South Korea to build back smarter after Covid

SEOUL – Any first-time traveler landing in South Korea cannot fail to be impressed, after disembarking at Incheon International Airport, by the excellence of public infrastructure.

The traveler will see fine highways, bridges and buildings flashing past the windows of the express train that whisks him or her into Seoul.

Once at Seoul Station, they should have few problems navigating the capital’s economical, extensive, speedy and safe – albeit often crowded – subway network. On it, they can pass time by utilizing seamless, broadband connections.

Compared to much of the region, a lot of Europe and most of the US, it is superb.

Granted, pork barrels exist. Do remote rural counties where traffic jams are unknown really require multi-lane expressways? Does central Seoul’s iconic Gwanghwamun intersection need yet another remodeling?

But generally, South Korea’s backbone is sound, enabling efficient production, distribution and consumption. Two key reasons are behind its excellence.

The first is the latecomer’s advantage. The country was a developing, agricultural economy as recently as the 1960s, so is unburdened with creaky, old-fashioned hardware.

The second is a record of well-executed industrial and infrastructure policies. In the 1960s and 1970s, Seoul guided investments into heavy industry and national infrastructure. In the early 1990s, it repeated that success, entrenching a world-class mobile telecommunications and internet backbone.

However, the 1997-1998 Asian financial crisis pinpointed problems in the model: too-cozy ties between business, finance and government and rampant over-investment. A smart-but-harsh reform program rebooted the economy and Korea Inc bounced back stronger than ever.

In 2020, South Korea endured its first recession since 1998, but still beat all other advanced nations, bar China and Norway, in GDP growth terms.

Now, South Korea is poised for another surge. As the world eyes an exit from Covid-19, Seoul is seeking to put high-tech wheels under its post-pandemic recovery plan.

Smart build back

Announced last July, the Korean New Deal, channels US President Franklin Roosevelt’s depression-recovery programs of the 1930s. Seoul plans to invest 160 trillion won (US$141 billion) through 2025, and hopes to create more than 1.9 million new jobs.

It is broken down into two sub-pillars: the Digital New Deal and the Green New Deal.

Six rolling IR, or investor relations, sessions, hosted by related ministries, have been held since last November to lure investment into public-private partnerships. These sessions show the sectors the government is prioritizing: data, artificial intelligence (AI) and 5G; future vehicles and renewable energy; eco-friendly vehicles and green industry; smart farms; eco-friendly ships; and regionally balanced development.

The seventh session, held in the headquarters of state-run policy bank Korea Development Bank, in Yeouido, Seoul’s finance hub, took place on March 4. It was jointly hosted by the Ministry of Land, Infrastructure and Transportation, or MOLIT, and the Ministry of Finance and Economy. 

“A contactless economy has been formed, and the fusion and digital transformation of different industries has been accelerated,” said KDB Vice President Seong Ju-yeong. “The key task of the Korean New Deal – social overhead capital digitization – is very timely.”

The seminar, which ran online and offline and was attended by financiers as well as officials, aimed to map out projects and “guide active investment by the private sector.”

Jung Jin-hoon, MOLIT’s director for Future Strategy and Job Creation, told Asia Times that his ministry will execute $2.4 billion worth of funds this year alone, but aims to raise three to four times that amount from the private sector. Referring to the New Deal as a “just transition,” Jung reckoned it would create “abundant, good-quality jobs.”

The subject of the session was twofold: smart cities and smart logistics facilities.

Smart cities

With about 55% of the global population now urbanized, MOLIT Vice Minister Yoon Seong-won noted that the global smart city market is seeing more than 14% annual growth and will be worth $820 billion by 2025.

And with more than 80% of South Korean urban dwellers, “this will be a new growth engine for our economy, backed by our abilities as a global technology powerhouse,” he said. 

Park Song-yong, who heads up MOLIT’s smart city project, noted that in Europe, smart cities tend to focus on climate change and recycling, while the US model is based more on ICT usage. In South Korea, he said, the aim is “to make a new industry to solve urban problems.”

South Korean smart cities benchmark the European “Lighthouse” model “… in which a focal site demonstrates new projects, then [other] cities adopt these programs,” Park said. However, South Korea aims not only at upgrading extant cities, but also developing smart cities “from scratch,” he said.

South Korea, which defines smart cities as those converging next-generation IT and construction technologies to create sustainable urban spaces, boasts considerable expertise in the sector. It is funding projects in Kuwait and Myanmar using the overseas development aid budget, briefers said.

There are three focal sites nationwide.

One is Songdo City, which rose on reclaimed land adjacent to Incheon, the port and airport city serving Seoul, from 1996. Privately developed by US real-estate firm Gale and local construction company POSCO, this “ubiquitous city” offers high-tech, green-friendly residential spaces, as well as flagship public architecture, international education facilities, and has become a home to South Korea’s biotech sector.

