1. Introduction The Current State of the Korean Electronics Industry and Options for Cooperation with Taiwan

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1 1. Introduction The fast-changing nature of technological development, which in large part has resulted from the technology shift from analogue to digital systems, has brought about dramatic change in the competitive structure of the global electronics industry as well as among individual products. The digitalization and development of networking electronic products has created new-concept fusion products, along with a sweeping restructuring of the industry s production processes. For example, audio and video content are now digitalized and can be downloaded from the Internet or enjoyed via mobile phones. Indeed, new venture enterprises with innovative ideas and products are emerging on a daily basis. As digital technology becomes increasingly commonplace, new business models capable of yielding high value-added benefits in terms of R&D, marketing, and distribution, have come to the forefront. The development of high value-added products based on innovative technology and a strengthened marketing capability based on the expansion of distribution networks are now among the key factors necessary to remain competitive in this industry today. Despite all of these changes to the global electronics industry, the United States and Japan continue to maintain their positions as the leading manufacturers of electronic products. This study, however, focuses on the competitiveness and strategic interactions of Korea and Taiwan in the electronics industry. Further, this study is to suggest the possible ways to achieve cooperation between Korea and Taiwan in this industry.

2 2. The Current State of the Korean Electronics Industry (1) Milestones in K.E.I. s Development In the 1960s and 70s, Korean electronics industry experienced dramatic growth thanks to the government s strong export-oriented policy. Korea benefited from active inducement of foreign investment, construction of industrial complexes that fostered exports, and accumulation of experience in manufacturing products and developing independent technology. In the 80s and 90s, Korean electronics industry focused on transforming its existing structure into one that focused on high value-added products. Many companies implemented large-scale investment projects which invested in semiconductors and VTR, etc. The currency crisis of 1997~1998 actually strengthened the electronic Source : KIET.

3 industry s competitiveness by forcing it to restructure and concentrate on core areas. Entering the 21st century, Korean electronics industry has led the world market in the production of semiconductors, mobile phones and LCD displays. K.E.I. s contribution to the domestic GDP has grown from 4.4% in 1995 to 6.6% in K.E.I. s contribution to the nation s total exports increased from 31.8% in 1995 to 38.1 % in Furthermore, K.E.I. s portion of the total workers in the nation s manufacturing industry rose from 12.7% in 1995 to 16.8% in In 2004, Korea s electronics industry accounted for 5.8% of the world electronics production, and ranks fourth in the world market following the U.S., Japan and China. By product, Korea s memory chips, LCD and mobile phones hold the largest share of the global market. Taiwan has an advantage over other nations in the area of computer, SFS(semiconductor foundry service) and semiconductor design. Source : KIET Statistics DB.

4 Source : The Yearbook of World Electronics Data 2004~2005. Note : White goods appliances(refrigerators, electric washing machines and microwaves) were not included in the above production figures. Source : Korea Development Bank( ). The major export products of Korea s IT industry include mobile phones, digital TVs, MP3 players, flat displays(lcd, PDP), and memory chips(flash memory, DRAM). The IT industry s remarkable performance is mainly attributed to the efforts of Korea s electronics corporations to enhance the brand image of Korean products through active overseas marketing as well as the corportation s focus on the production of high value-added products through the development of new technology. The export of Korean electronics registered phenomenal growth until 2004,

5 Source : KOTIS. but it has slowed down sharply since 2005 due to the overall export stagnation; the demand for mobile phones has decreased and the price of LCDs and related products has also fallen. Since 2005, import has also slowed down considerably. Since mobile phones can no longer exported as much as they were, there has been a decreased import of mobile phone parts and components. Korea has recorded about US$ 0.4 billion surplus in trade with Taiwan. Trade items with Taiwan consist mostly of electronics parts. While trade between the two countries was active before 2004, it s growth rate has shown a downward trend since (2) Driving Forces which have Aided K.E.I. s Development Establishment of mass production systems through decisive investments led by

6 large corporations. Structure of main products has been transformed into that of new and high value-added products, which consist of diversely renovated products, thanks to the efforts of businesses to actively develop new technologies. Two strategies that have proven effective: first, enhancing the industrial structure in a way appropriate to industry s stage of development and second, promoting the development of technology. Examples, the government enabled the growth of the mobile phone industry by developing the CDMA method and implementing domestic standardization. Actively utilized economy of scale by carrying out export expansion strategy after strengthening management structure of corporations as they enlarged the base for domestic demand. Examples, the policy to boost domestic market through early inducement of new IT services(cdma, DMB, Wibro, etc.) provided companies with stable demand base. Korea emerged as a test market from which to advance into the global digital market. New products could be distributed and adapted. As far as IT is concerned, it has become recognized that success in Korea is as good as a certified check of success in the global market.

7 Broad Band Internet Service introduced a free competition system which removed barriers to market entry and the restrictive regulation of initial charges. As a result, telecommunications service providers entered the market almost simultaneously and set fixed charges through facilities-based competition, bringing about the expansion of Broad Band Internet Service. (3) Factors Currently Threatening Korean Electronics Industry It is feared that because Korea lacks source technology, the nation s electronics industry will be muscled out by late comers including China and other advanced countries. (Rate at which Electronics Products are produced in Korea by Korean Companies.) Source : KETI (base year: 2004).

