Hardware vs. Software: Korea's Growing Dependence on Manufacturing

The Joongang Daily and other media are reporting today on a new Bank of Korea report that shows Korea's increasing dependence on its manufacturing sector over the past nine years.  (Click on the accompanying graphic to see a full size version)  Last year the manufacturing industry created total value worth $257.4 billion, or 30.6 percent of the country's total.  This represented the first time that the percentage from manufacturing exceeded 30 percent and it was also a significant increase over earlier years.
In terms of the focus of this blog, it is significant that Korea's manufacturing industries are led by electronics.  In other words, these figures reflect a heavy reliance on the manufacture of semiconductors, mobile handsets, flat screen television sets and computer monitors and other electronic components.  This compares with relatively small production of software and content, which comprises by far the bulk of the global ICT industry.  The Bank of Korea also reported that last year's exports tied to the manufacturing sector were 5.6 times greater than exports by the service sector.
According to an official from the Knowledge Economy Ministry, “There is a need to develop high-value service sectors such as medical, information technology, finance and insurance in addition to low-value service sectors such as retail and lodging.”

Korea's service sector lagged in 2010

Statistics Korea has released the nation's first-ever economic census.   Not surprisingly, it shows that in 2010 the manufacturing sector continued to dominate South Korea's economy.  According to the report, the total yearly revenue of Korean businesses reached 4,332 trillion won ($3.8 trillion) in 2010.  The breakdown of that total among major sectors is show in the accompanying graphic (click on it to see a full-size version). Note that the services sector, includes dining and lodging, broadcasting and media, education and health and social services.

As illustrated in a post I did over a year ago, the heavy dependence on manufacturing represents a long term trend.  Korea's dependence on manufacturing and the export of manufactured products seems to permeate its ICT sector.  Over the past week or so, Samsung Electronics has received a great deal of publicity owing to the dramatic increase of its exports in the first quarter of 2012, spurred by high global demand for its smartphones and other mobile handsets.  Industry observers have also noted the success of Samsung, along with LG, in the global market for television sets and displays, now that the thinner, lightweight and lower power consumption LED technology is going mainstream.
Despite South Korea's remarkable success in manufacturing and the global export of its manufactured products, there seems to be a general understanding that, to ensure future success, the nation must improve the relative strength of its service sector.   The reason for this is the relative size, in the global market place of services, software and content, compared with communications hardware.
It is difficult to convey just how large the global ICT sector is, but the accompanying bar chart from the Digital Planet 2010 report of the World Information Technology and Services Alliance provides one industry estimate. (click on the chart to see a larger version)  To interpret this chart, keep in mind that communications spending, represented by the blue bars, includes the total value of voice and data communications services and equipment.  The equipment category, of course, includes both wire line and wireless handsets, switching equipment, answering machines and so forth.  Nevertheless, it seems clear from this bar chart that the total value of software and services far exceeds that of hardware and equipment.

Japan trade dispute reveals risks of over-dependence on ICT hardware manufacturing

On July 1 Japan announced that it would tighten restrictions on the export to Korea of three materials that are essential for the manufacture of semiconductors, displays and smart phones.  The materials are are fluorinated polyimide, high-purity hydrogen fluoride, and photoresist.  As widely reported in the Korean press, Japan controls a dominant share of the global market for  these materials.
Regardless of how this trade dispute may be resolved, it illustrates a topic of concern in this blog, namely Korea's heavy dependence on manufacture and export of hardware versus software and services.  For example, see these posts.

Samsung and Google agree to share patents

There is a lot of news coverage, as rightly there should be, about the signing of a patent sharing deal by Samsung and Google.  The significance of this agreement lies in the fact that Samsung Electronics is an electronics manufacturing and exporting powerhouse while Google is arguably the world's most important company these days when it comes to software, content and services.
As reported by the Chosun Ilbo English edition,"The latest patent-sharing deal signifies closer ties between the two companies, whose relationship has been amicable and unique. While cooperating in hardware and software where they have an edge over each other, they have also sought to stand on their own feet in the mobile business. Samsung has tried to develop its own OS called Tizen to lower its dependence on Android. Google, meanwhile, has stepped up efforts to roll out its own smartphone by acquiring Motorola. The latest deal allows both companies to emerge from the competitive structure and step up cooperation." This new arrangement, of course, relates to the hurdle Samsung and other Korean companies face to lessen their heavy reliance on hardware manufacturing and export, in favor of strength in software. Working more closely with Google is likely to help, rather than, hinder the efforts of the Korean chaebol.

Smart apps, not Smart phones are the key to future growth!

An article in The Korea Times today caught my eye, because of its headline, "Smartphones remain key to Samsung, LG earnings."  The opening sentence of the article (which I encourage you to read here) reads as follows. "Despite the ongoing slowdown in the global smartphone industry, conflicting earnings forecasts from Samsung Electronics and LG Electronics indicate how crucial handsets remain as their key profit driver."  Indeed, this is the current narrative and thinking of many here in Korea.  Unfortunately, it does not square with global trends and the reality that this nation faces.  For well over decade now leaders of the ICT sector, from industry, government and academia, have recognized the need for Korea to shift from its heavy dependence on hardware manufacturing and export, to software and services.  Globally, services constitute the major part of the ICT market.  More importantly, they are growing at a much faster rate than the hardware segment of the market.

Reactions to proposed "super ministry" for future, creativity and science

As might be expected, there is a public debate taking place in Korea these days over the government reorganization proposals announced earlier this week by the incoming administration of President-elect Park Geun-hye.  Equally unsurprising is that one big topic in the debate centers on the proper approach to ICT policy in this era of the networked information economy.

