Korea's Hardware Success and Software Challenge

A great deal has been written over the years about the strength of Korea's IT manufacturing and export sector in comparison to its relative weakness in software and content industries. The Joongang Daily has a lengthy article on the topic today, with supporting data and an effort to explain why Korea remains relatively week in the software area.

According to the article, as Korean companies take a hard look at their software vulnerabilities, they say they see a vicious cycle at work.

First, students shun software-related majors at universities. The quality of Korean software manpower falls behind that of other advanced countries. Companies don’t pay and treat their software engineers right. And that goes back to students shunning software majors at universities.

The accompanying graphic shows average salaries by certain occupational groups (click on the graphic to see a full size version).

According to a recent report by the Samsung Economic Research Institute, the number of places in IT-related departments at about 100 major universities in Korea have been declining for four years straight since 2006.

Admission quotas, or places, in computer engineering departments plunged at the fastest rate. The figure stood at 80 in 2006, but decreased to 73 in 2009. That compares to the figure for electric and electronic engineering, which inched down from 87 in 2006 to 85 in 2009.

“As the IT environment undergoes rapid changes, it’s crucial for Korea to secure software capability fast,” the report pointed out. “But universities appear to have succeeded in neither attracting top-tier software talent nor providing high-quality education programs.”

“The morale of Korea’s software talent is at its lowest,” said Daniel Lee, 41, CEO of Inspirit, a local company that makes software for mobile communication networks. “The importance of software is growing day by day, but if things don’t change, Korea’s software industry has no future.”

Some cite an even broader problem in the Korean technology industry: An under-appreciation of the value of start-ups and their innovative ideas, except by foreign tech firms.

Korea's IT Exports Hit All Time Record in 2010

As reported by the Joongang Daily, Korea's IT exports hit an all time record of $153.9 billion, more than double the volume of IT exports in 2003.  The nation's trade surplus in the information technology sector was also a record at $78.2 billion.   Semiconductor exports were the single biggest export item for South Korea, totaling $50.7 billion.   Exports of flat screens reached $33.8 billion dollars, making them the fourth largest export item, following ships and automobiles.  Exports of televisions increased 42.6 percent to $7.4 billion.  Despite a late-year surge in exports of smart phones, overall exports of mobile phones decreased by 13.7 percent during the year, but they still totaled $24.7 billion.

Ministry of Knowledge Economy sources are predicting that IT exports will increase between five and ten percent this year and reach $160 billion.  Further evidence that the ICT sector and certain key technologies that anchor the information age are the main drivers of South Korea's export-led economy.

Korea's Export and ICT-Led Economy

It is January 2, but this is my first blog post of 2011.  As an industry colleague noted in a recent e-mail message to me, the world is changing fast, and IT is at the center of things.

The news about South Korea's all-time record trade surplus during 2010 is a significant piece of information about its ICT sector.  As reported by international media including Singapore's Straits Times, the nation logged a $41.7 billion trade surplus in 2010.  This raised Korea's global export ranking to seventh.

The ICT sector was at the center of this development.  The Ministry of Knowledge Economy noted that the record figures indicate the country had solid performances in many sectors including semi-conductors, automobiles, mobile communications and general machinery equipment, despite the appreciation of the Korean currency as well as the tension on the peninsula.  In addition to semiconductors and mobile communications, the display and television industries did their share to contribute to Korea's trade surplus.

There are many interesting aspects, including risks, to Korea's export-led economic growth, and this is a general topic that this blog will continue to follow in 2011.   However, at this point in time, South Korea is surfing a wave of change in the semiconductor, mobile and display industries worldwide.  The Japan Times carried an interesting article yesterday entitled "Digital age leaves myopic Japan facing manufacturing crisis."   The article noted that, in the past, Japan was able to gain market share because its products had a technological edge and their companies drew strength from vertical integration and testing in Japan's domestic market.  However, from the 1990s, the core technologies for many electronics products, including computers, TVs and DVD players went digital and with modular components.

In this new digital, modular age, Korean companies, led by Samsung and LG, but also including many SMEs and parts manufacturers, seem to be off to a very good start.

