Back to Contents of Issue: December 2000
by Jonathan Hopfner |
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WITH AN IMAGE PROBLEM. Wracked by invasions, divided by foreign strategic interests, and still gripped by a Cold War that ended long ago everywhere else, Korea has had a tough time shedding its image as a perennial Asian underdog. But while it's often languished in the shadows of its more powerful neighbors, the country has also demonstrated an uncanny ability to quickly transform itself. From Chinese protectorate and Japanese colony to independent nation. From financial basket case to industrial powerhouse. From a manufacturing to a knowledge-based economy. This chameleon-like ability is proving useful in a world marketplace that rewards fast movers across the board. Korea's business culture, once known for its overly hierarchical nature and resistance to change -- much like Japan's, which it zealously imitated over the past few decades -- has recently demonstrated a much greater willingness to toss aside old practices. While proper perspective should be maintained -- South Korea won't displace Japan as Asia's dominant economic powerhouse anytime soon -- there's little doubt that, thanks to a potent combination of solid infrastructure, daring government initiatives, and good old-fashioned ingenuity, Seoul has outpaced Tokyo both in terms of venture industry growth and the Internet's penetration into everyday lives. From choosy shoppers and game-crazed teenagers to daredevil investors, nearly everyone in Korea has taken to the Web. According to the nation's Ministry of Information and Communication, there were 15.34 million Internet users in South Korea and 28.3 million in Japan as of July, representing approximately one-third and one-fifth of the population respectively. More important, 2.2 million South Koreans surf the Net with high-speed connections, compared to only 330,000 of their Japanese counterparts. The Korea Securities Dealers Association revealed in June that online trading in Korea accounted for a whopping 56.9 percent of all share transactions, well above the negligible 5 percent recorded in Japan. And Korea's venture industry, despite investor jitters and a vertigo-inducing stock market free fall, is, by all accounts, booming. Between January and May this year, according to the Ministry of Finance and Economy, 2,176 new startups were registered with the government -- 80 percent of the number registered for the entire year in 1999 -- and sales for the top 100 small and medium-sized IT firms topped $2.1 billion, a 62 percent increase from the corresponding period last year. Another sign of the extent of Korea's obsession with new technology is the depth of cellphone penetration in the country. Although Japan is the clear leader in wireless technology, Korea's mobile phone penetration rate remains consistently higher than Japan's. As of August, according to the Ministry of Information and Communication, mobile phone subscribers represented 53 percent of the population, outnumbering regular telephone users. In Japan, the Telecommunications Carriers Association counted about 55 million cellphone subscribers for the same period, or just over 43 percent of the population. Analysts and the Koreans themselves are advancing many theories as to why the country once known as the "Hermit Kingdom," after following the Japanese economic model for decades, seems to be surpassing its tech-savvy former colonial master in terms of the New Economy. Some attribute the acceleration to the more peculiar traits of the Korean character. Among them is ppali ppali syndrome. It translates as "hurrying syndrome." The Internet quickened the pace of communication and commerce considerably, the argument goes, but Korea was already so infatuated with speed that its residents had a pre-existing phrase for the national obsession. "In Korea, everything is done as rapidly as possible. It's part of the culture," says Choi Chang-sup, a professor of mass communications at Seoul's Sogang University. "When Koreans do adopt something new, they are also more likely to focus on it obsessively and go to extremes. This is largely responsible for the rapid growth of the Internet here." The fact that the country has the highest online trading rate in the world, as well as legions of young people fleeing secure jobs to launch startups, seems to indicate an inherent tendency among Koreans to take risks. Though gambling is technically illegal in Korea, lotteries and underground card games flourish, and day trading has become a new means for Koreans to indulge their love for games of chance. "Online trading is definitely a form of gambling," says Song Lee, an analyst at the Korea Securities Dealers' Association. "Individual Korean investors enjoy making speculative, short-term, and extremely risky transactions." In the fast-paced, risk-filled world of tech startups, their willingness to take chances has given the Koreans an apparent edge over their more stoic Japanese counterparts. "I agree with this theory," says Yoko Sakanoue, vice president of marketing for us-style.com, a US-based Japanese-language information site. "The Japanese are simply a lot more careful than the Koreans are."