Another is the government-built Sejong City, an administrative city that rose 120 kilometers south of Seoul from 2012 onward in response to demands for decentralization. Built around a giant complex of ministries and government agencies, it also provides residential facilities for its inhabitants and was designated a smart city in 2018.

With a population of more than 300,000, it boasts cutting-edge cyber-education and recycling technologies and has become something of a regulatory sandbox.

A third site is now rising on the outskirts of Busan, South Korea’s second city in the country’s southeast, the Eco Delta Smart City. Developed between 2019 and 2023, it is small – with a population of just over 8,000 – but will function as a national pilot project, that according to briefers, and will converge 10 sectors of innovation.

Key goals include smart water management enabling a 100% recycling rate, while all housing will be built on the “zero-energy” concept.

Sejong will meet governmental requirements for “smart city” status by 2021, and ECDS by 2025, briefers noted.

What will be South Korea’s killer app in the sector?

A key local tool for beating Covid-19 was IT integration. A fusion of CCTV, credit card, mobile telecommunications, public transport and border control databases created a system that massively eased contact tracing. A similar fusion of Internet of Things (IOT) technology will form the brain of smart cities.

“We can put CCTV data, card data, mobility data, sensor data and so on into one integrated platform that collates all this data,” Park said. “We take care of the security of this platform, and can use it for the benefit of private citizens.”

The platform, enabling both management and analytics, will be ready for operation by 2023, Park said.

Smart logistics

One of the key winners of the Covid era in South Korea, as elsewhere, was e-commerce. Underwritten by a digitally highly literate population that was required to spend time and money from home, the sector has seen demand soar. The volume of delivery services is increasing 20% annually, MOLIT briefers said.

Firms in the space, such as Coupang and Market Kurly, have won, or are closing in on, “unicorn” status.

The problem is hardware. While South Korea’s seaports and airports are world-class, its intra-country logistics hubs are primitive. This has put enormous stress on delivery drivers, generating socio-political concerns over their intense working conditions.

“E-commerce is booming and they need more space for logistics,” a private equity fund manager at the seminar told Asia Times. “Supply does not match demand.”

One policy response, briefers said, is to incentivize firms to upgrade their distribution centers. Their automation and labor-dependency ratios will be graded, and the grades will affect companies’ ability to borrow from financial institutions.

But the session focused more on technology uptake. AI, robots and location-based information optimize processes – storage, operation, packaging and delivery, briefers stated. Benchmarks include Amazon, which through the use of AI logistics centers, has managed to chop its budget by one-third.

In South Korea, government-backed technologies are ready to enter the space.

“Since 2014, we have been proposing highly automated equipment and foldable containers,” said Son Bong-soo, director of the Korea Agency for Infrastructure Technology Advancement. Referring to fusion logistics and high-value equipment for the industry, he added: “Now, high technologies are in our hands.”

A pilot or demonstration complex for digital logistics will be created which will enable tests of drones and robots that have not yet been commercialized, briefers stated. Moreover, three sharing-type logistical complexes on the outskirts of Seoul will be supported by government, and seven will be established nationwide by 2023.

Smart investments

Given Seoul’s credibility and infrastructure build, the public-private business model has appeal. The PE manager was upbeat for two reasons. First, that the government is reducing investment risk by kick-starting funds and projects with public money, and second, by the possibilities intrinsic in logistics.

“They are trying to raise funds by government money, so that is definitely an interesting point for PE – that is the most important thing for us and other investors,” he told Asia Times after the seminar. “And the logistics sector is promising, so if funded by the government, the investor has more opportunity and less risk.”

A further inventive could be the shortage of investment destinations worldwide. Capital markets, buoyed by generous central bank policies, have defied the gravity of real-economy contractions, suggesting risky bubbles and a reckoning ahead. Moreover, bond yields are low.

In this situation, infrastructure looks like a safe bet.

“I am sure investment managers in PE and investment generally are looking for green, new-energy projects to fund, and if the Korean government is going to partner, that is a considerable relief,” said Hank Morris, a long-term Seoul expatriate with a background in finance.

“Infrastructure has the potential to create value and to deliver secure returns on investment: it is not a chimera,” Morris told Asia Times. “If done properly, to spec, across parameters, those projects should deliver the anticipated ROI.”

Still, MOLIT’s Jung conceded that the challenges are steep.

With Seoul planning to be carbon neutral by 2050, a detailed government plan is expected by the end of 2021, he said, but all future projects must aim at zero-energy and green-remodeling.

“It’s going to be very hard, as we have no abundant solar or wind energy,” he said. “We have to break tradition.”