Korean Corporate Perspective on China

Mr. Hyun Joon Cho
Senior Executive Vice President, Hyosung Group

Ladies and Gentlemen, let me first say thank you for the opportunity to speak on this panel with these accomplished guests on the subject of China in the Region

During my brief statement, I would like to focus my comments on 3 main subjects

1. First, General overview of China’s growth and the significant impact on the Korean economy
2. Second, The rapid and close integration of the Chinese and Korean economies and corporations
3. Third, The challenges that Korean companies confront as Korea and China become intertwined

China’s growth and its impact on the Korean economy

• Although formal diplomatic relations between China and Korea officially started 1992, the actual fact is that the two countries have a shared history of over 3,000 years
• Over this time, Korea has been heavily influenced by China in all areas including politically, culturally, economically, and linguistically
• When you look at a map of the region traditionally, I do not feel that the level of integration and community is clear
• However, if you simply turn the map around, it becomes clear that China, Korea, and Japan are very much part of the same geographical community much like that of Europe
• From a geographical standpoint, there are few regions in the world where you have so many cities with populations of over 5 million people
• As you can see from this slide, there are 5 cities within a 500 mile radius of Seoul, and if you go a little further out , you can include Tokyo, Guangzhou and Hong Kong
• This illustrates not only the large market opportunity in the region, but also the close proximity of this market to Korea.
• Furthermore, this is a region of 1.6 billion people who all share a common reverence for Confucianism, education, chopsticks, and rice
• Simply said, there is no other region like this in the world.
• In terms of growth, clearly China has set the benchmark for economic development and growth over the past 2 decades
• From 1990 until 2002, China’s annual GDP growth rate averaged 9.7%
• This moderated to 9.1% during last year and, as you can see, China has been the fastest growing economy over the past 2 decades
• China’s growth rate is forecasted to continue at an average rate of 7% until 2007
• With this level of growth, China will become the 4th largest economy by 2007
• Clearly impressive
• Additionally, China’s total trade volume grew from being 6th in 2002 to reaching $800 billion USD in 2003 which made it the 4th largest trading nation in the world, this also was the fastest increase by any nation over the last 5 years
• In summary, there is no doubt that China has entered an explosive period of growth and economic development and will continue to sustain this level for the foreseeable future.
• This will be largely driven by international events such as entry into the WTO, the 2008 Beijing Olympics, and the 2010 Shanghai World Expo

Now I would like to share a few comments on the impact of this phenomenal growth on the Korean economy and Korean corporations

• In 1991, only $4.4 billion USD of Korea’s total trading volume was with China, by last year that figure has grown more than 10 times to almost $60 billion USD
• In fact, China has now surpassed all other countries, except for the US, as Korea’s largest trading partner in terms of destination for exports
• To fully illustrate how important China has become as Korea’s trading partner, more than 88% of Korea’s trade surplus is with China
• In response to this trade surplus, Korea has been one of the largest foreign direct investors in China
• Up until 2003, Korean companies invested in almost 9,000 different projects cumulatively totaling over $6.4 billion USD
• From China’s viewpoint, Korea has also become a key partner in its rapid development
• Korea is now China’s 6th largest trading partner and the 3rd largest investor in China after Hong Kong and Japan
• Without any doubt, China, both as a trading partner and destination for foreign investment, is arguably one of Korea’s most important economic relationship

This brings me to my second topic of discussion which more specifically outlines how this growing relationship with China and the approach to China that Korean companies have developed over time

• Korea’s initial perspective on China was to capitalize on the significant market opportunities that existed as well as to support China’s emergence as a major export economy
• As China’s exports grew in the areas of textiles, electronics, and other finished goods, Korea supported that growth by providing the raw materials, intermediate goods, and capital machinery to manufacture those products
• This slide clearly illustrates the level to which Korean corporations supported and benefited from China’s market and export growth. As is evident, China exports have increased rapidly over the last decade
• As you can see, there is a high correlation between China’s exports to the rest of the world and Korea’s exports to China
• Over time, Korean corporations than migrated from a strategy of simply exporting to China, to viewing China as a competitive manufacturing base
• Given China’s highly educated and competitive labor pool, many of the small and medium companies and, later, major Korean multi-national companies then made the decision to invest directly in production facilities based in China
• China has now grown to become Korea’s single largest destination for foreign direct investment with more than 37% of Korea’s total direct investment overseas
• As is evident from this chart, while the initial strategy for Korean companies was to export to China, that strategy has now developed into a localized manufacturing based approach
• Instead of exporting to China, Korean companies now view China as a key part of their overall manufacturing strategy
• This is unlikely to change in the future as Korean companies look to capitalize on the competitive labor market situation versus Korea
• Most recently, Korean companies are moving one step up in the value chain and capitalizing on China’s vast pool of world-class engineers and scientists
• Given China’s strong technical and innovative tradition, Korean companies, including our own, are looking to capitalize on this expertise by establishing R&D facilities and organizations
• However, this effort is fairly recent and only seen in a handful of companies as the majority of Korean companies are still focused on establishing production facilities
• This simple framework describes the approach of most Korean companies to the Chinese market and opportunity and has been the predominant pattern to date

