Reports say Korea at risk of Taiwan-style polarization amid AI boom

Car carrier trailers loaded with vehicles for export are lined up at Pyeongtaek Port in Gyeonggi Province, Monday. Yonhap

Korea is increasingly headed toward Taiwan’s polarized economic path amid the artificial intelligence (AI) boom, where only a handful of AI-related exporters make profits while domestic demand remains largely stagnant, according to brokerage reports Monday.

Two reports, both released by DB Securities analysts, noted that this polarization is exacerbated by the weakening of the Korean won against the U.S. dollar, similar to development’s with Taiwan’s currency, the New Taiwan dollar.

The reports explained that the Korean currency’s depreciation is prompting exporters to keep their earnings in U.S. dollars for overseas investments rather than converting them into won, to avoid losses from the weak local currency.

These practices further diminish domestic investment, household income, consumer spending and other economic activities at home.

“The Korean economy is beginning to resemble Taiwan’s, and that is by no means a compliment,” wrote Moon Hong-cheol, a senior analyst at DB Securities, in a report titled “Taiwan, the Future of Korea under Currency Depreciation.”

While Moon did not specifically mention exporters, he implicitly drew a parallel between Korea’s leading chipmakers — Samsung Electronics and SK hynix — and Taiwan’s TSMC, with all three posting third-quarter earnings above market estimates amid the AI revolution.

Samsung Electronics posted a net profit of 12.2 trillion won ($8.6 billion), up 21 percent from a year earlier, while SK hynix saw a 119 percent increase to 12.6 trillion won.

TSMC recorded a 39.1 percent rise to 452.3 billion New Taiwan dollars ($14.7 billion).

Moon also noted that in terms of market capitalization, Samsung Electronics and SK hynix together account for more than 25 percent of the benchmark KOSPI, while TSMC occupies more than 30 percent of the Taiwan Stock Exchange.

“Under these circumstances, investment by Korean companies at home would help stimulate domestic demand, but as seen in TSMC’s case, they are relocating their factories overseas, including to the United States,” he commented.

The analyst also pointed out that Taiwan has been experiencing chronically sluggish domestic demand as well as accompanying socioeconomic challenges such as low youth employment, cautioning, “Korea is now moving onto a similar path.”

Another DB Securities analyst, Kang Hyun-gi, voiced a similar view in a separate report on the mechanism behind a recession-type bull run in the stock market.

“The current AI-led bull market is unusual because, unlike the dot-com or housing bubbles, it is occurring despite slowing economic growth and weak household spending power,” Kang wrote.

Regarding the currency, Moon noted that Korean exporters prefer holding earnings in U.S. dollars, as the won-dollar exchange rate remains consistently above the worrisome 1,400 mark, making conversion into the local currency less attractive.

He also pointed out that Taiwanese exporters have been doing the same, taking advantage of deliberate depreciation driven by monetary policies.

“Such depreciation is essentially like taking away households’ purchasing power to give a subsidy to exporting companies,” Moon said.