Spotlight on South Korea

Robert Hsu, August 13, 2007

I recently spent three jam-packed days in Seoul, the modern capital and the largest city in South Korea. In order to get an expert's perspective on South Korea's developing economy, I stayed with my friend (and Asia Edge subscriber), Young. Young is a successful Korean-American real estate developer with business interests in both America and South Korea. He generously showed me around, and thanks to him, I had a productive and enjoyable time in the capital city. It would be a difficult task to find a more hospitable and gracious host than Young.

I learned a lot from Young and the time I spent in Seoul. As a result, I want to give you a general overview of South Korea, from its size and demographics to the key industries that are driving its economy. Let's get started, shall we?

An Introduction to Seoul -- and Chaebols

Many people don't realize it, but the South Korean stock market has been on fire this year. Since January, the Korean market is up more than 35%, making it the second-best performing stock market in all of Asia -- just after Mainland China's red-hot market.

The heart of South Korea's thriving economy is Seoul, which also happens to be one of the largest cities in Asia. Seoul has a population of 12 million people -- nearly three times the size of Chicago's population! The city also contains one-quarter of the total population of South Korea.

Seoul is located about 30 miles south of the Korean Demilitarized Zone and is divided in half by the Han River. I found it interesting that the southern side of the city contains the newer buildings and more affluent citizens. It's also considered safer than the north side of the city because it's further from potential North Korean invasions. Because of this, real estate prices in the southern half of the city are roughly three times that of prices in the northern part.

The Korean economy is dominated by a handful of conglomerates known locally as chaebols. Three well-known Korean chaebols in the U.S. are Samsung, Hyundai and LG. Chaebols were originally products of crony capitalism during the 1970s, and before the Asian Financial Crisis 10 years ago, they enjoyed protection and financing from the Korean government. The combination of protectionism and access to cheap financing allowed chaebols to dominate the Korean economy.

Chaebols are controlled by well-connected private entrepreneurs, most of whom are billionaires and centimillionaires. Chaebols are unique because they're willing to get involved in any business that is interesting. Because of their excellent access to financing, chaebols have the luxury of dabbling in a wide variety of different businesses. One chaebol can be involved in everything from real estate development to ship building to electronics to restaurants.

Shift to Outsourcing Drives Prosperity

Although Seoul lacks the towering skylines of emerging Chinese cities like Shanghai and Shenzhen, that doesn't mean it isn't prospering. Everywhere I went in the city, it was easy to see the wealth and high standard of living in the Korean metropolis.

In an interesting way, Seoul reminded me very much of my hometown of Taipei in Taiwan. Like Taipei, the city is very clean. Both Taipei and Seoul are also fun -- they have great nightlife with a multitude of restaurants, coffee shops and bars open for business around the clock.

South Korea's level of economic development is similar to Taiwan's, with an average per capita income close to $20,000 USD, around ten times that of Mainland China (and half that of the United States). Another similarity shared by Taipei and Seoul is the large number of vacant taxis roaming the streets.

The excessive number of cabs is a sign of underemployment. Many Korean jobs have been moved to China in recent years. This is similar to what happened in Taiwan, where workers lost their jobs when factories moved to China. In both cities, many of the displaced workers became cab drivers.

Yet despite job losses to China, Korea is flourishing. Investors, land owners and chaebol executives are profiting from outsourcing to China. Massive wealth creation is taking place as the result of outsourcing, and resourceful Koreans are getting richer from this economic shift.

These wealthy Koreans are known as those in the "winners' circle." People in the winners' circle make up about 20% of the Korean population, and they are reaping the benefits from globalization by making more money than ever before. The quality of life for the average resident in Seoul is better than in Shanghai, Shenzhen or Hong Kong, where many locals can't afford the luxuries these cities have to offer.

The prosperity in South Korea is evident. Prices for most goods and services in Seoul are higher than those in Taipei, making the South Korean capital on par with New York City in terms of living costs. For instance, a 1,400-square-foot high-rise condominium in central southern Seoul with three tiny bedrooms costs around $1 million. The entrance to my hotel in COEX, the central shopping district in southern Seoul, is dotted with shiny Mercedes S-Class and BMW 7-Series sedans, which cost twice as much in South Korea than in the U.S. because of high import taxes.

