Tech Sector Slowdown Worries Insiders

A breakfast meeting took place at Westin Chosun Hotel in Jung-gu, Seoul on Thursday when Minister of Information and Communication (MIC) Rho Jun-hyong invited 13 CEOs in the mobile phone manufacturing industry including Lee Ki-tae of Samsung Electronics, Park Mun-hwa of LG Electronics, and Kim Il-jung of Pantech Group.

The MIC held the meeting to learn of the hardships the mobile phone manufacturing companies have faced; they are facing falling global market share and falling profits. It was the first time the MIC staged such an event with mobile phone industry CEOs.

The CEOs did not hesitate to share their worries: “The whole industry faces difficulty because the Korean mobile phone parts market is not lively”; “The government needs to enliven the domestic market”; and “Small and medium companies cannot develop new products because they cannot afford expensive machines.” Their comments were enough to show the uncertain situation the Korean information technology (IT) industry is in.

The IT industry in trouble-

Last year, IT industry-related exports amounted to 82.5 billion dollars and took up 30 percent of all exports. Four IT products: semiconductors (first place), mobile phones (third place), home appliances (ninth place), and personal computers (tenth place) made the top ten exports list. This means that a bust in the IT industry could lead to a bust in the Korean economy.

A look at the gloom in the mobile phone industry, one of the biggest industries in exports, illustrates the seriousness of the IT slump. The operating profit ratio of Samsung Electronics, which was almost at 20 percent last year, stood at 9.5 percent in the second quarter of this year. The mobile phone business at LG Electronics saw 3.0 billion won in deficits and dropped a notch to fifth place in the world.

Liquid Crystal Display (LCD) panels, a field where Korean companies are dominating, are also faring poorly. LG.Philips LCD had a deficit of 322 billion won in the first half of this year, which was the worst performance ever.

Small and medium companies are doing even worse.

A businessman said, “When the mobile phone maker VK filed for bankruptcy, I realized that this could happen to our company too. Gloomy prospects haunt the set-top box and digital television industry.”

Too much focus on manufacturing-

The fundamental cause for the slump of the Korean IT industry is the failing economy. The Korean IT market has been shrinking since 2004. Since 2005, the global IT industry began to slow. The rising rate of won value (falling exchange rate) led to lower price competitiveness and foreign companies are stepping up the pressure.

Experts, however, blame the structure of the IT industry as the most fundamental problem.

Researcher Min Hu-sik of Korea Investment & Securities says, “The manufacturing industry, such as the semiconductor industry, normally does not adapt to change swiftly. This makes manufacturing vulnerable to business cycles.

Some say that the software industry deserves more attention. They say that software companies like Microsoft and SAP support the manufacturing industry and are less prone to economic fluctuations.

Innovation: new products and new services-

Experts say that IT companies need to look away from simple manufacturing and start innovating.

Senior Researcher Ra Jun-ho from LG’s Economic Research Institute advises IT companies to turn from the manufacturing industry to the creation industry. The “creation industry” is creating new products and services that no one came up with. He says, that Korean companies must create products such as Microsoft’s Windows and Apple’s Ipod.

Some go further and say that companies must create new markets.

Business administration professor Ryeo Jun-sang of Dongguk University says, “Domestic products such as high-value mobile communication services and Internet sites must be presented to the global market.”

mikemoon@donga.com