SEOUL – South Korean supergroup and digital entertainment maestros BTS are winning new and wider plaudits than ever in an era when many musicians, bereft of live performances, face glum futures.
Could South Korea’s economy be similarly poised to prosper amid widespread and expanding Covid gloom?
Data published today suggests that answer may be “yes.”
Figures from the Bank of Korea found that from July to September 2020, South Korea’s GDP grew 1.9% over the second quarter, with its key growth engine being exports, which soared almost 16%.
Korea’s economic virility amid the unprecedented pandemic rests on three foundations.
Firstly, South Korea’s economy was recession-proofed and its corporate efficiencies were upgraded in a harsh but brilliant restructuring program initiated to counter the Asia Financial Crisis of 1997-1998.
Secondly, the top national export sector to emerge from that process – electronics – looks bespoke designed to thrive in the lockdown era of Covid-19 and its aftermath.
Thirdly, South Korea’s premier export destination is China, while its Top 15 import partners list includes eight other countries in East Asia. The region is handling the pandemic far more effectively than the United States and Western Europe, which are looking increasingly hapless and rudderless in their pandemic policies.
While neighbor China was the first country hit by Covid-19, it was also first country to contain the disease, and the first country to see its economy recover. South Korea now may be the second major world economy to follow China in all three of those metrics.
Adding icing to an already impressive cake: South Korea has handily contained Covid-19 without mandating the harsh lockdowns deployed in both China and the West.
Instead, in recent months Seoul has shifted nimbly between looser and tighter social distancing measures as infections ease or increase.
“Korea did not shut down call centers or factories,” said Tony Michell, founder of Seoul-based firm Korea Associates Business Consultants Ltd. “Korea is showing not just its control of Covid, but its control of the economy in knowing how to lock down with a very light touch.”
Bounce back, by the numbers
According to data published today by the Bank of Korea and carried in domestic media. South Korea’s GDP bounced back onto the growth path in Q3, expanding 1.9% over the previous quarter, when it had dropped 3.2%.
This year’s QonQ figure trumped expectations: Analysts polled by Reuters had anticipated a median 1.7% growth rate. Separately, Finance Minister Hong Ki-nam noted that it was the best quarter-on-quarter performance the country had delivered since 2010.
Even so, on an annualized basis, GDP growth was down 1.9% from Q3 2019. And overall, the BOK is forecasting a -1.3% GDP figure for 2020.
The third-quarter growth was led by the country’s core engine of economic expansion, exports. Exports grew by 15.6%, quarter-on-quarter, and 7.7% year on year, on expanding overseas shipments of two key products, semiconductors and automobiles, the BOK said.
According to financial news provider Bloomberg, the country’s quarter-on-quarter export performance for Q3 2020 was its best since 1986 – a year when the country was not a democracy, nor had brands like Samsung Electronics or Hyundai Motor achieved the worldwide fame they enjoy today
While a recession – the first South Korea will have suffered in 22 years – is hardly good news, the modesty of the anticipated economic shrinkage, and the overall outlook, looks applause-worthy compared to multiple global benchmarks, for it is not just the BOK that is painting pictures of an impressive performance.
The IMF, in an October forecast, expects G1 economy the US to shrink by -4.3% this year; G3 economy Japan to fall by -5.2%; and G4 Germany to contract by -6.3%. G12 economy Korea, however, looks set to fall by a far more genteel 1.9%, according to the IMF.
More? The so-called “Rich Nation’s Club,” wrote in an August report: “Korea is experiencing the shallowest recession among OECD countries.”
Recession resistant
Until this extraordinary year, recessions had been banished to a distant past in South Korea, with younger citizens never having experienced one. The last year the nation suffered negative growth was 1998; it even rode out the global financial carnage of 2008-9 with its macro numbers in the black.
Though many Koreans excoriate it for ending a “jobs for life” paradigm, in late 1997, the IMF waded into their country brandishing a then-world record $60 billion dollar bailout. The aim was to rescue an economy upon which the sky was fast falling.
The culprits behind this disaster were the chaebol, or family run conglomerates, whose leaders’ vaulting ambition led to massive leverage. Aiding and abetting them in a cozy stew had been officials and bureaucrats who overlooked systemic risk and bankers who had dutifully handed over cash, no questions asked.
In 1998 the IMF and Seoul, under South Korea’s first-ever opposition leader, President Kim Dae-jung, unleashed a whirlwind of creative destruction.
Formerly closed markets were hurled opened to foreign competition. Regulatory change enabled companies to slash bloated staffs, such as elevator button pushers and “corporate entertainment” managers. New discipline was imposed upon bankers and regulators. Most critically, chaebol were forced to slim down from “chip to ship” monsters, by divesting affiliates and refocusing on core competencies.
It proved bitter but effective medicine.
“I think 1997-1998 was crucial because – quite naturally – it is difficult to reform and change something that has worked very well when you don’t need to,” said Michael Breen, author of The New Koreans. “But there is nothing like a crisis to force change.”
Korean industry did not shed its skin: It never shifted from manufacturing to services. But, buttressed by a devalued won, a leaner, meaner, hungrier Korea Inc emerged.
Hyundai dived deep into cars and ships. Daewoo ended up just ships. But the real action – coming moreover, at a hinge point in recent history, when the world was surging online – was in electronics.
Deep in digital
In a smart, pre-crisis strategy, Korea had embedded a nationwide backbone of broadband Internet fiber optics. Post-1998, this would come online and provide the country’s firms with a living test bed. While Korea Inc did not manage to create any global platform business, it dove into hardware – both B2B (components) and B2C (devices).
