official of the Ministry of Foreign Affairs in Tokyo.

Moreover, Japanese companies afflicted with high-yen-induced costs at home are often able to buy cheaper components from Korea, improving their own competitiveness internationally. In early July, Fujitsu Ltd. announced that it would start buying CD-ROMs and LCD screens from Korean suppliers, hoping to bring prices down on its low-end personal computers. The Japanese also are deepening their technological alliances in Taiwan and Southeast Asia to drive their costs down. So even if the Koreans do beat Japan in some sectors, it may only serve to drive the Japanese to keep reaching new levels of competitiveness across a broad front.

The key to just how far Korea can go is how quickly it can develop its own human capital. Even though Korea claims the largest number of PhDs per capita in the world, the sheer speed at which it is moving into technology fields has outstripped its number of systems engineers, software designers, technology managers, and other personnel who understand how to get technology into the marketplace. "You can buy technology, but you cannot buy developed human resources so easily," says T.W. Kang, a U.S.-educated Korean in Tokyo who spent 10 years with Intel Corp. and is now managing director of Global Synergy Associates.

To see how the Koreans are trying to climb to the next level, pay a visit to Samsung Electronics' massive semiconductor facility at Kihung, about an hour south of Seoul. With its huge, spanking-new buildings nestled in onetime farmland, it has much the same look and feel as U.S. technology hot spots.

There, Dae Je Chin, 44, a PhD in electrical engineering from Stanford University and a two-year veteran of IBM's research labs in Yorktown Heights, N.Y., is heading the company's 2,500-person semiconductor division. Among them are 100 PhDs, mostly Koreans and about half of them from U.S. universities. "When you come back to Korea, you feel the urgency," says the diminutive, bespectacled Chin. "You work harder to fulfill the mission." IBM, in his view, was a "country club environment."

Samsung is already No.1 in the world in 4-megabit DRAMs, and now Chin is gearing up production lines for the dext-generation 16-megabit DRAMs. After that, he will turn to 64-megabit DRAMs. Most experts reckon the company can remain in the No.1 position in both those new generations. After that will come the 256-megabit DRAM, and Chin is racing to have commercial samples available by 1997. Aside from these memory chips, Samsung is trying to break into more lucrative chips, such as application-specific integrated circuits (ASICS).

Chin and his team are working 60 to 70 hours a week to realize their ambitions. "The Japanese, much like the Americans and Europeans, have a very defined procedure," he explains. "Everything is `first this step, then that one.' But if you're in a catch-up mode, you just do it and make it work. Koreans are good at that."

To develop his people, Chin sends 5 to 10 to U.S. universities each year and assigns others to work on projects with Japanese or American technicians, hoping they quickly trade knowhow. They are on average 10 years younger than their Japanese counterparts--and such relative youth could pay off. "High tech is not easy for older people," Chin says. The implication is clear: Brainpower, youth, hard work, and huge capital will triumph.

A NEW BLEND. If Samsung is using brute force, Daewoo and LG are trying a slightly more sophisticated approach by creating an institute and a research center, respectively. Daewoo's Institute for Advanced Engineering, with a budget this year of about $70 million, hosts 400 research engineers, students, and technical personnel from Daewoo's different operating units. Rather than merely buying technology from other countries and applying it, the institute allows specialists from Daewoo Motor and their counterparts from Daewoo Electronics to blend different technologies and actually innovate.

Clearly, the quality of Korean corporate R&D is improving. "We have to create something on our own," says Kim Chang-Soo, executive vice-president of LG Electronics Research Center. It's the sheer drive of technologists such as the silver-haired, precisely spoken Kim that lends credence to his country's push up the ladder. A PhD from the University of Florida, he spent 10 years with Harris Semiconductor, RCA Laboratories, and Digital Equipment Corp. By 1983, he was a consulting engineer for DEC, which he felt guaranteed him a job for life. At 43, he thought about pursuing the American dream--buying a piece of land and working much of the time from home.

Then one day, a friend from LG in Korea called to ask if he wanted to come home. "I decided I wasn't ready to retire," he recalls. "I wanted to come home to do something for technology and for my country."

His research center, with 300 researchers and a $45 million budget, is enjoying some sweet successes. Perhaps most significant is LG's progress in designing its own algorithms and models for signal compression and decompression. These are the key value-added part of semiconductors used in set-top boxes, digital video disks, and satellite broadcasting receivers.

