Commentary: Riding the Korean wave

Since the turn of the century, South Korea has become a major exporter of its cultural identity. And, as the "Korean wave" sweeping across Asia has taken demand for Korean goods and services beyond just creative industries, the significant influence of South Korea's culture on its neighbors, particularly China and Japan, is a notable contributor to its recent economic growth.

Many South Korean businesses have been quick to capitalize on a huge appetite for products that can successfully sell the notion of Korean identity. Take the country's hugely successful cosmetics industry as an example: From 2008 to 2015, the number of South Korean cosmetic companies mushroomed to 2,017 from 719. This scaling up of supply (and innovation levels) to meet demand, is typical of a country that has not only become highly adept at realizing the opportunity of its cultural cachet, but that for many years has been very quick to respond to the potential of its export markets.

The shining star in this regard is Samsung Electronics. The company's route to becoming the world's largest consumer electronics manufacturer mirrors the country's own journey in the past 50 years. While South Korea has risen rapidly from chronic poverty to its position as a major world economy, Samsung's path has seen it move from playing catch-up with developed-world rivals, to equaling and exceeding them, in terms of innovation and product design.

Samsung's focus on product development has been a key driver recently in the growth of its component business. Not only is the company highly vertically integrated, in terms of manufacturing hardware for its own products, it also has excelled as a leading producer of integrated circuits, LCD panels and memory chips for many of its competitors. Earlier this year, the technology giant reported its highest-ever quarterly operating profit from its semiconductor division, and offered a positive outlook for the year ahead.

As a memory-chip maker, Samsung is also riding high on what has been called a supercycle, with tight supply and increasing demand for more capability on devices such as servers and smartphones, driving up prices and profit margins. The industry is more consolidated than it has been in the past, with only three major DRAM players, and Samsung can continue to benefit from more rational market conditions. Meanwhile, another South Korean firm, SK Hynix, the world's second-largest memory-chip maker and fifth-largest semiconductor company, is also tapping into the growth of the memory market, and is set to respond to demand by mobilizing capacity in the information storage side of its operations.

For SK Hynix, as with Samsung Electronics, meeting this demand is already a profitable reality. Second-quarter operating profit this year rose a record-breaking 574% from a year earlier. The result beat the company's previous all-time high from the previous quarter, and it is now potentially on track for what could be its largest-ever annual operating profit.

Exploiting current market demand is one thing, but interpreting and successfully predicting the next big growth story is another. This again, is an area where many South Korean firms have historically fared well. In Bloomberg's latest index of the world's most innovative countries, South Korea continued to lead the field, topping the international charts in R&D intensity, value-added manufacturing and patent activity, with top-five rankings in high-tech density, higher education and researcher concentration.

Thermal-management company Hanon Systems, which specializes in producing air conditioning and cooling systems for vehicles, is a great example of a business using technology to pre-empt future demand. In particular, it has recognized that cooling systems in the burgeoning electric vehicle market are a major source of power drain, estimated at using around 20% of battery capacity – placing a significant limit on the potential driving range of a car. Hanon believes that, if it can resolve this problem for EV manufacturers, it will be well placed in a very lucrative future supply chain. While the upfront cost in research and development for this and other ventures is significant, the company views the size of these outlays as a competitive advantage.

It is impossible to ignore the prominence of South Korean culture in the country's everyday life. Visitors arriving at Seoul's Incheon Airport for example are greeted by an abundance of billboards and advertisements for South Korean pop groups, TV dramas, films and online gaming. The external projection of South Korea's culture has acted as a springboard for the phenomenal recent growth in many of its export-orientated markets. This inward application of culture is more telling: the collective ability to embrace change, innovate and work hard to meet not only current demand, but create demand in the future.

Paul Desoisa is portfolio manager, global emerging markets at Martin Currie Investment Management, Edinburgh. This content represents the views of the author. It was submitted and edited under P&I guidelines, but is not a product of P&I's editorial team.