Trade: Hard times

24 May 2002

Korean exporters have been having a difficult time of it lately. A high dependence on electronic and electric items in the country's trade portfolio has meant export income has slumped since the global IT bubble burst. The price of semiconductors, Korea's principal export, has plummeted to around one-third since 2000, and computers, televisions and a number of other electronic items have also seen considerable price reductions. As a result, the value of Korea's exports fell by 12 per cent to $150,439 million in 2001, even though the actual volume of sales increased.

Korean exports to the Middle East have not witnessed the same scale of decline as those to Asia or Europe. But even the rising oil price could not prevent a drop in the value of sales to the region. After registering a 17 per cent growth in exports to the Middle East and North Africa in 2000, sales dropped by 2.7 per cent in 2001 to $6,683 million - about 4 per cent of Korea's total exports.

A major contributor to the decline was the 20 per cent contraction in Korean textile sales, which shrank to $843 million in 2001. 'Until recently, Korea's principle export to the region has been polyester, destined for Dubai - the largest polyester wholesale market in the world,' says Hee Hong, manager of the overseas market research team at the Korea Trade-Investment Promotion Agency (Kotra). 'Traditionally, the Middle East has accounted for around one-third of total polyester exports, but now Korean exporters are fighting an uphill battle to maintain their market share.'

The problem is the growing force of the Chinese textile industry, which has already eroded the margins that the Koreans had previously enjoyed. 'Chinese polyester exports are so much cheaper that it is becoming impossible for Korean companies to compete,' says Hong. 'Already a number of Koreans have had to move their factories into China to take advantage of cheaper labour costs. Now it is only the large firms like Hyundai that are still able to export from Korea.'

Nor are hard-pressed Korean manufacturers able to take comfort in another traditional export, vehicles and construction machinery. According to Kotra, sales of transport machinery, including cars and construction equipment, fell by 28 per cent in 2001 to $1,611 million. Even so, they remain at the top of the list of Korea's exports to the region.

'The last few years have been difficult,' says Hyun-Il Lee, overseas sales manager at the construction equipment division at Hyundai Heavy Industries (HHI). 'The low oil price has meant that regional governments have had little or no budget allocation for purchasing new construction equipment. However, with this year's higher price we're hoping to see orders picking up.' Even if new budgets do allow for the replacement of old machinery, Lee warns that Korean manufacturers still face intense competition from European and US manufacturers, a problem compounded by the limited size of the Middle East market. To combat this, Korean exporters must develop new markets in the region, Lee contends. He identifies Iraq and Iran as offering major potential. HHI is already supplying Baghdad under the UN oil-for-food programme and is well placed to break into the Iranian market, although exports there are limited by the country's local content requirements.

Korean-made cars, which have been experiencing something of an export boom in many overseas markets, have also suffered from lacklustre demand in the Middle East in recent years. 'Last year, sales to the region amounted to 80,000 units, only 5 per cent of total exports, and the figure is forecast to drop to 70,000 units in 2002,' says Wan Huh at Korea Automobile Manufacturers Association (KAMA). 'It seems to be part of an ongoing slide, which has seen a rapid decline from imports of around 100,000 units a year at the end of the 1990s.'

But it is not all bad news for Korean exporters in the Middle East. Bucking the worldwide trend, the region is an increasingly willing consumer of electrical and electronic items. In 2001, imports of Korean-made home electronic goods, including televisions, video cassette recorders and digital satellite receivers, grew by 14 per cent to $776 million, while those of industrial electronic items rose by 28 per cent to $784 million.

'Televisions remain one of the single most important products exported to the region by Korean companies,' says Kotra's Hong. Moreover, there is still significant demand for sets as more and more countries open up, and the impact of the higher oil price trickles down to household incomes. In preparation for this, Korea is working hard to raise the profile of its products in Gulf markets, running advertising campaigns and participating in regional trade fairs.

'Digital satellite is rapidly gaining popularity in the Middle East,' says Hong. '[Finland's] Nokia, which originally provided the region's decoding boxes, is now finding them difficult to sell and Humax has assumed control of the market.' The Korean-owned electronics firm last year signed a $200 million deal with the region's leading satellite operator, Orbit, to supply its subscribers with set-top boxes.

Korean-manufactured industrial items are also increasingly finding their way to the Middle East. The proliferation of new power projects in the region has made it the most important market for the Electro Electric Systems Division of HHI, says Danny Choi, manager of the company's Asia, Africa & Latin America team. Sales to the region constitute half the division's total exports, $305 million annually, and include products such as power transformers for substations and 145-kV gas-insulated switchgear.

The importance of the Middle East to Korean electrical systems manufacturers could be on the wane, however. The rise of local low-voltage switchgear manufacturers is hitting Korean exporters, unable to avoid transport costs and customs duties. The entry of low cost Indian and Chinese manufacturers is expected to further tighten margins, to the extent that low-voltage circuit-breakers may no longer offer sufficient profits for Korean companies.

One factor still in the manufacturers' favour is the won/dollar exchange rate. 'At around 1,280 won to the dollar in May, Korean companies are still able to maintain price competitiveness over many of their international rivals in the region,' says one local businessman. 'The problems come when the won drops to around 1,100 to the dollar, and fortunately the forecast is for a slight upward trend in coming months.'

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