South Korea’s equity markets hit new all-time highs on Monday. Samsung offers a clear example of how technology companies need to diversify to stay ahead. It also provides an insight into one of the enduring strengths of the South Korean economy. The OECD ranking for R&D put South Korea second in 2015 (4.23% of GDP), just behind Israel (4.25%). Real exports have recovered strongly since late last year, and hit a new high in March. This has been led by a rise in semiconductors. Indeed, industrial production of semiconductors was up 20.5% y/y in the three months to March.
The political controversies of recent months have ostensibly cast a cloud over South Korea. Reform of the chaebols is viewed as imperative for growth. The involvement of Samsung’s vice president in Choi-gate was an opportunity for the company’s detractors to push their case for higher divestments. Management rightfully resisted: Samsung has managed to stay ahead because it has been prepared to invest heavily in R&D. Nonetheless, the race is heating up: China is closing the gap quickly, with R&D rising rapidly across key sectors.
Samsung is using its scale to good effect, investing heavily. Many larger tech companies rely on size to generate vast amounts of data, which is then collected to refine existing business models. South Korea is perhaps better placed than most countries to compete with the emergence of China as a major innovator in technology.
Summary
- The benefits of high R&D spending
- Samsung gains critical edge in semiconductors, OLED screens
- China is the biggest competitive threat to South Korea, not Japan or US
