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Korean economy is the Comeback Kid

Graham looks at the role of IT in the country's reversal of fortunes following the disaster of 1997

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Korea has the misfortune to be best known for being the home of the Moonies and MASH, but neither Sun Myong Moon's Unification Church nor the American sitcom that glorifies a war that took place fifty years ago come close to illuminating the remarkable developments happening in Korea today.

Less than three years ago, the street lights in Seoul were switched off over the Christmas season in order to help the fragile economy by saving electricity. Today, apart from signs in Korean, downtown Seoul could be easily mistaken a prosperous American city with a serious traffic problem. The recovery is quite a story, but its speed and depth is unlikely to be replicated outside the Far East because the essential cultural element is lacking in the West.

To be sure, stock options go a long way to creating a personal desire to succeed, but the missing element in the West is the intense nationalism and desire for education, as well as the work ethic that exists in Korea. There is a focussed government that has ensured an infrastructure to encourage the development of a formidable technology-based economy.

The 1997 crisis was triggered by the failure of some major companies, and resulted in a downgrading of Korea's credit rating. There were massive currency outflows, inward investment dried up, and the Won currency was devalued. Following the arrival of the suits from the IMF, and with the assistance of the World Bank and others, a total package of $58 billion of assistance was agreed - but at a price. There were tough regulations and a requirement to relax foreign ownership rules so that foreign investment could be attracted with a favourable tax regime.

Korea is one of the south-east Asian tiger economies of SE Asia - the others are Hong Kong, Singapore and Taiwan - but it has the advantage of a population significantly bigger than the other tigers combined.

The country is about the same size of the UK. It is increasingly referred to as Korea, rather than South Korea or the more formal Republic of Korea, perhaps because it is assumed that it is just a matter of time before North and South are reunited: what happened in Germany could happen in Korea at any time. Seoul has around a quarter of the country's population, with most people living in hastily erected tower blocks.

Korea has the main elements of oriental culture in a unique mix. Behaviour patterns result from Confucianism (as a social ethic, rather than a religion), so that business relationships require mutual respect and the preservation of face. In business, Koreans are highly disciplined and hard working, with decision making by group agreement following the circulation of memos. Business and social relationships overlap to a considerable extent.

The work ethic dictates a six-day, 56-hour week, with many people working even longer hours and meetings often taking place on Sundays. Salaries are less than those in Japan, Hong Kong, Taiwan or Singapore, but are ahead of Malaysia, China and India. Foreign companies in Korea tend to pay a little over the average.

A surprising one-third of net income is spent on education, with parents usually paying for their children's university education. As in Japan, good school grades are critical to getting to a good university, which usually leads to near-guaranteed advancement and success in life. Of the 46.4 million population of Korea, 11.7 million are students. Korean has one of the world's highest percentages of students at university, and produced 81,000 graduate engineers in 1998.

Koreans are extremely nationalistic, and do not like to lose - the economic recovery was accelerated by a strong desire to overcome the national shame that had descended over the country. Koreans dug the country out of the hole very quickly, with the IMF raising the growth forecast last month to 8.0 to 8.5 per cent from 7 per cent. Unemployment is just 3.8 per cent.

Foreigners visiting Korea are treated in a friendly way because it is generally perceived that they are helping Korea, but those working for non-Korean companies are viewed negatively. There are mixed feelings if a Korean concern is acquired by a foreign company, even if it continues as a Korean-registered company. Some Koreans may refuse to do business with a foreign-owned company. This may have influenced some of the responses obtained by the Wall Street Journal when it quizzed Lernout & Hauspie customers recently.

Europeans tend to be favoured more than Americans in Korea, mostly because of the friction arising from the massive trade imbalance with the US in the late 1980s, but partly also from disagreement about the presence of the US military there.

Korean conglomerates are known as chaebols and were introduced by the Japanese during their occupation, as a copy of the Japanese keiretsu. Because of the long-standing antithesis between Korea and Japan, until 1997 it was illegal to import Japanese goods directly from Japan - they had to come via Hong Kong. Chaebols received preferential treatment in the 1960s and 1970s, with four super-chaebols - Hyundai, Samsung, Daewoo, and Lucky Goldstar Electronics - emerging. The top 30 chaebols account for about a third of manufacturing.

The Korean IT market is now well into post-crisis recovery. PC sales were 2.19 million units last year, a growth of 79 per cent over 1998, according to IDC. PCs typically cost consumers less than $800 in Korea, as a result of government intervention in late 1999. China saw sales of 4.9 million units or 26 per cent growth in the same period, and although this is impressive, Korean sales were more than 12 times greater per capita, although the potential of China as an IT market must in the long run be greater than that of Korea because the population is 25 times greater.

There were 15.34 million Internet users in Korea as of July 2000 - a higher proportion than in most western European countries, and an increase of 276 per cent in the period between February 1999 and February 2000, according to Korean government statistics. Unlimited ADSL Internet access can be had for around $20 month. A Korean claim to fame is that there are more Korean language content sites per capita than anywhere else in the world.

In what became known as the garlic war, Korea recently increased the duty on garlic imports from China from 30 percent to 515 per cent just as China was about to increase the duty on Korean steel and plastics. China responded by banning the import of Korean mobile phones. This was interpreted as a pre-emptive strike by Korea.

There was a 16 per cent increase in the ICT market this year, to $99 billion, according to the Ministry of Information & Communication. There has also been a 39 percent increase in the software market this year, with sales of $7.6 billion forecast.

As of July 2000, 27 million Koreans subscribed to a voice portal, as the argot for mobile phones goes, which is remarkable since there were just 6 million 18 months ago. In fact, more Koreans use (CDMA) mobile phones than traditional phones. Telephone exchanges are being replaced by Web call centres.

So far as e-commerce in the Asia-Pacific region is concerned, according to the Boston Consulting Group Japan has double the 1999 Korean revenue of $720 million, with Australia being third with half the Korean total.

While Japan devotes itself to Pachinko - a kind of pinball game - for relaxation, Koreans have taken to Internet game shops: they are found everywhere, with anything from five to 100 or more PCs being networked.

Korean start-ups are reminiscent of the Silicon Valley scene a year or so ago. There is an area of Seoul known as Tehranro where thousands of small mostly dot.com companies have their offices and development centres. As in the west, the ambition is to get quoted on KOSDAQ, the local equivalent of NASDAQ. Venture capital money comes mostly from Asia and the US, although some money from the Irish Republic is creeping in. Much of the capital of course comes through the foreign-owned companies.

The Korean language is difficult and essentially unrelated to Chinese or Japanese: it belongs to the same group as Mongolian, Hungarian and Finnish. The Korean Hangul alphabet was developed in the 15th century. Because of the difficulty of the language, and with so few people speaking it, Korea is seeking a technological solution to translation that bodes well for automatic translation developments.

Quite separately, as a result of Korean demand for portals to a diverse range of services from stock trading to ticket reservations, there is a rapidly burgeoning market for speech recognition, text-to-speech and related technology. With Korea being amongst the world leaders in the integration of telephony and computing, it is not surprising that it is becoming a leading player in speech and language technology. This makes Lernout & Hauspie's position there very interesting. ®

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