south korea it 17 jul 02

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TECHNOLOGY

Quantum Leap

Four years after the Asian financial crisis, technology has emerged as the saviour of South Korea's economy. A hi-tech revolution has swept through every sector, from industry to education and politics, creating new jobs and shaking up old industries

By John Larkin/SEOUL

Issue cover-dated July 18, 2002

GOING ON-LINE IS a big deal for Kim Il Hwan. Four years ago his women's apparel company, Dae-In Trading Corp., was stung by the Asian financial crisis. Now he's worried about cheap Chinese imports. To compete he has to cut costs by putting his cumbersome supply chain on-line. "To me, doing that is more important than my own life," says Kim.

Chong Sei Yul is the brains behind the on-line systems Kim hopes will reinvigorate his firm. Revenues at his solutions company Matrix2b jumped 50% last year. Now he's in talks to export his software to China and Vietnam. "We started a few years ago with four staff," boasts Chong. "Now we've got 60."

These are two faces of a hi-tech revolution that is transforming South Korea's economy and sending ripples of change through its tradition-steeped society. While Korea's status as the world's most wired nation is well known, the economic impact of its digital obsession is only now becoming apparent.

Nowhere else in Asia is the impact of technology being felt more acutely. Embraced as the saviour of Korea's crisis-hit economy four years ago, IT has swept through every sector, from industry to education and politics, creating new jobs, shaking up old ways of doing business and prompting social change. How it plays out will provide a road map for other emerging countries on the same journey up the value chain to a level of innovation that China's low-cost workers can't match.

"Korea is becoming an Asian leader. We've really leapfrogged Japan," says Michael Kim, the Korea-based president of U.S. private equity firm The Carlyle Group's Asian operations.

Where is technology taking Korea? Consider the facts. Every day in the month of April a new e-commerce Web site went on-line. The market leader, SamsungMall.com, sells more goods in one day than six real-world department stores. Three out of four teens prefer to play on-line games than watch television. "That's real usage," says Ed Graham, head of Sun Microsystems in Korea. It's also real jobs, which are being created in the tech sector three times faster than anywhere else.

The trick is to turn usage into cash, and that's happening. New industries are sprouting as Korea transforms itself into a hothouse of innovation. And being ahead of the technology curve is giving the best companies an edge when the rest of the world wakes up to their products.

On-line game developer NCsoft could never have hoped to match the likes of Sony in the console-game industry. So it plunged into on-line gaming, a bold move as cyber-gaming was very much a novelty. NCsoft now expects profits to top $54 million this year. The pride of its stable--the medieval adventure Lineage--also happens to be the world's most popular game in an industry tipped to generate $2 billion in revenues in the United States alone by 2005. The game is the No. 1 seller in Taiwan, and NCsoft is moving into China and Japan. Sony and Microsoft are scrambling to catch up. "It's beyond our wildest imagination," says Heo Hong, NCsoft's chief financial officer. "Because of the Internet we captured a niche market."

It may sound like dotcom hype, but the Korean firms that survived the dotcom crash have their feet firmly on the ground. "The bad companies have gone," says Choi Jaei Young of the government-run Korea Information Society Development Institute. Those left have sharpened their focus and have more to offer off-line customers. Leading investment adviser Hyunchal.com, for example, sells services based on its database of Korean stock movements, dating back to 1996, to local fund managers. "We met our break-even point in June," says company spokesman Kwon Eun Young.

MORE THAN THE NET
In any case Korea's love affair with technology is about more that just the Internet. Computer chips still dominate tech exports, but more value-added gadgetry is catching up. One in five mobile handsets worldwide and nearly half the flat-screen monitors used in the latest TVs and computers are made in Korea. IT is the fastest growing sector of the economy. Its share of GDP is the highest of any industrialized country at 13%. Exports totalled nearly $40 billion last year, a quarter of total shipments.

That's good news for people like Yoo Mi Jun. She has a new job, so new that it didn't exist a few years ago. The 27-year-old designs cartoon-style digital animations for mobile-phone screens. Her employer, LG Electronics, is just one of the giant family-run conglomerates that are shifting their focus from mass production to frenetic innovation. "Designers are becoming very important to this company," says Yoo as she works on a snowboarding motif for the winter range.

No wonder. Korea's home market is like a shop-window display of hi-tech gadgets. Nearly two-thirds of its 48 million people own mobile phones, and 7 million of them use their handsets to access wireless Internet. Broadband is used by more than 8 million subscribers--by far the highest penetration rate in the world. If you count the broadband piped into schools and offices, 75% of Koreans have access to high-speed Internet on any given day. "This is unique in the world," says Lee Seung Il, chief executive of Yahoo Korea.

He should know. Lee recently entertained senior Yahoo executives from the U.S., Singapore and Australia who envied the on-line games, comics and movie-on-demand that his team had developed. They want to roll them out in their own markets, testimony to Korea's value as a test bed for new applications.

Korea was Yahoo's fifth-biggest office worldwide on revenue when he took the job a year ago. Now it's third, beaten only by the silicon-chip powerhouses of the United States and Japan, and basking in revenues 60% beyond last year's. Says Lee: "Korea is a leading forum for technology. No other country has developed to the same extent."

