A model shows off the Wave 3, a Samsung Electronics smartphone sporting its own Bada 2.0 operating system, which hit the domestic market earlier this year. Despite marketing efforts, the handset with the in-house software has failed to impress. / Courtesy of Samsung Electronics

Why Korea’s software industry lags so behind

By Chung Hee-hyung

When Samsung Electronics declared in the late 90s that it would one day take over Sony as the preeminent electronics company in the world, few took it seriously. The TIME magazine had to caution its leaders “don’t laugh” when it wrote on Samsung’s ambitious goal – some might have said too far- fetched - in 2000. At the time, Samsung’s market capitalization was less than one fourth of Sony’s.

More than ten years have passed, and the fate of the two companies saw a stunning reversal of fortune. In 2010, Samsung’s market capitalization amounted to $ 110 billion, dwarfing Sony’s $ 28 billion by a factor of four to one. Last year, it surpassed Sony in brand value as well and emerged as the most valued brand in Asia, according to a survey conducted by Nielsen, a market research company.

The problem is, although Samsung is now at the leading edge in hardware manufacturing, its competitiveness in software pales in comparison. Its own Bada (“ocean”) software, an operating system for mobile devices such as smartphones and tablet computers, had a paltry market share of 1.9% in 2011. Small wonder that Samsung had to make an alliance with Google and borrow its Android operating system instead.

A cottage industry

The tale of Samsung’s Bada operating system is but one example of Korea’s troubled software industry. Contrary to its stellar performance in electronics hardware, the country’s software sector is still at the stage of “cottage industry,” according to a scathing report by Korea Federation of Information Technology Societies (KFITS) in 2009. The country’s software industry ranked 14th out of 19 OECD countries in competitiveness, and measured in input to output ratio, it is nearly one third less efficient than the United States, according to a report by Samsung Economic Research Institute (SERI).

The underdeveloped state of Korea’s software industry has a root cause that goes back several decades. It is not just a matter of trimming cost, although it certainly played a part. Rather, Korean companies have so far held a deep seated bias toward software and failed to accord a role and importance it deserved. While they spared no expense in developing quality cell phones and computers that could compete in the global market, they neglected to develop accompanying software that was necessary to operate them.

The Asian financial crisis in 1998 wiped out what meager resources the software companies put into research and development. Samsung SDS, one of the few companies which had a genuine interest in developing its own software, ceased all development projects at the time when a consulting agency advised it to give up “unnecessary” businesses that did not make immediate profit.

Moreover, software industry did not fit well with the country’s corporate culture or organization. The ruthless pursuit of efficiency through a hierarchal, highly centralized management worked well when mass producing electronics or automobiles in an assembly line.

It was less well suited, however, for developing software programs where creative thinking and collaboration was more critical. It is not without reason that most IT companies in the U.S. saw the drawback in overly regimental corporate structure and made their headquarters like a college campus.

Decades of neglect resulted in a sorry state of destitute, and several more factors conspired to render the software industry all the more uncompetitive. First of all, the primitive stage of software firms meant that companies had relatively few well-paying jobs to offer. The best and the brightest among them tended to study abroad and stay there, resulting in a significant brain drain. The rest preferred to work for the government or publicly-owned companies which demand little of their expertise in developing software but do offer a far more stable job.

Moreover, the matter is not simply of low wages, although that itself is serious enough. The workload is so heavy that software developers have to pull all-nighters as a matter of course, and they bitterly joke that they have no weekends but only “three Fridays” in a week. There was no overtime pay for after-hour work.

The problem, however, does not step at the stressful working condition, which is prevalent in virtually every workplace of the country. But software engineers have an added disadvantage in that most of their jobs are unstable. “A lot of developers do not have a permanent job,” a developer from a mid-sized software company explained. “Instead of fielding a permanent staff of software developers, most Information Technology (IT) companies prefer to hire them on a temporary basis and form an ad hoc team whenever there is a project to be completed. As soon as the project is finished, the team would break up, and the unfortunate programmers have to look for other companies which might be interested in hiring them.”

The developer went on lamenting. “We are not unlike construction workers who move from one construction site to another, working at a particular site only for the duration of the building period.”

The combination of poor wage and working conditions of the industry has led to a vicious cycle, said Kim Jin-hyung, professor of Computer Science at Korea Advanced Institute of Science and Technology (KAIST). “Low paying jobs fail to attract talented software developers, and as a result companies churn out only mediocre products that are not well received in the market,” Kim explained. “This in turn leads to deteriorating profits and still lower wages. The cycle goes on and on.”

The Distorted market

Nowhere are the sorry state of Korea’s software industry is more manifest than in the System and Integration (SI) sector. Government agencies or large corporations require complex computer systems to manage their data, and it is in the hands of SI companies that most of such systems are drawn and built.

A few of SI companies, mostly affiliates of the country’s largest conglomerates (chaebol), take the lion’s share of these projects. However, these SI companies do not to the actual job of building the system. Instead, as original contractors, they dole out the work to a subcontractor which in turn gives some of its work to another subcontractor further down the chain. In the process, the payment shrinks in size as certain portion of the money is taken out as commission in exchange for subcontracting the prohect.

In the end, only a fraction of the initial payment (made by the government to the original contractor) is geared toward the real job of building the system. The subcontractor at the bottom of the chain has to make do with the pitifully small payment it got. As a result, it tries to finish the project in the cheapest possible way within the shortest period of time. Software developers are forced to bear the brunt of such brutal imposition from above, which means they have to work under extreme time pressure with very little pay.

Little wonder that many developers think they can no more cope with the workload and choose to exit from the software industry entirely.

Dearth of experienced software developer

Unable to embark on a stable career path, it is not surprising that software developers have little time to hone and build on their expertise. They are neither able to keep abreast of the latest development in information technology nor gain enough experience to manage a complex project. “We have a critical shortage of experienced developers who are capable of designing the entire software architecture instead of simply writing individual programs,” said Lee Young-sang in 2011, then head of the Korea Software Enterprise Association (KSEA).

“Designing software is a mix of art and science,” said Chung In-jeong, professor of Computer Science at Korea University. “There is no clear rule on the right way to build a system, since every system has its own requirement. A system designed to process placement of orders for an online retailer like Amazon is surely different from a system necessary to run a large utility network. A programmer has to come up with a different solution every time.”

Unfortunately, most companies failed to grasp the intricacies of building a computer system and regarded the job of software developers as little more than “simply writing programs.” As a result, the software industry has suffered from a critical shortage of underinvestment, with companies unwilling to put enough time and money to nurture a pool of mid-level or senior software developers capable of designing complex software architectures.

It did not help that most colleges cut down the size of their computer science departments in recent years as fewer students chose to study it. Even KAIST, one of the country’s most prestigious universities in science and engineering, reduced the student number of its computer science department by 71% from 129 in 2002 to 38 in 2009.

Belated measures

Fortunately, both the government and the private sector finally seem the recognized the importance of the software industry. Samsung’s failure to develop its own operating system for its mobile devices was a rude awakening that making a good electronic device alone would not be enough in an age of increasing “convergence” of software and hardware.

The government, on its part, passed the Software Industry Promotion Act in May and took the extreme measure of forbidding chaebol SI companies from taking part in large-scale projects.

These companies can no longer make easy money by winning lucrative projects, giving them out to subcontractors and collecting handsome commission fees in the process. “The act may stir some confusion initially, but the chaebol SIs would eventually go on for finding new source of income by diversifying their business and going overseas,” said professor Chung of Korea University.