However, I would like to now address the reasons why I believe that this traditional approach to China that I have just described is no longer suitable nor sustainable for the way Korean corporations approach China

• As you can see from the above slide, in a number of industries that Korean companies have large presence, the technological gap with similar Chinese corporations is shrinking and shrinking quickly
• In some industries, such as white goods and consumer electronics, Chinese corporations have matched or close to surpassing their Korean counterparts
• In other industries, the technological gap is at most 3 years with most less than even that
• As this next chart shows, Chinese companies are already the dominant players in a number of key industries with high levels of technological sophistication
• This should come as no surprise given China’s long history of technological development and innovation
• Even by international standards, you can see that Chinese corporations have now reached world-class levels and have become global corporations
• In most of the leading industries, China corporations are ranked amongst the Top 50 global companies on the basis of revenues
• So the key question then is what does this mean for Korean companies and how their approach to China should change
• I would like to conclude my talk by addressing this exact issue

Unfortunately, I can not claim that I have the answer to this question but as we have struggled with this issue internally at Hyosung, I can provide some insights on what the key issues are and the key questions that we need to answer

• As you can see from the above chart, my company has a significant level of current and planned investment commitments in the Chinese markets
• As a result, this issue is one that is of critical importance to the future of Hyosung
• Our approach has been to identify and breakdown the key issues and questions and address these issues at the highest levels in our organization
• I cannot pretend that we know the answers to these questions but I would now like to share some of my dilemmas with you and the panel as follows:
  • The first area is Assimilation
    • Are you taking steps to understand and adapt to the changing Chinese political environment including the significant differences between policies at the National level (Beijing) and the local level (individual provinces)?
  • The next area is Comprehension
    • Are we prepared to manage the unique challenges that exist in the different provinces and markets within China culturally and linguistically?
  • The third area is Tailorization
    • Do we understand the pace of the change of consumer demand and the vast differences across customer segments in China?
    • As an example, Shiseido, the Japan's largest cosmetic company, has launched a tailored line of branded cosmetics just for the Chinese market called "Opure" which has become the number one selling brand in China
  • We cannot neglect Localization
    • Is our Chinese organization and human resources fully localized and assimilated within China with Chinese management and leadership?
  • Equally important is Adaptation
    • Do you have an optimal sales & marketing network that covers both the major coastal markets as well as the populous inland markets?
  • We must also be prepared for Rationalization
    • Is your financial strategy prepared for anticipated transformations in China including RMB adjustments, financial sector reform, and restructuring of state-owned companies?
  • Our view must be characterized by Globalization
    • Are we in China with the goal of prevailing in the global markets by leveraging our Chinese operations and organization?
  • Finally, we must always look towards Expansion
    • Are you considering merging and/or acquiring Chinese competitors and leveraging their insights and infrastructure in the Chinese marketplace?

These above issues and questions are what we believe capture the heart of what the new approach to China will be required of Korean companies

Up until now, a fairly traditional approach has worked, however going forward it is clear that the issues and challenges will be much more significant

As you can see, we have come up with a handy framework to help our management team remember these key issues “ACT LARGE” which captures our fundamental position that we must not only think large but also act on these thoughts and strategies in China

In conclusion, I would like to leave you with these two radical questions that we all need to be prepared to accept and embrace

• “Think like Chinese”
  • Are we prepared to move our headquarters to China as it becomes clear that our future success is tied more closely to our operations/organization in China?
• “Play to Win”
  • Do I have an integrated China strategy or am I just being an opportunistic player in China? Am I playing to play or playing to win?

I believe that these two questions will need to be addressed much sooner than later
I regret the length of my presentation and would like to thank you for listening to my thoughts on this most important of subjects

Thank you