After decades of military dictatorships and high-profile corruption cases, most South Koreans are reluctant to credit the government with anything, but even the most jaded citizens have been forced to admit that it has played a primary role in propelling the country's leap into the information age. Still reeling from the effects of the 1997 foreign currency crisis, which culminated with Korea being placed under a $60 billion IMF bailout program, the Kim Dae-jung administration has over the past two years initiated a series of reforms that have shaken up the country's formerly all-powerful conglomerates and paved the way for small and medium-sized firms to lead its economic growth. Most significant were its efforts to set low tariffs for Internet access, introduce competition into the local telecommunications market, and privatize state-run Korea Telecom, which was first listed on the Korea Stock Exchange in December 1998. Home broadband connections can now easily be had for as little as $40 per month -- cheap compared to Japan, where 20 hours online with a pokey dial-up provider can still set you back $60. These rock-bottom access rates mean kids can wage two hours worth of online gaming battles in one of Seoul's PC rooms for the price of a small cup of coffee in Tokyo. In 1998, the Ministry of Information and Communications unveiled the "Cyber Korea 21" project, a four-year policy blueprint designed to make Korea one of the most advanced information societies in the world. It wouldn't be until July 2000 that the Japanese government initiated its similar "e-Japan" program, which aims to help the country overtake the US in IT in five years. But the program has been alternatively ridiculed and dismissed by observers. Many of Japan's venture industry insiders note that NTT's market dominance and the government's general apathy regarding the IT sector are the main obstacles to Internet growth. "The Korean government is supportive of e-business, unlike the Japanese government," says Grace Moon, COO and co-founder of TradeKu, a B2B marketplace that expedites transactions between Japanese and foreign e-business firms. Japan's lower Internet usage and penetration, she adds, are the result of "lack of competition and the slowness of the Japanese government." The Korean authorities seemed determined not to make this mistake. Cyber Korea 21 is a sprawling, ambitious effort that aims to both nurture the nation's venture sector and turn traditionally technology-shy segments of society -- the elderly, the working class, and the underprivileged -- on to the wonders of the digital age. The policy program's first target is Korean children, who by 2001 will take computer classes from 1st grade in LAN-connected labs at 10,000 schools nationwide. The government also has their mothers in mind, having established institutes to train some 2 million housewives in the use of the Internet. "It's nice for us to know we're not being left behind," says 30-year-old Mun Yu-kyoung, a Seoul homemaker who took a government-sponsored computer class with two of her friends. "Learning how to use the Internet was an empowering feeling. I feel more young and modern and I can finally understand most of what my son is talking about." Riding on the success of the housewives' classes -- a Ministry of Information and Communications poll showed that 65.5 percent of the women who completed the course went on to use the Internet regularly at home -- programs have been put in place that will bring some 20,000 military personnel, 150,000 farmers, and 20,000 young farmers and fishermen online by 2003. Also in the works is the "Silvernet Campaign," a bid to decipher the mysteries of computing for citizens 55 and older. "We have the time and money to educate them, and we want to reach these people," says Kim Byung-kyu of the Korea Network Information Center, a research body that works closely with the government to formulate social Internet policies. "Everyone is now aware that the Internet is an integral part of life, and that education in this area is crucial." While everyday Koreans appear to be blindly caught up in the general enthusiasm for all things technological, there are growing concerns about the effects this wealth of information and development are having on the country's time-honored Confucian social mores. The airwaves abound with tales of children surfing porn sites, wives divorcing husbands addicted to online trading, and university students using the Web to promote radical left-wing agendas. A local daily recently ran a feature that detailed the lurid nightlife activities enjoyed by free-wheeling young venture CEOs with bucketfuls of cash. The more reactionary elements