Korea's high broadband penetration is allowing off-line companies to create on-line businesses too. Education, which in an overachieving nation like Korea dwarfs even the monolithic automobile and defence industries, is going on-line.

Iroonet, a provider of educational materials, is combining with Microsoft to deliver study programmes to its 1,000 tutorial schools nationwide. Last October it launched an on-line learning service for students not enrolled at its cram schools. "Without broadband it wouldn't be possible," says Iroonet President Chung Hae Seung, citing the slow line speeds of dial-up connections as the greatest impediment to on-line education. He believes the venture will be profitable within two years.

Korea's rush to embrace technology is also spurring longer-term social changes. In this tradition-steeped, patriarchal society, women are realizing their ambitions; young people, who once would have stagnated in bureaucracy are running companies; even stick-in-the-mud politicians are moving with the times.

Meet Lee Hyun Sook, a programmer at Web-site manager Insung IDS, and one of the many young women for whom the tech boom has opened doors to professional careers. Lingering Confucian attitudes work against career-minded women. But the Labour Ministry estimates there are at least 10% more women in technology jobs than in other professional occupations.

As a result, more women are delaying marriage and children. At 28, Lee would be considered by traditionally-minded Koreans as far too old to find a good husband. Her boyfriend's parents want them to marry, but she's not interested yet. "I'm really enjoying my life, working hard during the week and spending the weekend with my boyfriend," she says. "Why should I marry now?"

That trend might contribute to the ageing of Korean society, but in other respects tech is breaking down age barriers. Most big businesses are still run by older executives in line with respect for seniority. But atop many of Korea's biggest tech companies sit young men who would be mired in middle management in most other industries. NCsoft's Kim Taek Jin is only 35 years old. "Before, Korea was like a fortress, but now everyone can realize their dreams," says Kim Geun, the 41-year-old head of software firm Haansoft.

Even the halls of power are being shaken up. Korea's politicians don't send each other text messages like the high-schoolers dubbed "thumb-people" in the media. But the administration of President Kim Dae Jung has been busy putting its paper-based operations on-line. The aim is to save time and make services more convenient. It also helps eliminate corruption by putting government procurement programmes on-line, where they leave an easily traced electronic trail.

But it's also making money for Korean companies hired to do the work. Systems-integration company LG CNS won a $50 million contract last June to put the Philippines' Lands Registration Authority on-line, and is scouting for similar business in China. "Developed countries already have e-government," says company spokesman Park Chul Hyun. "But most Asian countries don't have it. We think there'll be a big market."

How did Korea gain its edge? It didn't happen by accident. In the mid-1990s it became the first country to commercialize code-division multiple access, or CDMA, mobile technology. The mobile world, then transfixed by the rival standard Global System for Mobile Communications, or GSM, laughed out loud.

But Korea's laughing now. CDMA's edge in capacity is winning converts, and Korean handset makers find themselves with 56% of the global CDMA market. That's the launching pad for wireless Internet and applications which have taken hold in Korea like nowhere else bar Japan. This year Korea Telecom and SK Telecom rolled out the fastest third-generation wireless service yet seen, a CDMA-based standard known as EV-DO.

If that takes off in Korea, it will probably succeed in other markets. "Korean vendors now have a real competitive edge," says Park No Sung, a vice-president at Cisco System's Korea office.

It's a similar story with broadband. Its spread was driven by a $11.4 billion joint government programme with the private sector to establish nationwide high-speed Internet access. But it was also powered by Hanaro Telecom successfully commercializing a new way of hooking up users--through Asymmetric Digital Subscriber Lines. ADSL now makes up the bulk of Korean broadband subscriptions, and millions of dollars have flowed from their sale to foreign service providers.

AGENTS OF CHANGE
Technology isn't the only agent of change in Korea. Efforts to open up government and the economy have played crucial roles. The government's policy of fostering credit-card use to spur consumption, for example, has helped e-commerce reach nearly 10% of total retail transactions. Cleaning up the banks has opened the door for more sophisticated services like Internet banking. "We expect at least 10% of transactions will be done on-line in a few years," says Kim Jin Bum, an investor-relations manager at Kookmin Bank.

But there are roadblocks in the path of Korea's bid for on-line glory. While the big-name tech firms win plaudits, many of the "smokestack" businesses that powered Korea's "miracle" are being left behind. Most textile companies have proven averse to change, despite narrowing margins in the face of competition from cheaper producers. The consequences of complacency were rammed home in June with the closure of Chongro Bookstore, the oldest bookseller in Korea. It was put out of business by on-line stores offering cheaper prices.

Many old-school companies like Chongro are not using on-line solutions to upgrade their management and accounting systems. While consumers have been quick to buy on-line, e-commerce between businesses isn't growing as quickly as hoped. Tradition-bound companies are sticking with their old suppliers, which means they're probably paying too much. If they don't change they'll eventually be driven out of business.

"That's a big problem for us," says Choi Jaei Young of the Korea Information Society Development Institute. "If a company doesn't care about information technology it will eventually exit the market. That's for sure."

Kim Il Hwan, meanwhile, is determined his clothing business won't be one of them. "Saving time on paperwork means more time to spend on business," he reasons. That's a message Korea's on-line community understands, but one that off-line businesses must get before Korea's digital gamble is declared a success.