Overwhelming Competition
The export performances of the top five export industries are radically worsening due to the appreciation of the Korean won and oversupply from China. Hyundai Heavy Industries reported its historically worst loss due to low order prices, and the smartphone sales of Samsung Electronics decreased for the first time. The golden days of Samsung Electronics’ smartphone businesses, which have been leading the Korean IT industry for the last three to four months, might have passed.
Professionals point out two major reasons for the sluggish sales of Samsung Electronics’ smartphones. First, Chinese manufacturers are rising. Samsung Electronics has been dominating the market based on its advanced technologies, but the high-end product market is stagnant. On the contrary, in the low-end market, Chinese companies including Xiaomi, Lenovo, Huawai, and ZTE are aggressively challenging Korean companies. The market shares of Xiaomi in China, the so-called “Apple of China,” is 21 percent, right behind Samsung (23 percent). A foreign consulting associate said, “As smartphone manufacturing technologies become widely available, Chinese companies are more capable of manufacturing quality products, and their price competitiveness beats Korea.”
The second reason is a lack of innovation. Market research company IDC picked competition with the Galaxy S4 and Galaxy S3 as the main reason for the poor sales of the Galaxy S5 during the second quarter. In other words, there are no innovative changes in the Galaxy S5 to differentiate itself from its predecessors. The problem is that the doldrums of Samsung smartphones lead to doldrums of component manufacturing affiliates such as Samsung Display (display devices), Samsung SDI (batteries), and Samsung Electro-Mechanics (cameras and boards). In fact, the operating profits of Samsung Electro-Mechanics during the second quarter of this year dropped by 90.5 percent compared to the same period last year.
Heavy industries such as automobiles, shipbuilding, steel, and petrochemicals are directly hurt by the declining exchange rate and Chinese oversupply. Especially, the petrochemical and steel industries have structural vulnerabilities against oversupply from China. Since they do not have original technologies to overpower competitors, they are easily overtaken by Chinese companies, which are aggressively expanding their production facilities based on overwhelming capital and huge market size.
The refining industry was the number one export industry in 2012, but its recession started from the second quarter last year. Oil-producing countries including China and Saudi Arabia are building crude oil refining plants and putting pressure on Korean companies. In the petrochemical industries as well, the operating ratio of some plants dropped to 70 percent as Chinese companies are expanding their production facilities.
Professionals point out that Korean companies specialized in “equipment industries” based on large infrastructure investments need to change quality-wise. Equipment industries have been suffering from structural oversupply since the global financial crisis of 2008, and it is very easy for followers to chase if they have sufficient capital power.