Asia Weekly

A Postcard From Korea

Week Ended: June 12, 2009

Korea has grown rapidly over the last three decades and standards of living have improved as productivity has increased. There is also little doubt that the competitive environment in Korea has fostered much of this productivity improvement. In the past, companies competed for market share based on product or service differentiation, however, now with more firms offering similar products and services, it seems pricing is increasingly being used as the key lever to gain market share. The lack of differentiation among companies may be the result of fast information sharing among competitors, and the lack of innovative product or service offerings. As difficult as this makes it for Korean companies, nevertheless, there are some advantages to operating in a competitive environment. But the question remains to what extent have companies benefitted from the competition?

During this trip to Korea, I found it interesting that companies are effectively offering discounts in the form of free services and gifts as a way of competing for customers. Many after-sales services in Korea are now provided free of charge and consumers can expect to receive several gifts following the purchase of certain products. This is not indicative of a company in the initial stage of development, however: on the contrary, in the past companies competed by offering new products or better quality customer services. However, those gaps narrow quickly.

A cosmetic company I met on this trip had invented an innovative herbal product line, developed a strong brand and previously held the leading market position. However, a competitor quickly launched similar products after seeing their success. Furthermore, the entrance of low-end brands with effective marketing strategies further eroded the company’s market share— these low-end brands now offer herbal products as well. The company I met with was able to regain its brand power through product innovation and brand marketing. When I visited its local stores, I found that free skin diagnosis services and free gifts were now being offered to customers—in the past, this had been an effective way for smaller brands to attract new customers.

High levels of competition have fostered increased standards on the part of domestic consumers; as a result, companies need to continuously improve their products and services to satisfy the domestic market. The competition Korean companies face in the domestic market has helped them succeed in overseas markets as they have developed the ability to quickly deliver quality offerings at competitive prices. For example, the cosmetics company is now ramping up its sales in overseas markets. Additionally, I met several Korean Engineering, Procurement and Construction companies that have expanded overseas and are maintaining their positions in global markets during this economic downturn despite competitive threats from China and India.

While Korea has achieved a certain level of global competitiveness, there is still room for Korean companies to improve. For example, many business functions delivering quality customer service and efficient manufacturing are performed in-house in large companies through a consulting arm. In many cases valuable assets and businesses are internally owned by big corporates and could potentially be listed separately. Leaving aside the question of global competitiveness, if Korean companies turn to unlocking the value they hold internally, this might be a way of unleashing the next wave of growth.

In-Bok Song
Research Analyst
Matthews International Capital Management, LLC