of society are quick to point out the possible ill effects of the sudden, rapid influx of Western culture and language. "I don't believe that the Korean identity will be swept away completely," says Professor Choi of Sogang University. "However, there's no doubt that the Internet poses a significant threat to Korean values and culture." The elderly and the conservative may need a bit of prodding to enter the cyber-age, but Korea's younger generation are embracing it with a frenzy all their own. For teens, Starcraft tournaments and online chat rooms are replacing department stores and coffee shops as the main venues for social interaction, thanks largely to the ubiquitous presence of "PC Bang," Korea's version of the cybercafe. There are at least 15,000 spread throughout the country, ranging from grotty, smoke-filled caverns in the basements of old buildings to ultra-upmarket plazas like the new Mega Webstation in Seoul's COEX center, which boasts 400 computers, a TV studio, and a real-time cyber-stock trading center. With high-speed connections for rent at just $1-2 per hour, prices that would be unthinkable in Japan, these venues attract a resident crowd of red-eyed online gaming enthusiasts and young online investors who sometimes don't leave their seats for days. Such strong addiction can be found only in pachinko parlors in Japan -- and those are about as high-tech as pinball arcades. "I spend at least two hours a day in a PC bang," says one 11-year-old patron, Shin Yun-chol. "I've been playing Starcraft since I was 8. Me and my friends go to play games or to get some information on new movies. I'm often late for school or miss classes so my teachers are upset. Of course, I can't tell my parents how much time I spend here." "My mom says I'm not allowed to go to PC bangs more than once a week," adds Shin's friend Jun Jin-woo, 12. "But I have to come every day. I can't help it." Little boys like these may well grow up to be Moon Sang-hyuns. Two years ago, when the 28-year-old completed a master's degree in computer science, Sang-hyun had his pick of jobs. South Korean corporations were once again beginning to recruit new staff as the country slowly emerged from the depths of the 1997 IMF crisis, and Moon had graduated near the top of his class from an overseas university. Only a few years earlier, his choice would have been obvious -- he would have joined the legions of young men and women competing for an entry-level position at one of Korea's massive conglomerates, or "chaebol." To the shock of his family and friends, however, he signed on with Korea Internet Technologies, a virtually unknown Web design company, forgoing the housing packages and lifetime security offered by the major firms in favor of the quick cash, stock options, and fast-paced lifestyle that characterize venture businesses.
By all accounts, Sang-hyun is far from alone in his view. The infatuation with knowledge-based business is apparently contagious, as the rush from Korea's corporate behemoths to Internet startups has all the characteristics of a full-scale exodus. IT giants like Hyundai Information and Technology and Samsung Digital Systems saw nearly 10 percent of their staff resign en masse last year when the tech-heavy Kosdaq market surged. The trend has slowed somewhat with the market's ensuing decline, but shows little sign of abating. An April survey of 442 employees at SK Construction showed that 52 percent would leave their current jobs if offered the chance to work at a venture firm. Money was not the major drawcard -- 64 percent were attracted to the venture industry simply because of the challenges they felt it would offer. Though venture fever reached its peak last year, young Korean university students started striking out on their own as early as the 1980s by establishing tech startups like Medison and Bit Computer, now leaders in the domestic medical service and information fields. By the mid-1990s, the government had realized that it would be small and medium-sized businesses, not Korea's bloated conglomerates, that would lead the country's growth, and it began implementing policies accordingly. In 1996, it established the Kosdaq, a market for SMEs and venture firms, to encourage investment in cash-starved high tech firms. It wouldn't be until fall 1999 that the like-minded Mothers market was established in Japan. Interestingly, though, the formation of Mothers by the Tokyo Stock Exchange was largely a defensive reaction to the planned Nasdaq Japan exchange, the key driver of which was Softbank's gambling-man president Masayoshi Son -- a Japan citizen of Korean descent. By the end of last year, the Korean government had poured 350 million won into