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Changing lopsided industrial structure key to reviving economic growth

TOKYO -- South Korea is in a prolonged economic slump. The country's economy grew just 0.3% in the April-June quarter over the previous quarter, falling below 1% for the fifth straight quarter. The Bank of Korea, the country's central bank, in July further lowered its growth projections for this year by 0.3 point to 2.8%.

     In addition to the economic downturn in China, which accounts for more than 20% of the country's exports, and a decline in export competitiveness resulting from the stronger won, management of big conglomerates, known as chaebol, and the possible collapse of the industrial structure, among other concerns, are a more serious structural problem in the longer term.

     Consumer electronics giant Samsung Electronics faces with two problems: One is its declining global market share in smartphones, once the company's largest source of earnings.

     Samsung has no chance against Apple's iPhones in the higher end, while it is also losing ground to Chinese rivals such as Huawei Technologies and Xiaomi, as well as Micromax Informatics and other Indian smartphone makers in the lower end of the market.

     Furthermore, the electronics giant is threatened by the rise of emerging Asian manufacturers such as Cherry Mobile of the Philippines. With the rise of cheaper flat-screen TVs from emerging markets, it is becoming increasingly difficult for Samsung to capitalize on its strengths.

Family feud

Another issue is the succession of management from Chairman Lee Kun-hee to his son, Vice Chairman Lee Jae-yong. In an effort to continue the family business, Cheil Industries, the de facto holding company of the Samsung group, recently merged with Samsung C&T. However, there has been strong criticism of the merger, which is apparently aimed at strengthening the family's control of the company.

Lotte group founder Takeo Shigemitsu arrives at Gimpo International Airport in Seoul on July 28.   © Yonhap/Kyodo

     Other family-run South Korean conglomerates, such as Hyundai Motor, Hyundai Heavy Industries, SK, Hanjin, Hanwha and Lotte, have also come under scrutiny.

     The strength of Samsung, which grew into a huge company by making semiconductors, flat-screen TVs and smartphones, has always been cost competitiveness, product development in response to market changes, and prompt release of new products. Its swift decision-making and courage to make huge investments are exceptional among family managed companies.

     With these strengths fading and growth slowing, frustrations about the transition to the third-generation denting the swift decision-making and braveness unique to family management may be reflected in the hasty integration of group companies. However, it is clear that continuing its family-run, centralized management style even after becoming one of the world's largest electronics makers is an impediment to Samsung's growth.

     Family feuding over management at Japanese-Korean conglomerate Lotte group also provides evidence of the weakness inherent in family management. Lotte is a big conglomerate that generates sales of 400 billion yen ($3.18 billion) in Japan and 5 trillion yen in South Korea. However, there are concerns over the turmoil in management and a decline in brand value caused by the bickering within the family.

     South Korea undertook structural reforms such as the dissolution of conglomerates during the 1997 Asian currency crisis in an effort to secure support from the International Monetary Fund. Although President Park Geun-hye and her predecessors have all pledged to reform the economic domination by big conglomerates, none have been successful.

Lukewarm in everything

Another problem is the country's industrial structure. While South Korea is good at electronics, it competes with Japan in almost every field, including steel, petrochemicals, shipbuilding, heavy equipment, machinery, autos, construction, engineering, as well as daily commodities such as cosmetics, food and entertainment content such as music and games. Japan, South Korea and China are among the few countries in the world that produce the whole gamut of goods.

     With a population of just over 50 million, South Korea has developed a broad range of industries by focusing on exports. However, rising labor costs and the stronger currency have made the country's exports expensive, so that it is increasingly difficult to maintain leadership in a broad range of industries. In addition, South Korea's labor force is aging even faster than Japan's.

     Earnings from shipbuilding, for example, for which South Korea is ranked No. 1 in the world, are worsening due to the rise of Chinese builders and the resurgence of Japanese rivals. Given that rivals are threatening South Korea's other specialties such as electronics, the country needs to boost its competitiveness by narrowing down its industrial fields.

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