Korea has emerged as a global powerhouse in many industries. Read Portfolio Managers Elli Lee and Sojung Park’s latest on how Korea continues to create new opportunities for investors.
Over the past decades, Korea has emerged as a global powerhouse in many industries, building brands for both domestic and global consumers.
A Destination for Innovation. Korean companies dominate industries that cannot easily be replaced by global innovations. Initially, a destination for an efficient labor supply, Korea has successfully become a leader in semiconductor memory and electric vehicle-related production, adding value and innovating along the way. It is among the few countries that own dominant local platforms for internet search engines and e-commerce. Korea offers a well-balanced portfolio of both hardware brands and software capabilities.
The semiconductor memory market has consolidated over the last two decades. For DRAM, (dynamic random-access memory) which is responsible for fast storage in electronic devices such as personal computers and data centers, there are only three global players, and Korea has approximately 70% of the global production.1 Continuous technology advancements coupled with heavy capital investment have driven consolidation in the industry, helping Korean companies gain market share and deliver shareholder value.
Japanese and Western semiconductor production equipment players (SPEs) have played important roles in supporting the industry’s technological advancement. Recently, we’ve seen evidence that Korea is becoming a hub for advanced technology resources. Global equipment players are opening research and development (R&D) centers in Korea to support their clients and accumulate talent to staff these centers. It has been nearly 30 years since Korea has been in the memory industry and it has assembled an experienced talent pool to support this growing equipment ecosystem. Large companies such as Samsung and Hynix, the largest DRAM manufacturers in the world,2 have begun using equipment from local manufacturers for new technology migration.
Korea established a full value chain in NEV (new energy vehicles) including key components such as batteries. Having domestic automotive players targeting global consumers helped Korea realize the importance of building strategies for the electric vehicle ecosystem value chain including batteries and components, and they hold approximately 26% of the EV battery manufacturing market.3 The internal combustion engine automotive industry was dominated by Western and Japanese players; it’s interesting to see Korean supply chains and brands playing a bigger role in the NEV era.
Korea built its chemical industry over the last few decades to meet global demand and has quickly caught up to the level of its global peers in specialty chemical production. However, with China increasing localization, the industry is becoming more commoditized. Korean companies have focused on new energy vehicle battery development using their acquired expertise, advanced technology and mass production from these specialty chemical producers.
All of these outcomes are driven by an R&D-focused mindset targeting a leadership role in the global marketplace. Korea has had one of the highest R&D investments per capita as a percentage of GDP.4 This investment coupled with a diligent work ethic and top-notch education have supported Korea’s virtuous cycle of innovation advancement.
Improving Corporate Governance. We’ve seen many corporations in Korea establishing long-term shareholder return policies. Until recently, share buybacks and cancellations have not been the usual practice, but starting with large conglomerates, these have become options that create long-term value for existing shareholders. Comprehensive yield (dividend and buyback & cancellation) has improved close to 3% in 2022, and we are looking to see it grow from here.5
A Pop-culture Powerhouse. Korea has developed ‘soft power’ through the global popularity of its content. Over the past decade, we’ve seen K-pop music, Korean drama and Oscar-winning films growing in popularity across Asia and recently the trend has exploded, resonating with a global audience. Korean internet companies have also innovated the way online comic content is created and consumed. First launched in Korea in 2004 by Naver, the webtoons platform (web+cartoons; vertical scroll cartoons tailored for smartphones) has been gaining popularity around the world, and many of the creative stories from online comics have inspired and seeded global hit dramas and films.
This is important as we are starting to see companies creating intellectual property libraries with aspirations to generate sustainable cash flows. In addition, growing popularity is at the center of the phenomenon of increasing demand for Korean brands across different product categories in the global market. According to the Korea Export-Import Bank, a US $100M increase in K-content exports would lead to a US $180M increase in consumer goods exports, implying a positive and direct influence of Korea’s soft power on consumer goods trades. We think the country’s growing soft power may ‘spillover’ and provide a sustainable, growing, competitive advantage to many Korean brands looking to target global markets.
1 Samsung Electronics, 44%, and Hynix, 28%
2 Bloomberg, South Korea’s Dominance in Memory Poised to Increase, April 20, 2023
3 https://www.visualcapitalist.com/the-top-10-ev-battery-manufacturers-in-2022/
4 OECD.org
5 Source: Bloomberg
IMPORTANT INFORMATION
The views and information discussed in this report are as of the date of publication, are subject to change, and may not reflect current views. The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding a particular investment or markets in general. Such information does not constitute a recommendation to buy or sell specific securities or investment vehicles. Investment involves risk. Investing in international and emerging markets may involve additional risks, such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility, and limited regulation. Investing in small- and mid-size companies is more risky and volatile than investing in large companies as they may be more volatile and less liquid than larger companies. Past performance is no guarantee of future results. The information contained herein has been derived from sources believed to be reliable and accurate at the time of compilation, but no representation or warranty (express or implied) is made as to the accuracy or completeness of any of this information. Matthews Asia and its affiliates do not accept any liability for losses either direct or consequential caused by the use of this information.
A message from Advisor Perspectives and VettaFi: Our latest white papers offer research and analysis covering the most important topics and trends in financial planning, investing, and practice management. Click here to read the top insights from our valued partners.
© Matthews Asia
Read more commentaries by Matthews Asia