Korea's Booming IT Exports

As noted by a report in the Joongang Daily, Korea's IT exports continue to flourish, led by semiconductors, flat screens and smart phones.  As shown in the accompanying graphic (click to see a full-size version) November marked the sixth consecutive month that IT exports exceeded $13 billion.   The information presented in this article, based on reports from the Knowledge Economy Ministry, make it clear that the worldwide boom in smartphones and other mobile devices is perhaps the major factor behind the export growth.  After all, as discussed in earlier posts here, many of the key components in Apple's iPhone and iPad are manufactured in Korea.  So, in addition to the export of Korean smart phones per se, we must consider how many of the semiconductors and screens manufactured here are sold in order to provide hardware for the transition to mobile broadband around the globe.

It is equally apparent that the new finger-slim LED television sets are selling well around the world.  In addition to the export categories already mentioned, television components was among Korea's top ten exports in November.

Korea's First Half IT Exports Set a New Record

The Joongang Ilbo reports today that Korea's IT exports are at record-setting levels.  The graphic accompanying this post shows the recent pattern (click to see a full-size version).  Not surprisingly, semiconductors and flat panel displays are leading the export surge.   Exports of mobile handsets, a traditional Korean export strength during the feature-phone era, dropped 20.8 percent during the first six months of this year, due to a decline in export unit prices and a delay in smartphone production by Korean firms.

The regional pattern is also interesting.  Korea exported the most IT products to China, selling $33.1 billion worth of items in the country, followed by the European Union with $8.99 billion, and the United States at $8.49 billion.

Korea's IT Trade Surplus Reaches New Record

As reported in the Joongang Daily, a new report by the Knowledge Economy Ministry shows that South Korea's IT trade surplus has reached record levels.  In April, Korea posted a record trade surplus of $6.71 billion in the information technology (IT) product sector, led by increased demand for semiconductors and display panels.  IT exports surged to $12.67 billion last month, the eleventh consecutive month the surplus has exceeded $10 billion.  Exports of mobile phones fell 28.2 percent to $1.75 billion, mainly due to increased overseas production by local companies as part of cost-cutting efforts.   Also, as mentioned in the last post, the popularity of the iPhone was an overall factor affecting the market for mobile handsets. (Click on the graphic to see a full size version.)

Smartphones lead hike in high-end Imports

A short, but very interesting article in this morning's Joongang Daily is titled, "Smartphones lead hike in high-end imports."  According to the Korea Customs Service, imports of mobile phones surged by 149 percent last year to $137.04 million, largely due to smartphones.  The Apple iPhone, released in Korea late last year, was responsible for most of this effect, as 72 percent of the mobile phone imports occurred in the fourth quarter of last year.  Moreover, imports of mobile phones rose by another 369 percent in the first quarter of this year from the same period a year ago.

Growth in other high-end imports is shown in the accompanying graphic (click to see a full size version of the graphic).

Yet More on the "iPhone Effect" in Korea's Telecoms Market

One part of the "iPhone Effect" or the "iPhone Shock" to the Korean market is becoming clearer.  An article in today's Chosun Ilbo is headlined "The iPhone Casts Clouds for Korean Handset Makers."  The article notes that Korea's mobile phone exports for the first quarter of 2010 were down 11.4 percent compared to a year ago, mainly because Samsung and LG are unable to compete strongly in the surging "smartphone" segment, led by Apple's iPhone and the Google-based Android phones.

This is just another strong piece of evidence that Korea's leading handset manufacturers and exporters bear a big part of the responsibility for the two and a half year delay in bringing the iPhone to Korea.  

Korea's IT Growth Slows Since 2005

Citing a report by the Korea Chamber of Commerce and Industry, an article in the Joongang Daily notes that the growth of South Korea's IT Sector has slowed noticeably since 2005.  From 1989 until 2004 the sector grew at an annual average of 16.8 percent, but since 2005 the pace has fallen to the 4 to 7 percent range.  The report attributed the slowdown to three widening gaps.



1. Between software and hardware.  Between 2000 and 2008 the hardware industry recorded annual growth of 9.5 percent, while the software industry grew at an annual average of 7.5 percent.

2. Between finished goods and parts.  The report noted that domestic production of key parts in the IT industry remains weak.

3. Between large and smaller companies.  While the nation's 20 largest IT companies posted an 8.1 percent rise in average annual sales from 2000-2008, sales at smaller firms grew by just 4 percent annually.

