: Super User; S. Korea; 11 May 2011; Hits: 1325

Japan Quake, No Lift for Korean Producers

SOUTH Korea is the fifth largest economic power in Asia, after China, Japan, India and Russia. It is also one of the leading nations in the world in automobile manufacturing as well as the production of LCD screens and semiconductors.

Little wonder then, that as economists pondered the full implications of the devastating March 11 earthquake in Japan, some observers began to wonder about the extent to which South Korea might be able to take advantage of the drop in Japanese output.

Japan produces 20 per cent of the world’s semiconductors – essential components behind smartphones, computers and cars. And with some experts suggesting that it could be up to six months before Japanese manufacturers resume full production, South Korean companies such as Samsung and Hynix seemed well positioned to fill the gap.

Trade figures for April appear to underline the point. Exports for the month rose 26.6 per cent year-on-year to US$49.77 billion (S$61.3 billion), significantly faster than the average 20.6 per cent rise tipped by economists polled by Dow Jones. Imports, on the other hand, grew more or less as expected, producing a trade surplus of US$5.82 billion, up from a forecast US$3.36 billion.

“Manufacturers with little exposure to Japan’s supply line, such as car makers, likely got a boost” after the earthquake in Japan, noted HI Investment & Securities economist Park Sang Hyun. Reports say that Apple also asked Samsung and Hynix Semiconductor to provide more flash memory chips and mobile DRAMs for use in its iPad 2 and iPhone 5. Hynix, the second-largest memory-chipmaker in the world after Samsung, is also believed to be boosting its production of mobile DRAM chips at the request of foreign companies.

Meanwhile, South Korean automakers have been benefiting from the quake as Japanese manufacturers suffer from power outages or experience a serious shortage of parts. Toyota’s domestic production fell by 62.7 per cent in March. Other Japanese automakers also suffered serious drops, with Nissan Motor Company, Japan’s No.2 producer, reporting a 52.4 per cent reduction, and Honda Motor Company recording a 62.9 per cent decline. The major South Korean beneficiaries are expected to be Hyundai (luxury cars) and Kia (high volume sales).

But the extent to which South Korean exporters in general have benefited from the disaster in Japan can be exaggerated. After all, it was petroleum products and ships – not cars or electronic components – that were the biggest contributors to April’s export hike. Exports of petroleum products jumped 79.8 per cent year-on-year on the back of rising oil prices. Those of ships rose 56.1 per cent as shipbuilders saw greater demand for high value-added vessels.

And while the short-term ability of some South Korean companies to capture market share from the Japanese is hardly in doubt, the extent to which this will result in more permanent changes in global supply chains is far from clear. Japan is already giving priority to restoring industrial facilities in order to head off just such a possibility.

Moreover, as the Korea Development Institute noted in a recent study, the impact of the March earthquake has not been uniformly positive. Some manufacturing companies in South Korea are heavily dependent on Japan as a major supplier of intermediate goods, a factor that could lead to difficulties in production. And while South Korean chip manufacturers do stand to benefit, the country still lags behind Japan in terms of technological development. This means that there are some global shortages that South Korean manufacturers simply cannot take advantage of. Indeed, certain types of silicon wafers as well as resins used in high-technology electronic activities are produced almost exclusively in the four Japanese prefectures most seriously damaged.

Even so, there are reasons for optimism about the prospects for South Korean exports that have little to do with the earthquake in Japan. Unlike Japan and China – both of whose currencies are hovering around record levels – the Korean won remains about 20 per cent below its 2008 pre-credit crisis high.

And even if the won strengthens in response to higher interest rates, it will probably do so rather slowly. This is because although South Korean interest rates are at historically low levels, the Bank of Korea has been careful not to stoke speculative interest by raising them too quickly.

Overall, the positive effects of the windfall from the earthquake in Japan have probably been exaggerated. South Korea’s export performance can more easily be explained by reference to quite different factors.

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Key Political Risks

Park Geun-hye, daughter of former dictator Park Chung-hee, won the December 19 presidential election. She has the support of the ruling conservative New Frontier Party, but as a woman in a deeply patriarchal society, she may have to work hard to assert her authority in government.

WHAT TO WATCH FOR:

Attitude of the government towards the chaebols (large family-owned conglomerates). Ms Park's father strongly supported chaebol development when he was president, but during the recent campaign Ms Park indicated that she would back reforms aimed at ensuring fair competition for smaller firms.
Measures designed to assist women enter the workforce, improve child care facilities and help lower income groups.
Official policies towards the North. In campaign speeches, Ms Park appeared to distance herself from her conservative predecessor's hardline stance. But powerful elements within the ruling New Frontier Party are likely to resist any change.
Continuing power transition in the North. It has gone smoothly so far. But there also appear to be those in the upper echelons of the regime that are unhappy with Kim Jong Un's credentials and see him as a weak leader.