South Korea: Looking at the Market in Asia's Fourth Largest Economy

Dilip Badlani in South Korea

The economy of South Korea has come a long way since the early 1960s, when it was a largely insular developing economy.¹ That decade saw the beginning of an export-driven strategy, which helped the nation to achieve significant growth. South Korea has seen its nominal GDP per capita grow from $104 in 1962² to $20,591 in 2010.³ It has become the sixth largest exporter in the world,⁴ with exports including highly technological equipment, such as semiconductors and wireless telecommunication equipment.⁵ With a GDP of more than one trillion dollars, it is the world's fifteenth largest economy and the fourth largest in Asia—making it impossible to ignore for a global investor.

As a child in Asia during the 1980s and early 1990s, I was always delighted when my uncle returned from his work trips to South Korea. He often brought my cousins and me presents that were locally manufactured and unavailable in Dubai or India. I idolized sports stars and loved receiving pairs of Nike and Reebok sneakers. Both South Korea and I have since matured, and South Korea has moved away from manufacturing labor-intensive products such as sneakers.

South Korea is now a vibrant economy, with the fastest internet connections of any country in the world.⁶ It was also the first country in the world to provide high-speed internet access from every primary, junior and high school.⁷ In Seoul, its modern capital city, consumers can enjoy the best there is to offer in the world. Walking into any of Seoul's large department stores, you find yourself in familiar territory with one brand after another that would be at home in any major American department store. South Korea clearly views the global market as an opportunity, and its companies have worked towards fulfilling the demands of the global marketplace. Today, close to 50% of South Korea's GDP comes from exports, and its economy has truly become a barometer of global trade.⁸

A significant contributing factor in South Korea's success has been the key emphasis placed on education, with one of the globe's highest proportions of children who have completed an upper-secondary education.⁹ (It is also working to replicate its success by expanding into the middle-school arena.¹⁰) We have invested in a company in South Korea that is a leader in providing educational services to high-school students.

While they embrace global brands, South Koreans have local tastes that are unique to the country's culture, especially when it comes to food and drink. There are tastes that only South Korean companies are able to truly understand and satisfy. While walking down the aisles of South Korean supermarkets, one thing that stood out to me was the high percentage of South Korean products. The local content appeared to be far higher than in places such as Singapore or Hong Kong, where the supermarkets largely carry Western products. The food industry in South Korea is relatively mature in terms of organic growth, as the population growth rate is fairly anemic; in 2009, the population of South Korea only grew by 0.3%.¹¹ However, within the food industry there are certain areas that are growing faster as South Koreans become increasingly health conscious.¹² We have invested in a yogurt manufacturer in South Korea that should benefit from this trend.

South Korea's rapid pace of economic growth was buoyed by a baby boom that started in 1955.¹³ The boom ended in 1983, with the birth rate having now declined to 1.2, placing it among the lowest birthrates of any country in the world.¹⁴ As South Korea's population ages, spending on pharmaceuticals will increase. We have been investing in pharmaceutical companies in South Korea that should be the beneficiaries of this change.

South Korean consumers today are facing a problem common to consumers worldwide: inflation. This is reflected in lowered consumer confidence.¹⁵ By their nature, our investments in South Korea should be less affected by inflationary pressures as they are in critical, rather than discretionary, areas, such as education and pharmaceuticals, or in growth areas such as health food. That said, inflation remains a cause for concern.

Chabeol—South Korean business conglomerates—still play an important role in the economy. Following the Asian Financial Crisis of the late 1990s, the South Korean Government implemented measures to reform the Chaebol. These companies rebuilt their balance sheets over the last decade and are now increasingly competitive on a global basis. However, their significant influence and ownership of the South Korean economy has potentially limited the growth of smaller companies.¹⁶ An additional byproduct has been poor corporate governance, which the leader of the South Korea National Pension Service Fund is working to change.¹⁷

At the end of the Korean War in 1953, the economy of South Korea was smaller than the economy of North Korea. While the people of South Korea have worked to advance their economy rapidly and embrace the global economy, the economy of North Korea has languished behind. North Korea's GDP per capita today is estimated at $1,200.¹⁸ While diplomatic relations between the two countries have been largely peaceful, there have been skirmishes in recent months.¹⁹ It is difficult to determine what the eventual resolution of the situation between the two countries will be and when it might occur. Yet it is worth being mindful of the delicate relationship with North Korea when investing in South Korea.

¹ http://www.sjsu.edu/faculty/watkins/korea1.htm
² http://www.nationmaster.com/graph/eco_gdp_percap-economy-gdp-per-capita&date=1962
³ Data refer to the year 2010. World Economic Outlook Database-April 2011, International Monetary Fund. Accessed on April 11, 2011.
⁴ The World Trade Organization, accessed 26 March 2010, INTERNATIONAL TRADE STATISTICS
⁵ http://www.state.gov/r/pa/ei/bgn/2800.htm
⁶ http://www.nytimes.com/2011/02/22/technology/22iht-broadband22.html
⁷ Onishi, Norimitsu.April 2, 2006. Accessed 3 July 2009.
⁸ The World Trade Organization, accessed 26 March 2010, INTERNATIONAL TRADE STATISTICS
⁹ http://news.bbc.co.uk/2/hi/uk_news/education/4240668.stm
¹⁰ http://super-economy.blogspot.com/2011/01/relationship-between-education-spending.html
¹¹ http://www.google.com/publicdata?ds=wb-wdi&met=sp_pop_grow&idim=country:KOR&dl=en&hl=en&q=south+korea+population+growth
¹² http://www.ats.agr.gc.ca/asi/4209-eng.htm
¹³ http://www.uprofish.com/2010/09/north-korea-south-korea-china-and-unified-korea/
¹⁴ http://www.koreatimes.co.kr/www/news/nation/2009/05/113_45496.html
¹⁵ http://www.bloomberg.com/news/2011-04-25/south-korea-s-consumer-confidence-rebounds-from-23-month-low.html
¹⁶ http://www.economist.com/node/15816756?story_id=15816756
¹⁷ http://www.pionline.com/article/20100913/REG/100919979
¹⁸ GDP (official exchange rate) & Population, The World Factbook, Central Intelligence Agency, accessed on April 14, 2011. Population data obtained from Total Midyear Population, U.S. Census Bureau, International Data Base, accessed on April 14, 2011. Falkland Islands population data obtained from The World Factbook 2002 archive. Niue population data obtained from The World Factbook 2003 archive. Curaçao and Sint Maarten population data obtained from Central Bureau of Statistics Netherlands Antilles, accessed on April 14, 2011. Note: Per capita values were obtained by dividing the GDP (official exchange rate) data by the Population data. The figures were then rounded to the nearest hundred in typical Factbook fashion.
¹⁹ Kim, Jack; Lee, Jae-won (November 23, 2010). "North Korea shells South in fiercest attack in decades". Reuters. http://www.reuters.com/article/idUSTRE6AM0YS20101123. Retrieved December 20, 2010.