SERI Report on the IT Market in Korea
Korea's IT and electronics industry began with assembly of radio sets in the 1950s. By the 1980s, Korean firms
had moved into semiconductor production, and by the 1990s, Korean firms were producing high quality
consumer electronics and exploring high-speed Internet services. IT is now one of the nation's backbone
industries, accounting for nearly 11 percent of GDP, and 33 percent of exports in 2010. Korea's IT success has
thus far been mostly a hardware phenomenon, but Korean firms are now increasingly looking into software as
the industry evolves.
IT Drives Korea's Export Growth and Trade Surplus
Korea's IT exports reached $158.8 billion in 2011, a three-fold increase from 2001. Share for the IT industry in
exports is characteristically high, peaking at 39 percent in 2004, though this is expected to decline to 29 percent
in 2011. The trade surplus for IT, moreover, has consistently outstripped the nation's overall trade balance since
2001. Even during the global financial crisis of 2008, when Korea posted a trade deficit of $13 billion, the IT
industry recorded a surplus of $58 billion. Korean IT has also been a strong performer in comparison to other
nations. After ranking third in the world from 2005 to 2008, Korean IT's trade balance overtook Japan in 2009
and 2010 to take the No. 2 spot behind China. In terms of IT export volume, Korea climbed to 5th in the world in
2009 from 10th in 2001, greatly narrowing the gap with No. 4 Japan.
Expanding Share in Global Markets
Semiconductors, LCD panels, and mobile phones have spearheaded the recent growth in Korea's IT industry. In
the first half of 2011, Korean made memory chips and LCD panels accounted for more than half of the global
market, while Korean TVs and mobile phones claimed 36.9 percent and 27.6 percent global share, respectively.
Although global market share for Korean made mobile phones has been shrinking since 2009, share for highvalue added smartphones is surging. In the first half of 2011, share for Korean firms in smart phones reached
19.8 percent, compared to 4.2 percent in 2009.
COMPETITIVENESS OF KOREA'S IT INDUSTRY
The strength of the Korean IT industry has emerged from foresight, product development, and marketing by
Korean companies, along with close cooperation with the government. Business-government collaboration
targeted promising areas for investment and policy support. Anticipating huge growth in LCD panels, Korean
firms made massive investments that gave them a strong position when the panel market was ready to take off.
Such investments made it easier for Korean firms to rapidly gain ground, in contrast to analog TV, where Korean
firms lagged behind their entrenched Japanese counterparts. By betting heavily on digital TVs, Korean firms
were able to outflank their competitors, and exploit the transition to digital broadcasting. The Korean IT industry
also focused on large screens and lower operating costs by aggressively investing in LCD panel production
facilities. This gave Korean firms an advantage against Japanese companies, who initially focused on high-end,
high-definition TVs that failed to reach global consumers.
In semiconductors, Korean chipmakers raced ahead of their rivals by sustained investment even during
contractions in the IT business. Through strenuous efforts to improve production and increase output, Korean
companies were able to take the lead in semiconductor miniaturization and price competitiveness.
In addition, shortened product development cycles and innovations in supply chain management gave Korean
makers the flexibility to respond to sudden market changes. Unlike rivals who launched new TV models once a
year, Samsung Electronics released new models twice annually to quickly respond to shifts in the market.
Similarly, Korea's smartphone makers were able to immediately provide competitive products when
smartphones became a must-have item among consumers.
In marketing, when the TV industry faltered on price markdowns and the transition to digital broadcasting,
Korean TV makers were ready with LED, 3D, and smart TVs to satisfy unmet consumer needs. In mobile phones,
Korean phone makers upgraded their brand image from low-end models to high-end ones. Above all, Korean
companies developed brand power in emerging economies through diverse marketing and social contributions.
When global electronics makers reduced investments in the wake of the 1998 Asian currency crisis, Samsung
Electronics and LG Electronics ramped up marketing to increase the value of their brand.
CHANGES IN THE IT ENVIRONMEMENT
Global IT is closely correlated to the trajectory of the
world economy. When the economy flourishes, IT
booms, and when the economy slumps, IT also declines.
With the global economy expected to see slower growth
in 2012, Korean IT will experience strong challenges, and
the export-dependent Korean economy as a whole will
be more vulnerable. Markets for Korea's major IT
products are reaching maturity. Growth in TVs, including
large LCD models, has either slowed or flattened due to
price declines and saturation.
Market stagnation is expected in 2012 unless new
models can stimulate demand. In the market for 20nano semiconductors, competition for miniaturization is
reaching its limits. Semiconductor and academic experts
predict that development of processes below 20 nanos
will soon come up against physical limitations, requiring
the introduction of new processes.
A Resurgent Japan and an Emerging China
At the same time, competing IT manufacturers in
Northeast Asia are expected to charge ahead. Japanese
and Chinese companies will fiercely compete against
their Korean peers in areas where Korean companies
have gained a competitive edge. Japan in particular, which lost market share to Korea during the past decade,
has been working hard to reclaim its traditional markets. In all areas, companies are seeking to move away from
conventional technology and take on emerging markets with products that are technologically advanced and
profitable.
