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TOKYO – If you’re wondering why South Korea’s economy is outperforming Japan’s in 2021 by such a wide margin, events at drugmaker Celltrion offer some timely clues.
On Monday, the Incheon-based biopharmaceutical outfit announced positive results for an experimental antibody Covid-19 treatment. Clinical trials indicate it reduces the treatment period by nearly five days in Phase 3 global clinical trials.
The breakthrough is a reminder of how neighboring, more developed Japan is conspicuously absent from the vaccinations and therapeutics conversation.
It’s bad enough that Asia’s No 2 economy lags India and Bolivia in vaccination-delivery rates. Korea is beating Japan to the punch on coronavirus advancements in the geo-economic race that matters most.
That’s not an accident. For all the focus on stagnant wages and political dysfunction in Seoul, Korea Inc has quietly been creating what Economy and Finance Minister Hong Nam-ki calls a “smart country that leads the way for future industries and innovative public services.â€
The “future industries†piece of the puzzle stands in dramatic contrast with a Japan still grappling with the ghosts of the past. The scariest among them is the return of deflationary pressures Tokyo tried to eradicate for 20 years and a dangerous disconnect between a shrinking population and surging government debt.
But the real headwind is the industry Japan pivoted to in recent years: services. In a perfect world, the fast-growing role of the service sector, now roughly 70% of gross domestic product (GDP) and 75% of employment, marks progress. At the moment, though, Prime Minister Yoshihide Suga might be wishing Japan had protected the primacy of exports.
Whether by design or luck, that engine is paying great dividends for South Korea, with a vital assist from the areas that Seoul has been championing. Exports, which account for half of the nation’s GDP, surged 45.6% in May year-on-year amid strong demand for chips. That followed a 41% jump in April.
The Korea Economic Research Institute, or KERI, predicts nearly 4% GDP growth this year. Not the 6%-plus expected in China but leaps and bounds above what Japan might produce in 2021.
KERI is particularly bullish on corporate capital spending – it sees an increase of 9% – on buoyant demand for chips, IT businesses and green sectors. Korea’s auto and shipbuilding industries are playing shock-absorber roles as global commerce resumes.
Private consumption, meantime, is projected to rise 2.3% this year. Not what President Moon Jae-in might’ve hoped for following a 5% decline in the data series in 2020. But in the face of delays in Covid-19 vaccine supplies and crushing household debt, Korean consumption is moving in the right direction much faster than economic mentor Japan.
Monday’s news from Celltrion demonstrates but one way Korea is better positioned than Japan to harness the reopening of economies everywhere.
Research and development investments in the pharmaceuticals space are paying big dividends. Case in point: a new deal with the US for Samsung Biologics Co to manufacture Moderna Inc’s Covid-19 vaccine.
Equally important is how Moon is going all-in on supporting a semiconductor Big Bang. The centerpiece is a new plan by companies to pour at least $450 billion into the industry and a series of tax incentives to prod Korea Inc to raise its innovative game in chipmaking.
Samsung Electronics alone is ponying up $153 billion as Korea’s biggest company finds it can’t rely on rivals like Taiwan Semiconductor Manufacturing Company, or TSMC, to fuel its future growth.
Hong’s Ministry of Economy and Finance team plans to cut from 40% to 30% the tax reduction ratio for semiconductor R&D investments. That aims to incentivize Korea’s biggest business groups including Samsung and SK hynix Inc to spend even more on increasing the sector’s self-sufficiency.
The government is doubling to 6% the ratio for tax deductions on investments in facilities. Moon also has been meeting with executives in pivotal sectors from autos to semiconductors to shipbuilding to increase competitiveness. That is particularly so of the giant family-owned conglomerates that tower over the economy.
“We set up this K-semiconductor strategy in cooperation with the private sector to cope with the rapidly changing situation surrounding semiconductors amid the chip shortage,†says Minister of Trade, Industry and Energy Moon Seung-wook. “We can lead the global supply chain and contribute to the global economy if we can be a stable chip supplier to meet global demand.â€
President Moon’s team is so keen on increasing Korea’s prowess in chipmaking that he’s reportedly considering releasing Samsung’s Jay Y Lee from jail. Lee, Samsung’s de facto CEO, has been in and out of prison since 2017 on bribery charges.
Moon’s administration is under pressure from business leaders to grant Lee a pardon so that he can help lead Samsung, and by extension Korea Inc, to increase its role in the global chip market. Samsung has been upping investments in large-scale integration, or LSI, devices and foundry businesses.
South of Seoul, in the city of Pyeongtaek, Samsung is building a new 2.9 million square-meter factory with a cutting-edge manufacturing unit. There, Samsung will make 14-nanometer DRAM and 5-nanometer logic semiconductors that rely on extreme ultraviolet, or EUV, lithography technology.
“The entire semiconductor industry is facing a watershed moment and now is the time to chart out a plan for long-term strategy and investment,†says Kim Ki-nam, who heads Samsung’s device solutions division.
“For the memory business, where Samsung has maintained its undisputed leadership position, the company will continue to make preemptive investments to lead the industry,†he said.
Now contrast these ambitions with machinations in Tokyo. Since taking office in September 2020, Suga’s main accomplishments are reducing the number of fax machines in government offices, curtailing the use of “hanko†stamps on documents and cutting mobile phone fees to slightly less exorbitant levels.