Their work has set the stage for a reversal in how LG deals with U.S. chip companies such as Texas Instruments Inc. as well as Japanese chipmakers. "In the past, they came to us and said here is the chip design and how to make it," Kim says. "But now we say: `We need a chip. Here is our design. Do it our way."'

Partly as a result of the flow of returning engineers and scientists, Koreans argue that their goal is to secure leadership positions in key niches and use those positions to swap for other technology and components they need. "We are becoming a significant player in the global R&D arena," says Science & Technology Minister Chung Kun-Mo, who received a 1963 PhD from Michigan State University in nuclear physics. "We hope to be a respectable partner in the global game, to be accepted in the same league."

In Korean eyes, technology equals economic growth, which equals national advancement. Clearly, there is a driving force of nationalism at work. A stable, prosperous Korea with hopes of reunification does imply a country less likely to be intimidated by trade threats or directives from Washington. When President Kim says that North Korea is "a Korea issue," he in effect is telling Washington to follow Seoul's lead in dealing with Pyongyang--or else.

But Korea won't be another Japan, with all the connotations that carries. The return of so many well-educated Koreans appears to be tilting the balance away from an inward-looking, relatively closed nation toward one that is eager to play a larger international role. The second language of Korea's youthful intellectual and technological elite is English, rather than the Japanese spoken by their elders.

The opportunities for America in Korea's emergence seem to outweigh the points of possible friction. It is probably wishful thinking to believe that Korea's success will dethrone Japan, thus indirectly helping the U.S. Nevertheless, there are ways that America can gain from Korea's gradual liberalization and its deepening grasp of technology. Korea is likely to open more widely to the U.S. and Europe to avoid Japanese dominance in capital goods, components, and other products.

PAINFULLY SLOW. Consider HP's LaserJet. The government banned the sale of LaserJet printers in 1991--ostensibly because the Japanese printer engine put Japanese content at more than 35% of the total value of the finished product. But now, the Trade Ministry has quietly agreed to lift the ban this January. "Sometimes it's painfully slow, but they're recognizing that to sell into export markets, they're going to have to let people sell here as well," says John A. Toppel, President of HP Korea.

That's one reason U.S.-Korean trade is booming, with the U.S. enjoying a surplus. More broadly, the Koreans are breathing new ambition and capital into the U.S. technology base. If they can achieve even part of their agenda, they will be players on the 21st century Infobahn in the U.S. and Europe, while building prosperity in Asia. Which explains why Korea's dash toward the top tier of economic and technological power will reverberate around the world.

Where Korea Will Be Strong

AUTOS Korea is already the world's fifth-largest auto manufacturer, and leading producers such as Hyundai, Daewoo, and Kia are doubling capacity by 2000. In addition, a powerful new player, the Samsung group, is spending $5 billion to enter the industry.

SEMICONDUCTORS Already dominant in 4-megabit DRAM semiconductors, Samsung, LG, and Hyundai are expected to stay ahead of Japan in 16-megabit and 64-megabit generations, while also attempting to crack more profitable applications-specific integrated circuits.

INFORMATION PROCESSING Korean makers are attacking Japanese dominance of liquid-crystal-display industry; also gearing up massive production of CD-ROM drives. Will clearly be entering the personal-computer industry with greater force.

TELECOMMUNICATIONS Increasing use of satellites and fiber-optic networks; major players gearing up rapidly in personal communication systems and mobile


NUCLEAR ENERGY Already ranking with France and Japan as one of the world's top three developers of civilian nuclear energy, South Korea is seeking to export its designs to North Korea, China, Vietnam, and elsewhere.


Korea Inc. Is in Transition

The government plans to enhance competition by liberalizing the domestic market...but it will keep shaping industrial policy


Previously closed sectors such as autos will open to more domestic and foreign


...but the pace of the opening will be managed to reduce negative impact on domestic players.


The won will become convertible and foreigners will gradually be allowed to buy as much as 25% of a company's equity...

...but they will be blocked from taking majority control of Korean companies, and Korean capital outflow uill be restricted to prevent capital flight.


The government will privatize state-owned telephone, power, and other companies to spur greater competition...

...but it will retain a "golden share" in privatized companies, an imitation of French-style capitalism.


The government will reduce its micromanagement of the economy, by interfering less in private sector decisions...

...but will keep building national champions and borrow from Japan's keiretsu system to nurture small and medium-sized companies.

DATA: KOREA INSTITUTE FOR INDUSTRIAL ECONOMICS & TRADE, BUSINESS WEEKBy William J. Holstein and Laxmi Nakarmi in Seoul, with bureau reports

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