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(EDITORIAL from Korea Times on Jan. 10)

All News 07:01 January 10, 2019

New framework needed
: Time for structural reform to tackle risk factors

One of the major risk factors facing the Korean economy is its undue reliance on exports. More seriously the economy is too heavily dependent on a small number of family-owned conglomerates, or chaebol.

No company is a better example of this problem than Samsung Electronics which accounts for 14 percent of the country's total exports. In other words, if Samsung enjoys a boom in its exports, the economy gets stronger. If it performs badly, the economy becomes weaker.

As Samsung Electronics announced a worse-than-expected quarterly performance Tuesday, market watchers expressed concerns that the Moo Jae-in administration may not meet its economic growth target of 2.6 percent to 2.7 percent this year.

The company said its operating profit plunged 28.7 percent year-on-year to 10.8 trillion won (US$9.6 billion) in the fourth quarter. It also marked a 38.5 percent dive from a quarter earlier. Its sales also dropped by 9.8 percent from the previous quarter and by 10.5 percent from a year earlier.

More worrisome is that the disappointing figures are the result of a tumble in the company's exports of semiconductors whose prices have been declining amid sluggish global demand. Samsung did not disclose detailed figures about its semiconductor business. But analysts projected the company posted an 8 trillion won operating profit from semiconductor sales in the October-December period, a nosedive from 13.6 trillion won in the previous quarter.

In a nutshell, the tech giant suffered an earnings shock from semiconductors which account for 80 percent of its overall operating profit. This shock is not limited to Samsung. It is reverberating throughout the country's semiconductor industry, which represents well over 20 percent of Korea's total exports. This means that the country has relied too excessively on memory chips for not only exports, but also economic growth.

What matters is that the two years of a so-called semiconductor super-cycle is likely to end sooner rather than later. If this becomes a reality, the Korean economy could suffer a serious setback.

According to the Bank of Korea, the country' semiconductor exports totaled $8.85 billion in November, a 17 percent decrease from the previous month. This apparently caused the current account surplus to plunge to $5.06 billion from October's $9.19 billion.

Some skeptics are worried that the looming end of the semiconductor boom may trigger the collapse of Korea's manufacturing industry. The country is now the world's largest exporter of semiconductors. But it will likely have to relinquish its top position to China which is trying hard to catch up with its rivals. So the semiconductor business may follow in the footsteps of the steel and shipbuilding industries, which have lost their international competitiveness.

Now the question is how to prevent such a catastrophe from taking place. It is really hard to find an easy solution. If there is any, this could be structural reform to overcome the country's inherent weaknesses and to find new growth engines, such as artificial intelligence, robotics, autonomous cars and biotechnology.

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