Korea’s electronics industry not making progress

By Dominique Numakura

The Korean electronics industry has been a focus in several electronics publications the past few weeks. The increased energy in industry is the increase in orders to component suppliers and printed circuit board (PCB) manufacturers due to the demand increase within the overall electronics sector. Unfortunately, major technology companies are considering overseas procurement from Taiwanese manufacturers for some of their components and assembled products in an effort to reduce costs.

Samsung Electronics, one of Korea's electronics giants, announced it will begin importing printed circuit boards for cellular phones this year from a few major Taiwanese printed wiring board (PWB) shops such as Compeq and Unitech.

LG Electronics, one of Samsung Electronics' competitors, followed suit and now purchases assembled LCD TVs from a Taiwanese original design manufacturer (ODM).

‘Buy Korean' has been the national policy in place for South Korea over the past twenty five years. This battle cry began in the early ‘80s when the Korean consumer electronics market was only in its infancy. It relied heavily on components and materials imports, especially from Japan, and spent a great deal of foreign money on such imports.

The goal for Koreans was to have equivalent technologies and manufacturing capabilities for electronics materials when being compared to other countries. The Korean government provided many benefits to help fund the establishment and growth of domestic manufacturers and was successful in doing so.

Today, the Korean consumer electronics industry has climbed the global ladder and is now a significant leader in both technological development and market share.

The Korean electronics industry has since realized its dream of being self sufficient. However, new hurdles now stand in its way.

The ‘Buy Korean' policy only works well when each contributor to the manufacturing cycle follows the same rules keeps investments in ‘the family'. Korean manufacturers now face significant competition from developing countries in Asia, especially China. Unfortunately, domestic component and material suppliers are not competitive when compared to Japanese and other Asian suppliers.

Meanwhile, Korean suppliers compete only with manufacturers from other conglomerate groups and they do not typically consider the foreign supply chain. The cost savings for these supplies will become lower, therefore, also making components from developing countries lower in price. Herein is the conflict. How can Koreans compete globally when their procurement ideals limit them to a domestic supplier?

Another issue to consider in the global arena is labor costs. Korean wages are higher compared to other Asian countries.

Korean company executives have several choices to help them to overcome these obstacles.

One of the best choices for Korea is to duplicate the Japanese model and significantly improve productivity within the manufacturing cycle. This is not an easy fix, but employing the Kaizen Method of continuous incremental improvements is a philosophy the Japanese adopted and proved to be effective.

An alternate choice for Korea is to outsource production to lower labor cost markets such as China and Vietnam. On this note, many printed circuit board companies recently built new manufacturing plants in the northern part of China where many Korean-Chinese people live.

Another choice to consider for South Korea requires it use its trump card and re-establish relations with North Korea and employ the North's very low cost labor pool.

The president of South Korea, Roh Moo-hyun, recently visited North Korea's leader leader Kim Jong-il for a summit. A large contingent of top management from several major companies in South Korea also visited North Korea. While its only speculation, it is possible talks may have included manufacturing opportunities for the North.

Most hi-tech companies are hesitant to consider such possibilities because of North Korea's foggy political situation. However, many ‘low-tech' Korean companies already operate production facilities in North Korea using the North's much lower cost for labor.

Product procurement from Taiwanese companies will present a positive contribution to Korea's electronics industry, long-term. Meanwhile, smaller-sized domestic suppliers in Korea will face choppy waters due to the competitive costs from Taiwanese manufacturers, but they have no choice but to cross these waters.

Once Korean companies become more competitive with their pricing, new opportunities could arise from not only within domestic markets, but foreign markets as well.

For Korea, her long-term, sustained economic growth is dependent on an open domestic market.

Source: EPT Newsletter