South Korea Vs. Taiwan: Battle Of The Asian Tech Giants

Opportunities in Asia

South Korea Vs. Taiwan: Battle Of The Asian Tech Giants

We compare the economies and stock markets of South Korea and Taiwan to see how these two tech powerhouses stack up.

Published on 19 December 2017

South Korean companies like Samsung, LG, and Hyundai are household names across the world. They are among the country’s largest chaebols ­– a Korean word that refers to a conglomerate that is owned by a family. The total sales of South Korea’s top five chaebols exceed 50% of the country’s total gross domestic product (GDP) of US$1.44 trillion. Collectively, they also account for about half the country’s stock market capitalisation.

Samsung Electronics, the largest company in the Samsung group, is the world’s biggest tech firm in terms of revenue. It is a global leader in the manufacture of televisions, memory chips, and smartphones. The company’s size and profitability give it the ability to invest massive amounts in research and development (R&D).

The Bloomberg Innovation Index ranks South Korea as #1 in R&D. Samsung alone spent US$12.7 billion on research in 2017. Only Amazon and Alphabet, Google’s parent company, spent more than Samsung on R&D.

Taiwan is the other East Asian tech giant. Its hi-tech industry accounts for about a fifth of the country’s US$519 billion economy. Hon Hai Precision, popularly known as Foxconn, exemplifies the prowess of Taiwan’s tech sector.

Foxconn has extensive manufacturing facilities in mainland China and has grown rapidly as a supplier to western technology companies, notably Apple. Since the launch of the iPhone, Foxconn has supplied over 500 million units – that’s about half the total number of iPhones sold since it was first introduced in 2007.

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Samsung Electronics, the largest company in the Samsung group, is the world’s biggest tech firm in terms of revenue.

The booming global technology industry and the strong demand for electronic products across the world have helped South Korean and Taiwanese companies to grow rapidly. Their success is reflected in a buoyant share markets in both nations.

The iShares MSCI South Korea Capped ETF – which tracks large and mid-sized companies in South Korea – has gained 40% since the beginning of this year. About 21% of the fund’s US$4.07 billion is invested in a single company – Samsung Electronics. The other large holdings of the ETF include SK Hynix and Naver Corp, which are tech companies as well.

US$10,000 invested in the iShares MSCI South Korea Capped ETF on 1 December 2016 would have increased to US$14,088 by the beginning of December 2017.

South Korea’s benchmark Kospi index is up 22.4% in 2017, and hit an all-time high in November this year.

Taiwan’s stock market has also registered a strong performance over the past year. The Taiwan Stock Exchange Capitalization Weighted Stock Index (TAIEX) – which measures the performance of all listed stocks on Taiwan Stock Exchange – has gained about 19% in the last 12 months and reached an all-time high in November.

Hon Hai Precision Industry’s share price has gained 26% in 2017. Another prominent company, Taiwan Semiconductor – which manufactures chips for mobile application processor – has climbed 42% in the last 12 months.

South Korea’s role in the global electronics supply chain

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South Korea is the world’s largest producer of liquid crystal displays with a global market share of 40%. It is also an important manufacturer of other electronic components, accounting for 17% of the world’s semiconductors and 64% of memory chips.

A recent report by Capital Economics, a research firm that provides consulting services to large banks and financial institutions, points out that any disruption to the electronics sector in South Korea could have grave consequences for the world’s tech firms. The note prepared by the consulting firm addresses the issues that could arise if war broke out with North Korea.

Gareth Leather and Krystal Tan of Capital Economics wrote that, “If South Korean production was badly damaged by a war there would be shortages across the world. The disruption would last for some time – it takes around two years to build a semi-conductor factory from scratch.”

Although South Korean companies have a strong global presence and enjoy a big lead over their rivals, the country’s tech industry is exposed to two potential threats.

The first area of concern for the country is that Chinese companies are catching up with Korean technology. The Institute for Information & Communications Technology Promotion, a South Korean government institution, estimates that that South Korean companies have a lead of less than a year over their Chinese counterparts in several IT areas including mobile communication, internet of things (IOT), Information technology devices, software, artificial intelligence (AI), networks, smart cars, rechargeable batteries, and robotics.

The second threat that the country faces is the stranglehold that its chaebols have over the economy. The country’s big firms wield tremendous economic and political power, and it can be difficult for startups to establish themselves and compete in such a business environment.

Some of South Korea’s laws serve to stifle innovation. Tim Chae, a partner at venture capital firm 500 Startups, says, “In Korea, it’s only legal if the law says it’s legal. In the US, it’s only illegal if the law says it’s illegal.” Both Uber and Airbnb find it difficult to operate in the country because of regulatory restrictions.

Taiwan’s exports are surging

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In September this year, Taiwan’s exports rose by 28.1% as compared to the same month last year. In the three preceding months, exports had risen between 12% and 13% on a year-on-year (y-o-y) basis. The upward trend continued in October too, although the y-o-y increase was lower at 3%.

September’s electronic exports stood at US$10.18 billion, a figure which Taiwan’s finance ministry described as a “historic high”.

Although Taiwan economy seems to be on firm footing and its exports are surging, there are several underlying issues that the country is facing.

Over the years, Taiwan’s firms have no doubt built up very strong technological capabilities. However, they have been unable to establish any leading global brands. Contrast the performance of Foxconn and Samsung. The former is a low-cost supplier to the world’s tech firms. But Samsung, in addition to being a manufacturer of intermediate electronic products, is also a strong brand in its own right.

Another problem area is that many of Taiwan’s top tech companies are headed by ageing leaders. Taiwan Semiconductor Manufacturing Co, a company with a market cap of US$200 billion, is led by 86-year-old Morris Chang. He has only recently announced his retirement, which is scheduled for June next year. Foxconn is headed by Terry Gou, who is 67 years old. This is in sharp contrast to American and Chinese tech companies, which typically have younger CEOs.

Additionally, several leading tech companies from Taiwan have not been able to capitalise on new opportunities. For example, HTC, a manufacturer of smartphones, has failed to build its brand globally. Acer, a computer manufacturer, could not make the shift to mobile.

The bottom line

The technological brilliance of both South Korea’s and Taiwan’s firms cannot be denied, and the strong performance of these companies has boosted their countries’ economic growth and stock market gains in recent years.

But Taiwanese and South Korean tech firms are facing constantly increasingly intense competition from global players. In the semiconductor market, for example, South Korea emerged as the world’s largest semiconductor manufacturer this year, dethroning Taiwan – which held the top spot for the past five years, according to a report by industry association SEMI. China finished in third place, but Chinese semiconductor equipment sales are forecasted to increase by 50% in 2018 – potentially enabling the Asian economic superpower to surpass Taiwan and South Korea in semiconductor sales next year.

To maintain their position as global tech leaders in the coming years, South Korean and Taiwanese firms will need to evolve, innovate, and overcome numerous issues.

Despite these challenges, many market analysts are forecasting that both South Korea and Taiwan will continue to see solid GDP growth in 2018, capitalising on strong global consumer demand – and this may very well fuel a further rise in their already booming stock markets.