• Members of the Korea Communications Commission, one in particular, are not happy at what amounts to a demotion of that commission's responsibilities.  As reported by The Korea Times, it will continue to have ICT-sector regulatory responsibilities, but policymaking and strategies for industry growth in the sector will become part of the new "super ministry," yet to receive its official English name, that will be responsible for future creation of science, including ICT.
• Many people at the Ministry of Knowledge Economy (MKE) are no doubt unhappy because the proposed new super ministry would take over several functions currently assigned to the MKE, which will revert to its pre-Lee Myung Bak administration role as Ministry of Industry Trade and Resources (Energy).
• As noted in the previous post (below), people who argued for restoration of the Ministry of Information and Communication are unhappy because  they perceive ICT-policy being handled at the Vice-minister level under the new super ministry.

The national assembly will need to approve the proposed governmental changes, so the current debates and discussions may have some impact on the final shape of the new government.  However, it is highly likely that the new "super ministry" will emerge, as it was one of the central campaign pledges made last Fall by candidate Park Geun-hye.  The graphic below, published by The Hankyoreh,  may help a bit to understand the forthcoming changes (click to see a full-size version).

As to the ultimate shape of the new super ministry and its relationship to ICT policy and regulation, I have several observations.   First, the debates over restructuring need to agree on a common concept or understanding of digital convergence.   In fact, convergence is a much broader, multi-faceted and complex subject than just the convergence of telecommunications and information technology, on the one hand, with broadcasting, on the other.  Some of the public statements being made these days seem to reflect limited conceptions of convergence.  However, the reason for including ICT policy in the purview of the new super ministry is that these new digital computing and communications technologies are what economists call "general purpose technologies" that pervade all industries and segments of the economy.

Second, the inclusion of (창조, the Korean word for "create" or "make") in the new ministry's title is significant in that one of the major challenges for future ICT policy, broadly conceived, is to help Korea move away from its heavy dependence on hardware manufacturing and export and toward greater involvement with software and content-based services. 

Finally, while some have argued that incorporate of ICT policymaking in the new super ministry under the leadership of a vice minister does not give adequate emphasis or prominence to this area of policy, there is another perspective that needs to be considered.   Reportedly, the reason that ICT policy is being included in the proposed new Ministry is that President elect Park Geun-hye feels strongly that ICT should be integrated with and not separated from the nation's overall science and technology policy.   This is in line with the need for a broad understanding and general agreement about what digital convergence and the information revolution is all about.  

Samsung's challenge is Korea's imperative

As reported today in the Joongang Daily, Samsung Electronics operating profit in the fourth quarter of 2013 fell by 6 percent, largely because of the declining profitability of the company's "cash cow" smartphone business. (click on the accompanying graphic to see a larger version) This marked the first profit decline in nine quarters and was attributed to  "...slowing growth in sales of smartphones and tablets in developed countries, an overly strong local currency and higher marketing costs compared to arch-rival Apple." The article also noted that "Disappointment in the earnings of Samsung Electronics, which accounts for 20 percent of Korea’s stock market capitalization, wasn’t totally unexpected. But the scale of the decline was a surprise, and the company’s shares dropped 0.23 percent from the previous day."
Globally, more than half of all mobile phones being sold these days are smartphones.  However, Samsung is facing increased competition not only from Apple, but also from other manufacturers of Android devices, notably in China.  Also, smartphones like other computing devices are modular and becoming increasingly commoditized.  As noted in an earlier post, companies like Google are looking into "build your own" or "design your own" mobile phones.  Such technological and economic trends suggest that the challenge for Samsung is part and parcel of the next big hurdle for South Korea, to lessen its heavy dependence of manufacturing and exports by large chaebol industry groups while increasing its strength in software, services and content.  This has been the subject of numerous posts, including this short one last October.
Gartner's latest projections underscore the urgency for Korea of making this transition.  As shown in the accompanying table, the three categories of enterprise software, IT services and telecom services together account for 78 percent of projected worldwide IT spending for 2014, while all the hardware devices together, including smartphones, make up only 18 percent of the total.
In light of Samsung's large influence on South Korea's export-led economy, it is probably appropriate to suggest that its challenge to shift from emphasis on hardware to a more balanced approach that includes software innovation is an imperative.   That imperative, in turn is at the heart of the Park Geun-hye administrations emphasis on digital convergence as a basis for realizing the "creative economy."

Lenovo a threat to Samsung's Smartphone dominance?

Local analysts and the local media are abuzz with speculation that Lenovo, especially after acquiring Motorola Mobility, will quickly become a threat to Korean smartphone manufacturers, led by Samsung Electronics.  As reported in the Korea Joongang Daily,"The Chinese company, which gobbled up Motorola on Jan. 29, is openly professing that its goal is to move past Apple and Samsung. “From now until 2015, Lenovo and Motorola’s smartphone sales goal is 100 million,” said Lenovo Chairman Yang Yuanqing on Feb. 2." As shown in the accompanying graphic, with the purchase of Motorola Mobility, Lenovo "...leapfrogged LG Electronics and Huawei to become the world’s third-largest smartphone vendor. According to Strategy Analytics, Lenovo and Motorola’s combined market share in the global smartphone market was 6.2 percent as of the end of last year, compared to Huawei’s 4.8 percent and LG Electronics’ 4.7 percent.
This prospective shift in the international market for smart mobile devices illustrates the risks of heavy dependence on the manufacturing and export of hardware, which is modular in nature and keeps getting smaller, cheaper and more powerful.