Saviors of Korean economy

By Andrew Salmon

Quo vadis, Korean economy? Woeful predictions of doom and gloom abound.

Domestic spending evaporated after the credit crisis of 2002, leaving the economy reliant upon exports and at the mercy of the volatile global economy. But in sector after sector ― at present, mobile telecommunications and shipbuilding ― Chinese manufacturers are leveraging their giant home market to out-produce and under-cutting Korean competitors.

The traditional locomotives of Korea's economy, the chaebol, are offshoring production ― to the U.S., to Europe, to Southeast Asia, and (of course) to China. While chaebol continue to profit, their "trickle down" is drying up: they are making minimal investments at home and creating minimal jobs.

And Korea is a mature economy. Hence ― to the horror of editors and pundits steeped in the the surging economic expansion of the 1970s and ‘80s ― growth rates are stuck in low single digits. Another downside factor is Korea's increasingly mature population. This doddering demographic undercuts productivity, forcing a shrinking workforce to generate rising welfare spending.

Despite dreams of "unicorns" ― startups that sprout into billion-dollar enterprises ― there is no indication yet that Korea's much-hyped "creative economy" is capable of birthing such agile and promising firms as Facebook or Uber. Korea's economy has always been two-tier: Stifling big boys (the chaebol) at top, and a mass of small, but not particularly promising or innovative companies (mom ‘n pop shops, restaurants, education institutes, etc) at bottom. There is little in the middle.

Seoul can hurl money at ventures and create a low-cap stock market, but the shortage of benchmark entrepreneurs (show me a Korean Mark Zuckerberg or Travis Kalinick), the lack of incubation expertize and the harsh financial and reputational penalties for failure are daunting barriers to success.

Is there a way forward? Perhaps ― and perhaps the Korean economy's saviors will hail from the same location as those companies who are eating Korean companies' lunch.

Anyone who drives in Seoul will be familiar with the infuriating tourist buses jamming downtown. Anyone who visits Jeju will have seen the island's economic saviors bustling in, visa-free. And anyone who visits Myeongdong and heard the babble of foreign voices knows who I am talking about.

Enter the Chinese.

At a recent conference in Seoul, their potential was made stunningly clear: Just 6 percent ― yes, 6 percent ― of China's population currently hold passports. China's potential population with aspirations to travel and spend abroad is immense. According to McKinsey, only 14 percent of Chinese were "upper middle class" in 2012; by 2022, they rise to 54 percent.

Where are they going? Currently, Chinese tourists' top two "overseas" destinations are Hong Kong and Macau. Battling for third, fourth and fifth spots are Korea, Singapore and Japan.

Hong Kong and Macau are benchmarks. True, they have the advantage of geographical proximity and a shared language. But neither is a large geography - yet both manages to absorb huge numbers of tourists. And neither is a manufacturing economy - yet both generate fortunes from services.

This is tremendously significant. Leisure and tourism - with their corollary sub-sectors of transport, shopping, dining, hospitality, entertainment, sightseeing and gaming - are huge potential earners.

There has been massive growth in recent years: After all, Koreans themselves only won a five-day workweek, granting them the opportunity to enjoy a leisured lifestyle, in 2005. The sector has expanded massively: Look at the quality restaurants and bars! The sizzling nightlife! The multiple leisure options, from jimjilbang to multiplexes to Han River jet skis!

Given the increasingly vast numbers of Chinese who will soon be seeking overseas experiences, and given the way Hallyu operates as a national tourism advertisement, this is the tip of the iceberg. Smart players are already rising to the challenge.

Retail companies are innovating giant, downtown duty-free shops where luxury products are offered in a traditional market atmosphere, rather than the rarified ambience customarily surrounding branded goods. Samsung is upgrading its world-class Everland leisure facility and investing in the mid-range "Shilla Stay" hotel brand nationwide. Various groups are preparing multi-use casinos to profit from the Chinese love of gaming. Entrepreneurs on Jeju are creating such niche tourism attractions as mazes.

One plus of leisure and tourism is that you don't need to be a giant to be in it. Restaurants, bars, BnBs, pensions, niche tours and specialty shops are all small businesses that can ride the wave.

Korean needs to don a new, service-centric headset rather than continuing its customary focus on metal bashing. If Korean manufacturers continue to offshore to China, and Chinese companies continue to compete with Korean manufacturers in all sectors, Korea risks becoming an economic colony of China.

Better, surely, to add value and aim to become a service center for China?

Andrew Salmon is a Seoul-based reporter and author. Reach him at andrewcsalmon@yahoo.co.uk.