THE SOURCES OF EAST ASIA´S INDUSTRIAL PROWESS / PROJECT SYNDICATE

The Sources of East Asia’s Industrial Prowess

A corporate structure that plays to the strengths of both family ownership and professional management, together with the vision to seize opportunities as they arise, has enabled firms from a small East Asian country to become major – and reliable – global players. This is good news for the West.

Keun Lee

SEOUL – As the United States works to limit China’s access to advanced technologies like semiconductors, it cannot ignore its own dependence on small Asian economies like South Korea and Taiwan for many of those same technologies. 

The question the US and its allies must ask, then, is how reliable these economies are as producers.

Examining South Korea’s industrial successes can go a long way toward providing an answer. 

It is by now old news that the Korean giant Samsung Electronics has surpassed Japan’s Toshiba and America’s Intel to become the world’s top chip producer (by revenue). 

But South Korean industry’s prowess extends well beyond semiconductors.

For example, Hyundai Motors recently became the world’s third-largest carmaker, after Toyota and Volkswagen – with quality to match. 

Hyundai and its sister company Kia took the top spots in this year’s J.D. Power Vehicle Dependability Study, beating Toyota and General Motors. And in both 2022 and 2023, the World Car Awards named Hyundai’s electric vehicle (EV), the Ioniq, “world car of the year.”

South Korea’s arms industry also is growing fast. 

Taking advantage of the opportunity created by the Ukraine war, firms have increased arms exports to the West – for example, selling K9 self-propelled howitzers and infantry fighting vehicles to Poland. 

Moreover, in February, Korea Aerospace Industries confirmed a deal to sell 18 fighter jets to Malaysia’s government. 

Hanwha Group, which has grown rapidly since acquiring Samsung’s chemicals business in 2014, is now expected to acquire Daewoo Shipbuilding & Marine Engineering – one of the country’s top ship makers, which also produces military vessels and submarines.

South Korean firms are even making headway in biotechnology. 

The barriers to entry for such long-cycle sectors are high, and some South Korean firms tried and failed in the 1990s to break in. 

But the COVID-19 pandemic created a window of opportunity, and South Korean firms did not miss it. 

Since 2020, three biotech companies – Samsung Biologics, Celltrion, and LG Chemical – have been among the top ten companies trading on Seoul’s stock market.

It is worth noting that this list also includes NAVER, a South Korean counterpart to Google, and Kakao, Korea’s Facebook. 

This makes South Korea one of just a few countries – such as China – where homegrown digital platforms outperform those of America’s tech giants.

South Korean firms have thrived by seizing external opportunities as they have arisen. 

Their agility – and their success more broadly – is rooted partly in their structure: the economy is dominated by diversified family-owned conglomerates known as chaebols.

The chaebols’ track record is hardly spotless. 

They were widely criticized for helping to fuel the Asian Financial Crisis of the 1990s by investing excessively with borrowed money. 

But while roughly one-third of the top 30 chaebols went bankrupt during the crisis, the rest were reborn as profitable global players.

Family ownership enables quicker decision-making and longer strategic time horizons than are typical of Western-style hired management, which might be less willing to pursue innovation that could disrupt existing business for the sake of a firm’s long-term success. Stable ownership supports long time horizons for risk-taking.

LG’s rise as a leading electric-battery producer would never have happened were it not for the vision of its founder’s grandson and chairman, Koo Bon-moo. 

Even as losses piled up, Koo remained committed to developing world-leading battery technology over the course of nearly 20 years. 

Thanks to his tenacity, LG Energy Solution is now the top battery-maker in the global market, excluding China.

To be sure, family ownership is also prone to opaque corporate governance and entrenched management. 

But increased public scrutiny in recent years has led to important progress on these fronts. 

Many chaebols now employ a two-pronged leadership structure, with the family owners leading alongside hired professional CEOs with strong incentive packages.

This has proved to be a winning combination. 

It was Samsung founder Lee Byung-chul who, over the objections of his management team, decided that the company would begin producing semiconductors. 

And it was two CEOs, Yun Jong-yong and Kwon Oh-hyun, who, after seven years of losses, made the chip business profitable. 

Yun and Kwon were both given substantial autonomy and financial incentives, while the Lee family and its staff provided constant monitoring and updates on the business.

Chaebols have often succeeded by leapfrogging over incumbents. 

As the digital revolution took hold, for example, South Korean firms were able to pioneer cutting-edge products, while the Japanese incumbents were weighed down by analogue technologies. 

When Samsung and LG launched the world’s first digital television in the American and European markets in the 2000s – the result of a decade-long joint public-private research-and-development effort – Japanese firms were still attempting to market high-definition analogue TVs. 

Sony had long been the leading TV maker, but it could not compete in global markets that had already turned to digital.

In a sense, Hyundai, under the leadership of its founding family’s third generation, has replicated this dynamic in its EV business. 

Toyota was a first-mover in the hybrid-vehicle market. Rather than playing catch-up, Hyundai focused on developing purely electric passenger vehicles, as well as hydrogen-powered trucks and buses. 

As soon as consumer demand for EVs was sufficiently well-established, Hyundai ramped up its EV production.

A corporate structure that plays to the strengths of both family ownership and professional management, together with the vision to seize opportunities as they arise, has enabled firms from a small East Asian country to become major global players. 

Their agility and capacity for innovation, together with their reliability, is good news for the West.

Keun Lee, a former vice chair of the National Economic Advisory Council for the President of South Korea, is Distinguished Professor of Economics at Seoul National University and the author of China’s Technological Leapfrogging and Economic Catch-up: A Schumpeterian Perspective (Oxford University Press, 2022).