Korea Joins Top Ten Exporting Countries, Led by ICT Sector

There has been a great deal of commentary in the local media lately about the performance and goals of South Korean exports. The country has broken into the ranks of the top ten exporting nations in the world, with total exports valued at about U.S. $260 billion. and it has done so during a global economic crisis and with ICT-sector exports leading the way.
As reported in the Korea IT Times and other media, it appears that three of the four top spots in Korea's exports this year will be IT products. These are cell phones, semiconductors and display products including digital LCD televisions, which rank, which rank second, third and fourth on the list of Korean exports, following vessels (the shipping industry). The last year that three out of the top four exports came from the ICT sector was 2004.

Perhaps more important than the ranking of these major product categories is their total value, which this year will account for almost 25 percent of all Korean exports. Also, display exports showed a greater percentage increase relative to cell phones and semiconductors.
The reasons for the increase in ICT exports are different for each of the sub categories. For example, exports of displays (including television sets) skyrocketed after the introduction early this year of the new LED backlit models. They represented a breakthrough from the older models, being much thinner, lighter weight and lower in energy consumption. In other words, they were a breakthrough technology in the marketplace that made all of the competing products seem old fashioned. On the other hand, the increase in cell phone handsets, while reflecting consumer preferences for Samsung and LG products around the world, was not based on significant increases in the rapidly emerging "smart-phone" segment. This has been the subject of other posts and should be of great concern to Korean exporters. Especially since the worldwide transition in mobile communications is clearly toward hand-held computing and internet devices. It is a transition that will perhaps be more important than the arrival of personal computers three decades ago.

Digital Multimedia Broadcasting (DMB) Developments of Late

My wife and I just recently traded in our Kia Sportage and purchased a new Hyundai Tucson.  In the process, we chose several options, including the built-in navigation system.  The navigation options on the system are quite nice and highly programmable.   In addition, the system includes a DVD player, FM, and DMB (Digital Multimedia Broadcasting), among other things.  One day, a couple of weekends ago, I was checking out the system and when I pressed the DMB button on the left of the console and found myself watching a Korean drama via terrestrial DMB, it occurred to me what a convenient and natural option this was.  I imagined being caught in traffic, arriving at an appointment or simply being out in the mountains on a Fall afternoon, when it might be nice to watch a bit of television.  I also thought of the fact that most countries in the world don't yet enjoy the convenience of free DMB television, so this is an update on two earlier posts (the first here and the second here.)   Several things are happening in the DMB industry.

First, according to reports in Korea's electronics newspaper (전자신문), several of the terrestrial DMB broadcasting companies are starting to specialize, in an effort to attract a more targeted audience, and advertisers.  For example, U1 is specializing in online and offline sports, and Korea DMB was changing its name and plans a focus on the economy.

Second, also according to the Electronics Newspaper, three big mobile carriers in Korea are experimenting with two-way data broadcasting services using DMB.  Using such services, users can do search, shopping or communications while watching DMB programming.   This is similar to the sort of services that are incorporated in the IPTV offerings for which more than one million Koreans have subscribed to date.

Second, the export market for Korea's DMB technology, although in its infance, is still alive.  The technology is being used in such nations as Germany, China, Ghana, and France.

Like wireless broadband (WiBro), Korea's DMB technology faces competitors in the global market.  However, there may well be an important market niche for Korean technology.  This is a sector to watch closely.

Korean IT Firms Benefit from the Won's Decline

Korea's leading IT exporters are benefiting from the recent decline in the value of the Korean Won.  According to an article in today's Korea Times, the Won this week fell to as low as 1,062.6 per dollar, the weakest since December 2004.  A source at Samsung Electronics estimated that "if the exchange rate drops 10 won, we expect won-denominated sales to rise 300 billion won."  Exports account for 80 percent of Samsung's sales. In the second quarter, the electronics giant reaped an additional 300 billion won in sales thanks to the weakening won, sources say. LG Electronics benefits in a similar fashion.  "When the won-dollar rate drops 10 won, then we expect to gain some 70 billion in won-denominated sales," an LG spokesman said. 

However, the changing value of the won is a double-edged sword.  South Korea's airlines, steel makers and oil refiners, are suffering from the weaker won in the wake of surging prices for imported raw materials.