8 Korea has almost caught up with advanced countries in terms of production technology and quality level, but it still depends heavily on advanced countries for design technology and core source technology. The nation depends on imports for the majority of its source technology in the area of high value-added items including non-memory chips, telecommunications systems, S/W, digital equipments. Electronic Parts and Material Industries are vulnerable due to the so-called Selection & Concentration strategy that favors large companies, emphasizes the assembling & processing part of production, and encourages the introduction of overseas technologies. Despite quantitative growth, external dependence on other countries for core parts and materials has been intensified because Korea lacks technology. Major export products are still focused on a small number of mass produced items, which are based on economy of scale and mass production capabilities. To be precise, the exports of electronic products are highly dependent upon semiconductors, mobile phones, LCDs, and digital TVs. In terms of production structure, a few kinds of products still make up the majority of the nations exports, rendering Korean electronics industry vulnerable to changes in the external economy. In particular, the industry is very sensitive to external shocks such as fluctuation of foreign exchange and changes of demand & supply in the world market. In case of LCD, its price is predicted to decrease as its supply surpasses its demand - Korea will be facing fierce competition from Taiwanese companies.

9 Korea s industrial structure is fixed as follows: large corporations have a claim on the export of finished goods, foreign companies have a hold on the import of core parts, and small and medium-sized domestic subcontractors are relegated to the delivery of low value-added goods, processing merely on commission. Thus, although we have increased exports, the potential for domestic development is left untapped, ultimately widening the gap between large export corporations and small-and medium-sized companies. Fears that the industry might be hollowed out are threatening to become a reality as an increasing number of Korean companies relocate their factories to China. Since the manufacturing industry makes up a large part of the nation s economy, the industry s ripple effect is considerable. Deindustrialization, if continues without disruption, would bring about severe side effects. There is a potential for the following vicious cycle : hollowing out of manufacturing industry decreased employment avoidance of science and technology subjects inadequate creation of new industries lack of renovation capability reduced growth potential. The electronics industry accounted for 30% of the manufacturing industry s overseas investments in 2004, a significant increase from 23.7% in The emergence of China gives rise to significant changes in the current status among North-Eastern Asian countries. Korean and Taiwanese companies have concentrated their overseas production plants in China which has offers a sufficiently low-waged, but skilled workforce and has an excellent system for foreign capital inducement. China has emerged as a production base for the world in the area of computer, home electronics appliances and

10 Source : KIET. wide use hardwares. In particular, since China attracted the bulk of foreign capital investment, neighbouring Korea and Taiwan are in a situation in which the basis of small-and medium-sized companies is weakening and the restructuring of large corporations is being sped up. (4) Strong Points and Weaknesses of K.E.I. s Core Capabilities Korea has secured competitiveness in the mass production of a small number of items. The major producers in the global IT industry are Korea, China and Japan, and their intense competition facilitates the rapid development of IT industry. Regarding technology renovation, Japan has secured a competitive advantage in product technology, Korea in process technology, and China in assembly technology, respectively. Concerning value-added products, Japan is strong in core parts and sophisticated materials, Korea in parts that needs large-scale investment, and China in analog electronics. As for productivity, Japan has developed a comparative advantage by creating a flexible production system which can manufacture diverse items in

11 Source : KIET. small quantities, Korea in standardized mass production systems, and China in labor-intensive production systems. Korea has a strong base for mass production technology in producing memory chips whereas it lacks source technology and suffers intensified imbalance between large and SMEs. In Taiwan, small-and medium-sized electronics parts companies have been developed keeping their balance, while the basis of set makers is vulnerable and their brand image is weak.

12 3. Options for Cooperation between Korean & Taiwanese Electronics Industries (1) Expanding the most advantageous areas of Mutually Beneficial Strategic Alliance It is desirable for the two countries to build a mutually cooperative system through strategic alliance that properly utilizes each of their strengths for the development of IT industry in both countries. For this, they need to lead the industry through joint standardization and joint investment. For instance, semiconductors foundry and fabless industry is highly developed in Taiwan, whereas Korean set makers have made great strides in the area of mobile phones, digital TVs and cars. Therefore, it would be highly practicable that the two countries seek ways for complementary cooperation between them. It is expected that in the future, IT industry will favor a system which can produce diverse items in small quantities, a system that meets the individual taste of consumers rather than one which mass produces standardized products. Given the current trends, it is estimated that the Taiwanese IT industry, with its strong base for small-and medium-sized companies, has high growth potential. (2) Implementing Joint Development by Selecting & Concentrating on Specific Area including Car-electronics It is advisable for the two countries to find ways to lead the market by carrying out joint R&D in newly emerging product lines such as Car-electronics. These partnerships would be led by organizations of companies. (3) Seeking Ways to Mutually Cooperate in order to Advancing the Gaeseong Industrial Complex It could prove greatly beneficial to consider methods of making inroads into

13 North Korea s Gaeseong industrial complex through mutual cooperation between Korea and Taiwan. (4) Implementing an International Cooperation Project to Cope with Environmental Regulations It is necessary to establish joint countermeasure systems between the two countries against advanced countries regulation banning the use of lead and mercury. (5) Expanding Manpower Exchange between the Two Countries Companies and Research Institutes The most desirable form of manpower exchange between Korea and Taiwan would be to adopt trainees in areas where respective country have advantages according to the principle of reciprocity. For the purpose of this exchange, the two countries could utilize their respective technology training institutes or high-tech expert training courses. Manpower exchange between research institutes can be implemented smoothly as the institutes share many things in common. Increased manpower exchange can be expected when international joint research projects are carried out together with exchanges in training institutes and courses.