The Hollywood of East Asia

When it comes to the population of South Korea, young men outnumber women by about 20%. Korean society follows patriarchal Confucian traditions more so than any other place in the world, and as a result boys are prized over girls. Because it's expensive to raise kids, many Korean couples opt to have only one child and go to the drastic measure of aborting females early during pregnancy. This shortage of women has driven many Korean men to look for brides from less-affluent neighbors such as China, North Korea, Vietnam and Thailand.

Because there are so few of them, young women in Korea have economic advantages. Not surprisingly, businesses that cater to young Korean women are booming. One of the hottest businesses in Seoul today -- just like in my neighborhood of Beverly Hills -- is cosmetic surgery. One young Korean socialite told me that it's common for her girlfriends to receive eyelid or nose surgery as a high school graduation present.

Korean cosmetic surgery is gaining a strong reputation throughout Asia. Cosmetic surgery tour groups, consisting of young women from China, Hong Kong and Taiwan, flock to Seoul nowadays for inexpensive assembly-line eyelid and nose jobs.

Another reason why Asians are flocking to Seoul for cosmetic procedures is because the city has become the entertainment capital of East Asia. The Korean government and chaebol leaders such as Lee Kun-hee, the billionaire head of Samsung, recognized the economic and cultural significance of developing an Asian-centric entertainment industry to compete with Hollywood. These business leaders and the government have worked hard to promote Seoul as a major entertainment center.

With support from the Korean government and chaebols with deep pockets, Korean soap operas, movies and pop stars began to penetrate other Asian markets during the '90s. Over the past three years, many of the top-rated TV shows in Hong Kong, Taiwan and Mainland China have been South Korean programs. Korean stars such as Bae Yong-joon, Kim Hee-sun and Rain have become pan-Asian pop idols. These stars are so popular that many Chinese women go to cosmetic surgeons in Seoul specifically requesting to have a nose like Kim Hee-sun's.

Not only has South Korea prospered from Seoul's status as an entertainment capital, but the country has also been successful at exporting Korean entertainment consumer gadgets. Such exporting promotes Korean-branded goods, like Samsung cell phones and LG flat-panel monitors.

Entering the Global Economy

Based on what I saw during my trip to Seoul, it's obvious that the Korean economy is strong. In many ways, Seoul rivals Hong Kong in prosperity. The one thing, however, that puts Hong Kong ahead of Seoul is the number of local English speakers. Relatively few locals in Seoul can speak English, while most people in Hong Kong can speak the language to varying degrees. English proficiency is still an important attribute to have in order to participate competitively in the global service economy.

Koreans are working hard, however, to learn English. In fact, aside from cosmetic surgery, foreign language schools are perhaps the fastest-growing businesses in Seoul. In the past, English was the top language in demand at these schools, but last year Chinese surpassed English as the number-one choice of foreign language students. Clearly Koreans want a piece of the China Miracle.

Speaking of China, many Koreans feel squeezed between China and Japan, Asia's most powerful economic giants. When I visited the Korean Stock Exchange, my guide asked me what I believed would be the best course of economic action for Korea.

In my view, the best strategy for South Korea is to integrate its economy with China's rugged northeast and take advantage of the vast natural resources and cheap labor available there. Korean capital and technical expertise combined with northeastern China's cheap labor and natural resources would make a powerful combination. Although the Japanese have similar ambitions, Koreans have a big advantage -- China has long-lasting historic ties with Korea and feels antagonism towards Japan.

Historically, Chinese have generally liked Koreans, and Koreans view China as a powerful force. Ancient Korea was a tribute state under the Chinese Middle Kingdom's protection for several hundred years. About 500 years ago, during the Ming Dynasty, the Chinese government treasury nearly went bankrupt from protecting Korea against Japanese invaders. Today, there are over 2 million ethnic Koreans living in northeastern China, and they get along well with the locals. Given Korea's geographic proximity to northeastern China, it has a huge advantage in dealing with the Chinese.

Stay Tuned!

I hope you have enjoyed this in-depth look at South Korea. If you're interested in learning more about the profit potential of the country, join us at Asia Edge. I keep my Asia Edge members up to date on all of the latest happenings in Asia, including which companies to buy in which emerging markets. Don't miss out on the opportunity to profit from South Korea! Join today.