Korean IT Companies May Lose Ground at Home

“US IT firms are augmenting their power after taking over the Korean market. Chinese firms are also trying hard to overtake Korean rivals,” said an official high in a local IT firm on April 28. The official added, “So, there is growing concern about the possibility that local IT companies can lose ground to foreign competitors in the local market sooner or later.”

Currently, Google is a dominant player in the Korean mobile search market. Internet users who visited Google’s homepage through mobile devices in the first quarter of this year amounted to an average of 19.46 million per month, far exceeding that of Naver (16.18 million) and Daum (12.48 million). It shows that the era of the search engine giant’s domination of the local market is approaching. 

The same is true with the local Internet market. According to data compiled by Nielsen-KoreanClick, the number of people who visited Google and YouTube via PCs or mobile devices reached 50.55 million in March. The figure surpassed the 47.13 million of Naver and the 38.78 million of Daum, showing that the influence of local portal operators has been dwindling as a whole. Considering that more and more people are using mobile devices than PCs to access the Internet, Google’s power is expected to grow. 

To add insult to injury, Chinese IT enterprises, which have acquired expertise through business partnerships, are also actively seeking to enter the local market. Alibaba, China’s leading e-commerce company, is going to open its local branch and start its business. The firm is making a strenuous effort to dominate the Korean market, as evidenced by posting Alipay user guides in the local portal sites for local Internet users and business operators. The Chinese Internet giant is more likely to buy Korea’s small IT companies such as gaming companies, based on its enormous financial firepower. If the penetration of Alibaba into the local e-commerce market kicks into high gear, it is bound to be successful.

American and Chinese IT companies are growing faster than Korean rivals. Google, Facebook, and Alibaba have gone from strength to strength, but local IT enterprises such as Naver and Daum have been struggling owing to stagnant growth in recent years. An official high in the local industry remarked, “To take one example, IT companies in other countries tried to reclaim market share from Google, but to no avail.” The official continued by saying, “The Korean IT industry is also in the same precarious position.” 

Experts are pointing out that local Internet companies are not actively seeking corporate acquisitions, or they have difficulty in finding new growth engines. To be specific, the world’s top Internet companies like Google and Facebook are aggressively seeking future growth engines through M&A transactions. In contrast, Korean Internet giants Naver and Daum, who inevitably compete with global firms at home and abroad, appear to be inactive because of a negative sentiment about M&A deals and government regulations. 

According to major overseas media outlets on April 27, Facebook has been speeding up the expansion of business areas. For example, the social networking giant acquired ProtoGeo Oy, a Finnish startup that develops the mobile app Moves, for an undisclosed sum in the fourth week of April. The recent deal came after its buyout of WhatsApp in Feb. for US$16 billion (17 trillion won) and another takeover of virtual reality headset maker Oculus VR by the social media company for US$2 billion (2.15 trillion won) in March. 

Google, who normally purchases dozens of companies each year, is also accelerating efforts to dominate the global smart home and IOT markets, as seen by its acquisition of home gadget maker Nest Labs for US$3.2 billion in Jan. this year. In addition, the Web search giant bought high-altitude solar-powered drone maker Titan Aerospace in April, after waging a fierce acquisition battle with Facebook. The US-based Internet firm is planning to deliver wireless Internet access to remote parts of the world. 

Alibaba acquired Chinese digital mapping and navigation firm AutoNavi Holdings for US$1.5 billion (1.56 trillion won) in the fourth week of April in a bid to target the mobile market. 

Overseas IT firms are moving quickly to prepare for the Future Internet era, but local ones do not seem to be active. In other words, Korean firms have yet to find a way to compete with global companies.  

Last year, Naver acquired or made an investment in 7 venture firms including Quicket, developer of a mobile used goods market app. Daum only bought two companies including Smartphone launcher Buzzpia in 2013. The two portal operators haven’t purchased any firm so far this year.

An associate of a local portal firm said, “In general, Koreans are more hostile about M&A deals than people in other countries,” adding, “Some even think that large companies with sufficient capital destroy the ecosystem for the industry by purchasing start-ups who are engaged in a similar business. So, local firms, on the whole, are reluctant to be involved in M&A transactions.”

Industry analysts are saying that local companies cannot match IT giants such as Google and Facebook, who turn over dozens of trillions of won a year, due to insufficient cash. However, it is pointed out that Korean firms should not slack up efforts to secure technology and manpower through M&A deals and to start a new business. The local industry thinks that the government also ought to ease regulations so that local companies can secure new growth engines, as the top Internet companies are growing very rapidly.

A source in the local IT industry commented, “Facebook, Google, and Apple are moving too fast, which is scary.” The official concluded by saying, “It will be probably difficult for Korean IT companies to make large-scale investments or M&A deals like global enterprises. But the government should relax regulations to ensure that local firms can survive in the market by wisely selecting companies for corporate acquisitions.”