Korea as Number One

In 1979, Harvard professor Ezra Vogel’s book, Japan As Number One, became a runaway best seller in both Japan and the United States. After a swing through Asia the past two weeks, it’s clear to me that Ezra needs to do a rewrite with a new title: Korea as Number One.

The South Koreans have long been confident that anything the Japanese can do, they can do better, but now they’re proving it. In the 1970s-80s, the likes of Sony, Panasonic, Sharp, Toshiba, Hitache, NEC, and Fujitsu killed off RCA, Motorola, and the rest of the American consumer electronics industry and came close to killing off Intel and closing down the U.S. semiconductor industry from which Silicon Valley takes its name. Yet, today, it’s the Japanese who are on the ropes as the likes of Samsung, LG, and Hynix have seized the high ground. Whereas Sony used to be the king of TV, now it’s Samsung. Developed initially in the United States in response to military needs, the market for flat panel electronic displays was quickly taken over by the Japanese who out-invested the American producers and whose dominance of television and then of VCR production gave them an in-house source of demand for mass production and its related economies of scale.

Indeed, the VCR is a classic example. America’s Ampex developed the initial professional video tape recording technology, but never got a consumer product off the ground as the Japanese preempted the market through quick, massive investment. Because VCRs were massive users of semiconductor memory chips, the dominance of the VCR business coupled with use of the same tactics in the semiconductor industry gave the Japanese producers a strong position from which to attach the Silicon Valley chip makers. In 1984-85, many U.S. companies left the business and the Japanese became the dominant players in DRAMS (dynamic random access memories).

Well, in the past month, both of Japan’s main chip makers (Elpida and Renasas) have declared bankruptcy while leading flat panel maker Sharp is selling off pieces of itself to Taiwan’s HonHai. Rudely pushing the Japanese aside are South Korea’s Samsung, LG, and Hynix. Nor, is it only and electronics phenomenon. In the auto industry South Korea’s Hyundai/Kia Motors is gobbling up market share in the U.S., European, Chinese, Indian, and Southeast Asian markets at the expense of the Japanese producers. The same goes for shipbuilding and even soap operas where the Korean shows are even all the rage in Japan. Perhaps most telling is the fact that South Korea’s GDP per capita is now about 90 percent of Japan’s and appears to be on track to surpass Japan’s in the next couple of years.

To achieve all this, the Koreans have used a well known, tried and true formula. For starters, they have worked like crazy, saved like crazy, and invested like crazy. At the same time, like the Japanese, they have rejected American ideas and advice about specializing only in what they do best and trading for the rest. Rather, they have concentrated on developing world class capabilities where before they had none. They did this by protecting and subsidizing in various ways new, infant industries like steel, consumer electronics, and semiconductors. But they also knew their own market was not big enough to yield the necessary economies of scale. So they have had to focus on exports and become competitive in global markets by keeping their currency, the won, somewhat under-valued and by often selling abroad at prices below their own domestic prices. The most successful Korean companies are either those like steel maker Posco that was founded with government investment or those like Samsung that are giant family dominated conglomerates with extensive special relationships with the government and monopoly or quasi -monopoly positions in many interlocking industries and technologies.

This is, of course, the classic Japanese formula. It is the formula Lee Kuan Yew of Singapore had in mind when the advised his countrymen to "look East" for a model to imitate for their own development. It really works, and the Koreans are again proving that anything that works for the Japanese can be made to work better by Koreans.