PREVIEW-Weak exports show hollowing out of Korea Inc

Tue Apr 30, 2013 9:17am BST

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* April exports seen up but largely on calendar effect

* South Korean exports lagging behind global growth

* More structural weakness than yen's slide to blame

* Wake-up call for new president's push for rebalancing

By Choonsik Yoo

SEOUL, April 30 (Reuters) - Korea Inc., like Japan 20 years ago, is hollowing out. Exporters like Samsung Electronics are shifting more and more production offshore, changing the shape of Korea's economy and the role it plays globally.

The trend means concerns about how the slump in the yen might impact Korea may be overdone and the exchange rate, which is making Japanese exports cheaper, could instead support the aims of the new president in Seoul to shift policy away from favouring exporters more towards domestic service industries.

"The slowing growth in exports appears inevitable and makes it all the more important for the country to strengthen the service sector, which already has been and will be the main provider of jobs going forward," said Jun Min-kyoo, economist at Korea Investment & Securities.

"As we have seen in recent years, high economic growth led by star-performing exporters no longer makes due contribution to boosting domestic employment and household income," Jun added.

Korean exports, still seen as the bedrock for the economy, have underperformed global trends for the past two years. Data for April, due on Wednesday, is expected to show exporters still struggling for significant growth.

The median forecast in a Reuters survey of 17 analysts suggested exports rose 2.4 percent in April from a year earlier, a far cry from the regular double-digit growth seen in past years. Reuters calculations show calendar-adjusted exports probably fell about 6 percent in April.

Underlining the sluggish trend, figures on Tuesday said March industrial output defied expectations for a rise to fall for the third month running.

SHIFT

Korea still relies heavily on trade. Exports amounted to 56 percent of 2011 GDP, far above Japan's 15 percent or an average of 29 percent for the 34-countries in the Organisation for Economic Co-operation and Development (OECD), OECD data shows.

With export products ranging from mobile telephones, to autos, to flat screens and various electronics, Korea has long been a bellwether of global demand. But that role is on the wane as companies shift more of their core overseas.

Central bank data shows South Korea companies have quadrupled overseas direct investment in the six years since 2006 to nearly $200 billion last year, partly to shift production to lower-cost bases or closer to consumer markets.

More than 80 percent of mobile phones sold globally by South Korean vendors, including Samsung, were made outside the country last year compared with 58 percent in 2008, the National IT Industry Promotion Agency said.

Automaker Hyundai Motor more than doubled its global sales in eight years through 2012, but last year it produced just 43 percent of its total output within South Korea, down from almost half in 2004, the company's data shows.

The 1.4 percent fall in South Korean exports last year was already worse than a 0.5 percent drop in world exports, the second consecutive year that it underperformed the rest of the world, the World Trade Organization's data shows.

The WTO's latest figures, covering January and February this year, show that South Korea is still lagging the global trend.

Korea's changing exports landscape means it stands to lose less economically than many may think from a weak yen, which has fallen 20 percent against the dollar in the past seven months while the won has risen 1 percent.

A firmer won against the yen puts Korea's exporters under pressure against their Japanese rivals but can help consumers by lowering costs for imports from its neighbour, which include industrial machinery, electronic components and consumer appliances.

Still, the domestic market is not strong enough yet to carry the economy, analysts say. Domestic service sector output grew between 2008-2012 at half the rate of the manufacturing sector, central bank figures show. Productivity rose at just a fifth of the pace of manufacturing over the same period, government figures show.

"Unlike other economies in Asia at the moment, Korea does not have vibrant-enough local demand to act as a buffer against headwinds in exports markets," said Frederic Neumann, co-head of Asian Economic Research at HSBC in Hong Kong.

"The service sector, for example, lags in productivity growth, and spurring innovation and research would not only help Korean goods keep an edge in international markets but also strengthen domestic demand," he added.

POLICY SHIFT

Manufacturing no longer produces as many jobs as in the past, reflecting both the shift overseas and automation, which helps explain the emphasis President Park Geun-hye is placing on the domestic market following her Dec. 19 election victory.

"We have to pursue a balanced economy between domestic demand and exports, turning away from one dependent only on big companies and exports," she said during the campaign.

Park has not made any explicit comment favouring one sector over the other since taking office in late February for a single, five-year term, but she said as recently as Monday that her policy was firmly focused on creating more, decent jobs.

Samsung, Hyundai and other family-run conglomerates, known as chaebol, may have led the dramatic rise of the war-torn country into a major global manufacturer in just over a generation. But signs are growing that this structure is changing and with it the economy.

"In the past, higher exports resulted in more investment and employment, but the story has changed and even a major motivation for investment these days is to boost automation, which eventually means less employment," said Jun at Korea Investment. (Editing by Neil Fullick)

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