venture capital and venture investment capital associations, a figure that should pass 1 trillion won by year's end. Meanwhile, the Japanese government continues to pour money into concrete pourers, supporting the politically well- connected construction industry despite receiving almost universal criticism for its wasteful, outdated ways. Struggling startups in South Korea are also assisted through indirect perks such as tax breaks, free marketing advice, and research assistance. "Small companies have an unprecedented opportunity here," says Charm Lee, a German expatriate who has lived in Korea for decades as a teacher and TV personality and is now CEO of Charmsmart, an Internet-based marketing firm. "If they have wisdom and a little bit of luck, they can work with government research institutes, which basically supply them with skilled manpower and all the resources of a large corporation." In this cozy environment, venture firms in South Korea mushroomed, and the success stories began to take shape. These include Daum Communications, Korea's first domestic Internet software and service company, which in its five-year history has grown to become the country's leading portal site and largest free email provider. According to US research firm Alexa, it now ranks third worldwide behind MSN and Yahoo in terms of Web traffic. Equally impressive is the performance of network service company Dacom, which while fighting a losing battle with Korea Telecom for dominance of the IDD (international direct dial) market scored a major coup with its subsidiary Chollian, the most popular dial-up Internet service and content provider in the nation. Perhaps the best known of Korea's IT powerhouses abroad is Serome Technology, which introduced the free PC-to-phone service Dialpad to the United States. Other now major players include Haansoft, which runs the 6.2-million strong Skylove and Netian communities; and Thrunet, Korea's first and still-dominant broadband supplier. As with all other things in Korea, the dot-com industry is concentrated around Seoul. Some 42 percent of all the venture firms in the country are based in the capital area. Teheran Road, a strip in an affluent southern part of the city, was officially renamed "Seoul Venture Valley" early this year in tribute to the businesses that have revitalized it. The names on the office buildings in the area are a virtual who's who of domestic and foreign technology -- Microsoft, NEC, Cisco Systems, Korea Telecom Freetel, and Dacom are just a few of the firms who have settled in. Sandwiched between two major subway stations, a stone's throw from major luxury hotels and the massive COEX center and with plenty of financing sources nearby, most venture firms still view this as the paramount place for startups to do business. This is likely to change in 2008, when the massive "Media Valley" project is wrapped up. Aiming to create a "Silicon Valley of the Far East" in the Songdo area of the port city of Inchon, the government has reclaimed the land necessary for the venture and is currently working on establishing the infrastructure for a completely self-sufficient IT city that will house high-tech industries, research institutes, housing complexes and green space. Nearly all of Korea's major companies have invested heavily in the project, as have foreign corporations like Cisco Systems and Intel. Tehran Road and Seoul itself may lose some of their luster if the reality of Media Valley measures up to the vision. The government's eagerness to make Korea a world-class IT player and the promise shown by Korean venture firms initially lured investors in droves. In 1999, foreign holdings in the Kosdaq market increased sixfold from the previous year to 166.5 million shares, or 4.1 percent of the total. This February, buoyed by heavy buying from foreign investors, the volatile Kosdaq climbed to a peak of just under 300 points, and there were a total of 159 venture funds worth a total of 1.1 trillion won in operation. Even Korea's conservative chaebols got in on the action, with Samsung, LG and SK injecting a combined total of 880 billion won into venture businesses in the first half of the year and becoming the industry's biggest enablers in the process. Despite the size of their contributions, the employees of many smaller venture firms view the chaebol with suspicion, and suspect that they're trying to sneak their way into a game they can't play. "If they have good judgment, they won't take over any companies," says Suji Kim of Delirium, a New York-based Web solutions firm that recently opened a Seoul office. "They should know their limits. They'll always be one step behind smaller, more adventurous firms."