Armed with cost competitiveness based on low wages, China is well on track to threaten the gains made by
Korean IT firms. In particular, China has a government-led plan to foster industries like semiconductors and LCD
panels that require large-scale investment. Though China's share in the global chip market was 0.8 percent in the
first half of 2011, China's chip production soared 34.7 percent year-on-year, far outstripping the global 3.9
percent growth rate. China's share in the LCD panel market also grew from 2.4 percent in the first quarter of
2010 to 3.4 percent in the second quarter of 2011. China's mobile phone industry has also grown impressively.
In terms of shipments, ZTE and Huawei ranked fourth (4.7 percent) and sixth (3.6 percent) in the world
respectively in the third quarter of 2011, and are gearing to enter the high-end smartphone market.1
Software and Content Grow in Importance
Refusing to maintain the status quo, the IT industry is rapidly morphing into a mobile-centered one. Demand for
mobile devices like smartphones and tablet PCs is forecast to zoom, inflating the amount of mobile data traffic.
With the spread of Internet peripherals, the cloud service market is also expected to grow fast. Market
researchers predict that cloud services will grow 22 percent annually, from $81.3 billion in 2011 to $148.8 billion
in 2014.2 Although Korean companies are likely to stay competitive in the mobile device sector, they are being
greatly upstaged by global firms in the cloud service sector.
With growth in the IT industry increasingly coming from the mobile sector, software and content are emerging
as key elements of competitiveness. Platforms that enable content and applications to work on various devices
are likewise rising as a new source of competitiveness. As the boundaries between mobile phones, TVs, and PCs
blur, companies like Apple and Google that have secured both software platforms and content are becoming
market leaders. This evolving market structure is less favorable to the current Korean IT industry, where
hardware has accounted for more than 60 percent of growth since 2000.3 Korean firms are now tasked with
securing competitiveness in software and content as well as hardware.
KOREAN IT'S FUTURE DEVELOPMENT STRATEGY
IT has been a mainstay of the Korean economy for decades, and has continued to prosper even during and after
the global financial crisis. Today, however, Korean IT is facing new challenges, and failure to anticipate shifts in
the direction of the industry can threaten the advances it has made. The most pressing task for Korean IT firms
today is increasing competitiveness in software and content.
New Growth Engines
As growth in the global IT industry tapers off, Korean IT will need to find new ways to sustain its position. On the
hardware side, investment in the development of AMOLEDs and next-generation memory semiconductors must
be further scaled up. Since there is little domestic production of major components like amplifiers and RF chips
(for mobile phones) and prisms, light guide plates, polarized light sheets, and color filters (for LCD panel
backlights), Korean companies must still depend heavily on imports.
Government-led efforts to nurture the parts and materials sectors can help wean Korean companies off imports
of key components.
Diversification in products and markets will also be critical. Korea's IT industry has mainly revolved around strong
performance in a few items in a few markets, making it sensitive to sudden shifts. The share of the top three
export items (mobile phones, display panels, and semiconductors) among Korea's total IT exports has been on
the rise: accounting for 49 percent in 2003, and over 70 percent in 2008. The share of Korea's IT exports to China
ballooned from 26.3 percent in 2003 to 46.5 percent in the first half of 2011. To overcome these dependencies,
Korea needs to both devise new products and diversify into new markets.
Reinforcing the Software and Content Sectors
In tandem with the global IT industry, which is transforming into an increasingly mobile-oriented world, Korean
IT will need to revitalize related industries. Greater competitiveness is needed in advanced mobile devices,
including smartphones and tablet PCs. In addition, Korean IT firms need to develop diverse cloud services in
mobile computing and personal data storage that can leverage existing strengths. Special attention is needed in
low-voltage mobile processors, and low power parts and technologies.
Most of all, strengthening competitiveness in software and content should be the top priority for Korean IT.
Korea's software competitiveness ranks 14th among 19 OECD nations, and its level of software utilization by
non-software industries is one third of that of leading nations like the US, the UK and Japan.4 Raising the use of
software to the level of developed nations will increase GDP (as of 2011) by an estimated 1.43 percent. Before
this happens, however, Korea will need to improve the competitiveness of its software industry, particularly in
the startup of more professional software-specialized firms. Companies that buy software need to team up with
software providers to raise software utilization rates. At the same time, convergence between Korea's
competitive automobile, shipbuilding, and heavy industries firms with software providers has the potential to
create significant synergy. Platforms capitalizing on Korea' hardware strengths can be built to expedite
connections between hardware and software.
In sum, IT has been a very successful bet for Korean enterprises, but as can be seen in the experience of
numerous predecessors, nothing in this industry is assured. For Korean IT companies to sustain their growth,
aggressive bets on new growth engines will be critical. Most of all, Korean companies are challenged to address
their longest held and most critical weakness, neglect of the software side of IT. Making the right investments in
this area can insure a long and prosperous future for an industry that has become critical to the Korean
economy.
Keywords
IT industry, IT exports, semiconductors, LCD panels, mobile phones, diversification
Note
1. Ministry of Knowledge Economy (Nov.9, 2011). Monthly Report on the IT Industry (2011/10)
2. Gartner (Hwang, Hwa-Jung (2011). "Current Status of Cloud Computing and Outlook". Technology Inside: LG
CNS R&D Journal. Issue 12)
3. Bank of Korea, NIPA (Ministry of Knowledge Economy (Oct. 12, 2011). Monthly Report on the IT industry.
(2011-09 Issue))
4. Oh Dong-Hyun (Mar. 9, 2011). "Ways to Raise Competitiveness in Korea's Software Industry" (CEO
Information Issue No. 794).