Cell-Phone Blues? Not for Korea's Go-Getters

Samsung, LG, and smaller fry are ringing up rapid growth

For much of the wireless world, the news is unremittingly bleak. Mobile-phone giants such as Nokia Corp. (NOK ) and Motorola Inc. (MOT ) have reduced their sales forecasts. Others, like Ericsson (ERICY ), are predicting outright losses for this year. The much-hyped rollout of fast 3G networks has stalled around the globe. Are the days of rapid growth over for cell-phone makers?

The South Koreans certainly don't think so. Led by Samsung Electronics Co. and LG Electronics Inc., the nation's handset makers are pumping hundreds of millions of dollars into research and development, hooking up with foreign partners, and flooding the world with hot new phones. In the first quarter, Korean handset exports surged by a third over the same period in 2001, to $1.97 billion. Trade officials expect Korea to sell $9.2 billion worth of cell phones overseas this year, or 20% of the global market outside Korea--for the first time surpassing chips as the nation's biggest export.

Currently, many of the phones are being built for the interim 2.5G standard, but Korean companies are gearing up to snatch a share of the 3G market once it takes off. "The good times are just beginning," declares Jang Hyun Geun, a deputy director at the Commerce, Industry, & Energy Ministry. "We're optimistic that Korean mobile-phone makers will get stronger."

Naturally, Samsung and LG are setting the pace. In fact, Samsung says this year it will edge out Siemens (SI ) and Ericsson (ERICY ), putting it behind Nokia and Motorola as the world's third biggest mobile-phone maker. For its part, LG is gunning for the fifth spot within three years. Together, the two chaebol aim to sell more than 50 million cell phones worldwide this year.

But Samsung and LG are not the only ones defying gravity. A host of smaller Korean handset manufacturers you may have never heard of are also rushing in--among them Pantech, Telson Electronics, and Appeal Telecom. These guppies lack global marketing expertise or the cash to build brands. But they are using their expertise in code division multiple access (CDMA), the technological standard that is increasingly seen as a serious contender in the 3G era, to design and make phones for such big fish as Nokia and Motorola. Both Pantech Co. and Appeal Telecom Co. are supplying handsets to Motorola--15 million over the next three years for Pantech--while Telson Electronics Co. is developing and making phones for Nokia.

Most of these small handset makers sprang from the creative destruction that has revolutionized Korea since the Asian crisis. Take Pantech. Eleven years ago, Park Byeong Yeop quit his job as a salesman at a telecom and started Pantech to make pagers. Looking for management and technical knowhow, Park recruited execs from Samsung and LG. Last year, he joined forces with a Seoul venture capitalist to take over a handset unit spun off from Hyundai Group. In 2001, Pantech reported profits of $7.1 million on sales of $309 million. Says Park: "I'm confident we can survive in any race."

Thanks to Korea's early bet on CDMA, local handset makers have a head start over companies that had focused on the rival GSM standard. Then, of course, there is the Korean fascination with everything wireless. As a result, the likes of Samsung and LG have had an opportunity to test their new products before unleashing them on the world. More recently, Korean consumers' wild embrace of high-speed wireless services has given Korean handset makers an opportunity to devise the next generation of phones. Add to this Korea's strength in chips, liquid crystal displays, and circuit boards, plus its thousands of experienced engineers and seasoned factory hands, and you have an ideal production base for wireless gadgets.

The upshot: Korean companies are poised to invade Europe and the U.S., where carriers and consumers have been slow to adopt 3G technology. "The fierce marketing battles at home give birth to innovations, making us winners in export markets," says Peter Yoo, a manager at Telson, which is developing a 3G handset for Nokia.

Just as Japanese consumer-electronics companies stormed the world in the 1980s, the Koreans are doing the same in the wireless sphere. Western handset makers won't sit idly by and let these newcomers snatch major markets, of course, but Korea's cell-phone makers are beginning to look like serious competition.

By Moon Ihlwan in Seoul

    Before it's here, it's on the Bloomberg Terminal.