Reacting quickly to the downturn, the government recently unveiled a series of policies aimed at energizing Seoul's flagging bourse, attracting further foreign investment and capitalizing on the country's strong technological base. Believing that the bulkier Kosdaq firms are stealing the spotlight from their smaller counterparts, the administration will attempt to level the playing field by simplifying administrative procedures and relaxing registration conditions for SMEs. "We will also strengthen the supervision of unfair trade and encourage companies with growth potential to enter the market, while curbing unnecessary initial public offerings to maintain a balance of supply and demand," says Byung Jong-rip of the Ministry of Finance and Economy's Small and Medium Business Policy Team. "We view this only as a cooling-down period for a market that grew very rapidly in a short period of time." Most professionals involved in the venture industry share Byung's opinions. "The investors will come back and we're confident the market will rebound," says Song Lee, an analyst at the Korea Securities' Dealers Association. "Fundamentally, there's a higher IT adaptation level here than there is in other countries, and all major growth will still come from the IT industry." With the venture industry scaling such dizzying heights over the last two years, the current slump is even being viewed as something positive that Korea's best IT firms will learn from. "A year ago, venture companies were arrogant," says Charmsmart's Lee. "They demanded ridiculous premiums from investors. Now they need money, and they're going to have to work harder to court foreign investors and find complementary partnerships." For Korea's CEOs, who tend to have less experience abroad than their counterparts in other Asian countries, this could be a difficult task. Keith Rabin, the president of New York-based research and consulting firm KWR International, recently ran a US road show called "Portfolio Korea 2000" for the Korea Securities Dealers Association. Though these kinds of events help bring further attention to Korea's venture market, he notes much more needs to be done. "Korean firms are very active in their own market," Rabin says, "but if they truly want to become global, competitive and sustainable, they must be more focused and internationally conscious. Some firms are listed on the Nasdaq, but they're not doing enough to establish a presence or encouraging investor relations." With Tokyo a short two-hour plane ride from Seoul, it's not surprising that many Korean firms are looking toward Japan as both a source of investment and a major market. Cross-pollination between the new economies of the two countries has continued to accelerate, and culminated last month in the conclusion of a joint initiative on IT cooperation by President Kim Dae-jung and Japanese Prime Minister Yoshiro Mori. The two leaders agreed to establish an ecommerce policy committee and launch a "integrated next-generation electronic commerce environment project," a $2 million venture that aims to dismantle the major obstacles to e-trade in Asia. They also pledged to discuss Kim's proposal for a Trans-Eurasia information network, which would connect research institutes from Japan to Europe via high-speed fiber-optic cables. Private exchanges between the two countries are also bustling. In June, MUX research institute, a Japanese fund management company, agreed to establish a $1.79 billion venture fund to be jointly controlled with the Korea Consultancy Association. Slated for 2005, the fund will be one of the largest-ever Japanese investments in Korea. Many of Korea's big-name Internet firms, including Daum and Dacom, operate Japanese subsidiaries. Despite this, the Japanese public remains largely unaware of the IT revolution going on next door. "The Japanese media does not really track Korean IT development, although there's always something about US ecommerce," says Moon of TradeKu. "So there's not really a good grasp of what's going on in Korean e-business." If Japan is to maintain its status as a technological leader, it must monitor Korea's growth more closely. The rapid ascendance of Korea's IT startups and the growing recognition of Korea as an ecommerce leader in the international community should convince the Japanese government to speed up negotiations on lowering Internet access rates and formulate policy that helps young, creative minds establish startups, receive funding, and take their chances. Unfortunately, there is still little movement in this area. (Though see "Pork-Barrel Infotech?") Naota Hamaguchi, CEO of incubator papabean Japan says, "The Japanese government is trying to support the venture industry, but isn't serious enough. There's a slow, complicated system in place, so new policies take time to implement. This has made some people very frustrated." Korea is already leagues ahead of its neighbor in this department, and though many of the venture firms currently operating in the country will fail, there is bound to be a certain number of spectacular successes. Japan has the infrastructure, wealth, and know-how to take its "rightful" place as Asia's New Economy leader, but until it removes the barriers that exist to domestic venture development, particularly the high costs of Internet use and setting up and maintaining businesses, it will be forced to watch longtime competitor Korea race ahead -- and maybe, if things continue apace, to follow where once it led.
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