“The Koreans did not come up with Facebooks or Googles,” said Breen. “But they did look at all the things that were happening and asked themselves, ‘What do I need to make that is needed for all this?’”
Samsung focused on electronic appliances and semiconductors, LG on appliances and displays. A new, combined entity – chip-maker Hynix, spun off from Hyundai and LG – was acquired by mobile operator SK.
All were world class. Samsung rose to global leadership in memory chips and smartphones, LG in displays. Both also offered full suites of appliances from TVs to PCs. Nationally, Samsung and SK hynix made South Korea’s memory chip industry the leader of the sector, worldwide.
Currently, Samsung is leveraging its experience, relationships and vast capital base to thrust aggressively – and by early indications, successfully – into the high value-added non-memory chip sector.
Crafted for Covid
On the soft power front, BTS is well equipped – with its 360-degree digital presence and precision engineered system of online fan-base curation – to benefit from Covid-19, compared with most of its Western competitors.
Ditto, when it comes to the harder power of industrial economics.
Korea’s electronics sector is well fitted for a pandemic generating massive demand for online everything – offsite working, video conferencing, digital entertainment, streaming concerts. In other words: soaring demand for both data centers and devices.
“The semiconductor industry is reporting year-on-year growth of 20%,” said Scott Foster, an analyst with LightStream Research in Tokyo. “Because of everyone working from home and having to upgrade home workstations, everything related to it is doing very well.”
Samsung and SK hynix are being boosted both by an ongoing cyclical upturn in memory chips as well as the ongoing viral boost that is similarly enriching major US dot coms.
LG Electronics may not be taking flight yet, but Foster says an upturn in displays, LG’s top product, is imminent: “What had lagged so far is displays, but that is only a matter of time: Displays are cyclical.”
At the height of the pandemic, Asia Times has learned, it was almost impossible to buy a new laptop in New York. That demand may have dropped off now – but even so, Foster reckons many digital practices related to the pandemic are going to outlive it.
“We are probably never going back to old business trips and conferences because video conferencing is like 10,000 times cheaper,” he said. “Remote working, no business trips, distancing everything online – they all play to Korean strengths.”
Overall, electronics components are far and away Korea’s biggest export items. According to data provider OEC World, in 2018, among the country’s big three product categories, chips were worth $113 billion, followed by refined petroleum, worth $43.6 billion and autos at $38.7 billion. “Semiconductors is not their entire economy but it is very large,” Foster said.
Sweetly sited
If proximity assists trade, South Korea is geographically favored to ride out the pandemic. Data provider World Stop Partners puts South Korea’s top 15 export destinations as:
- China: US$136.2 billion (25.1% of total South Korean exports)
- United States: $73.6 billion (13.6%)
- Vietnam: $48.2 billion (8.9%)
- Hong Kong: $31.9 billion (5.9%)
- Japan: $28.4 billion (5.2%)
- Taiwan: $15.7 billion (2.9%)
- India: $15.1 billion (2.8%)
- Singapore: $12.8 billion (2.4%)
- Mexico: $10.9 billion (2%)
- Malaysia: $8.8 billion (1.6%)
- Germany: $8.7 billion (1.6%)
- Philippines: $8.4 billion (1.5%)
- Australia: $7.9 billion (1.5%)
- Thailand: $7.8 billion (1.4%)
- Russia: $7.78 billion (1.4%)
Clearly, the bulk of Korea’s exports go to East Asia, This is promising positioning, given the efficiency of Covid containment in the region.
“When you have Korea Vietnam, Taiwan and China doing so well, you realize Asia is the place to be,” said Michell of KABC Ltd. “Those people cutting supply chains in the region in order to be somewhere else will end up having to come back
China, which the IMF expects to grow 1.9% this year, and which saw third-quarter growth of 4.9%, is the top export destination for both Korea and Japan.
This year, Beijing has been strengthening its currency, thereby boosting domestic consumption, and has made high technology central to its economic future. As it motors out of 2020, it should drag the two big economies to its east in its wake.
Korea’s number two export destination is the United States – a good hedge against China, perhaps, but a country that places Korea in a dubious position. With Washington being Seoul’s only ally, South Korean finds itself a shrimp between trade-warring whales.
However, there are caveats. Firstly, by US fiat, Samsung and SK Hynix are unable to sell chips to Huawei and SMIC – but that still leaves plentiful mainland tech companies to buy the Korean firms’ components.
And a Joe Biden win in the US presidential election next week could see an eased trade war – a possibility which would likely ignite applause in executive suites in both South Korea and Japan.
Yet Korea is not out of the woods yet. Michell, who admitted to being pleasantly surprised at the latest numbers, pointed out some risks.
“When you look at GDP there are three main components: local consumption, investment and trade,” he said. “If you look at consumption it is slightly down, if you look at investments it is markedly down; only exports are massively up.”
As is the case elsewhere, multiple sectors – notably travel, tourism and leisure – are facing economic devastation. And there are wider cash-flow problems in Korea Inc.
Citing BOK data that shows that “39% of major corporations did not cover their interest charges last year,” Michell sounded a downbeat note.
“I am afraid of a shake up when banks return to normality,” he said. “Of course, interest rates are down and borrowing costs are nominal, but my guess is a lot of companies are going to be in trouble.”
Still, as of last month, the government was implementing the fourth supplementary budget of the year: stimulus packages thus far are worth some 67 trillion won ($59.3 billion).
And next month, the country is planning a nationwide retail festival to support shops and markets that have been hard hit by this year’s fall in consumer spending.