The vast majority of Suga’s attention is on saving the Tokyo Olympics from cancellation. Yet even if the pandemic doesn’t kill the Games scheduled to start July 23, the contrast between 1964 and today is rather dramatic – and not in a good way.
The 1964 Tokyo Olympics was Japan’s post-war coming out party. It announced Asia’s then-biggest economy’s return to the global fold as a technological leader. Tokyo wowed the globe with neon-lit skylines, futuristic stadiums and monorails, cutting-edge telecommunications and game-changing bullet trains.
Those Olympics were awarded to Tokyo thanks to the lobbying efforts of then-Prime Minister Nobusuke Kishi. Forty-nine years after Tokyo’s big moment, in 2013, Kishi’s grandson Shinzo Abe secured the 2020 Games to recreate that magic.
The coming out party former Prime Minister Abe hoped to stage was Japan’s victory over 20 years of deflation and political drift – and buttress Tokyo’s ambitions to restore its place as Asia’s top financial center.
That included welcoming a record 40 million foreign visitors in 2020, announcing Japan’s arrival as a top tourism destination. Hence, the accelerating shift from exports to services. Thanks to Covid-19, Japan’s entertainment, hospitality, retail centers and tourism meccas like Kyoto and Shibuya are ghost towns.
The glacial pace of Japan’s vaccination efforts ensures that tourism and the services jobs that rely on the sector will remain a bust for the foreseeable future. That leaves Japan with three GDP drivers. One, fiscal pump-priming. Two, additional monetary stimulus. Three, riding the post-Covid export boom.
The first two stabilizers face considerable limits. The $2.2 trillion, or roughly 40% of GDP, Suga’s Liberal Democratic Party tossed at the pandemic in mid-2020 leaves little fiscal space. The Bank of Japan’s balance sheet, meantime, is already bigger than the nation’s entire $5 trillion of annual output.
Exports are indeed getting a boost from China’s “V-shaped†recovery. In May, Japan’s overseas shipments surged 38% in April from a year earlier, the most in more than a decade. Yet gains of that magnitude are unlikely to continue for Japan.
Korea is a different story. May’s export boom was the biggest Seoul recorded in 32 years. Some of the surge reflects a “base effect†given how much exports fell in 2020, says economist Park Sung-woo at DB Financial Investment said. But, Park notes, “robust†demand for Korean products “will remain strong†from China to the US.
Korea offers an enviable mix of industries currently in high demand, leaving it well-positioned for what’s to come. Shipments of chips gained 24.5% in May year-on-year, rising for the 11th month in a row. Car shipments jumped 93.7%, while petrochemical products surged 94.9%.
Looking at the bigger picture, average exports per working day increased 49% in May, well above the 29.5% rise in April, a month that saw exports gain 41.2%. This, in turn, is morphing Korea into a regional growth driver of sorts. Case in point: a 37.9% year-on-year jump in imports.
Not surprisingly, Korea topped the latest Bloomberg Innovation Index, grabbing the crown from Germany, which took first-place honors in 2020. Korea, it’s worth noting, has led the pack based on Bloomberg’s metrics in seven of the last nine years. In 2021, Singapore came in second, followed by Switzerland, Germany and Sweden. Japan didn’t even crack the top-10, coming in 12th.
To Lee Kyung-mook, co-author of The Samsung Way, Seoul’s commitment to R&D is coming full circle. The urgency to continue such investments, Lee says, is “essential†given how Korea is “sandwiched between more developed nations†and China, which is both catching up and lowering costs.
This imagery will sound familiar to students of another Lee – the late Samsung Group chairman Lee Kun-hee. In 2007, Lee warned that Korea must move rapidly up market to rise above being “sandwiched†between wealthy Japan and scrappier China.
It might seem a reach, 14 years on, to say Korea is now eating Japan’s lunch. It’s clear, though, that the ingredients that went into Korea Inc’s 2021 are proving plenty satisfying to investors and multinational CEOs alike.
Winnie Tang at the University of Hong Kong notes that the pivotal role of Pangyo Techno Valley, Korea’s answer to Silicon Valley, in morphing the nation into an “innotech†hub – a combination of innovation and technology development – deserves more attention.
First, she argues, Korea rebounded from the 1997-98 Asian financial crisis faster than its peers. Over the next two decades, Tang argues, GDP per capita doubled, K-Pop and Korea’s innotech “gained global renown,†while sectors from cosmetics to home appliances to mobile phones to food to clothing to automobiles made the nation a top player in global trade.
Now, though, things are going full circle, as innovative energy spreads far and wide afield of Pangyo Techno Valley sitting 21 kilometers from Seoul. Japan, by comparison, spent most of the last eight years obsessing over hosting the Tokyo Olympics, not relocating and reviving the economic mojo on display in 1964.
The worst news for Japan in the World Bank’s latest Ease of Doing Business index is not that Tokyo came in 24 places behind Seoul. It’s that at 29th Japan lags Russia, Kazakhstan, Thailand and Mauritius. In 2013, by the way, Japan was 24th. Since then, Korea has only enhanced its reputation as an economy on the move as Japan walks in place and falls further behind.
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