Brief

Listen to Real Actors

This is the third in a series of articles summarizing a report entitled "Korea: Knowledge Exporting Nation."

By Bain & Company

Published on August 15, 2001
min read


This is the third in a series of articles summarizing a report entitled "Korea: Knowledge Exporting Nation" prepared by Bain & Company under contract with the Ministry of Commerce, Industry and Energy. To identify relevant industrial policies, policy makers should first listen and learn from the real actors, the businesses. In this spirit, four selected manufacturing and service industries such as automotive, tourism, IT services and biotechnology have been viewed in depth. Korea enjoys distinctive assets in each of these industries and can become a major knowledge exporter if it successfully addresses a set of common challenges. Automotive In the auto industry, for example, there is much opportunity outside of manufacturing the car alone. When a typical customer buys a car, the total ownership cost of that car is much greater than the purchased cost alone. Other opportunities like accessories, financing, insurance and maintenance represent far greater revenue opportunities than the actual price of the car. Currently, most of these needs are met through other business entities through different channels and business means. The challenge for Korean industries is to take advantage of these opportunities to expand their profit pool. As many of us know today, selling a base model car is just not enough to propel this industry into the 21st century. Furthermore, in the automotive industry, knowledge drives higher profitability. This can be illustrated by looking at the profitability of different types of vehicles. A base model automobile can yield up to a 10 percent operating margin. In fact, many of the cars being sold under $10,000 are commanding much lower margins than that. The real profit in selling automobiles comes from the option pricing and packaging such as air conditioners and CD players, which command higher margins. The highest profit generators are in other high value added options like navigation systems, which can command even higher margins, up to 50 percent. "Telematics" is a good example of a high value added option that can drive higher profitability. Telematics is an in-dash system, which links the driver to the rest of the world through Internet, and wireless communication. This is an adjacent industry, which combines knowledge based manufacturing industries and knowledge based service industries to widen the profit pool of the automotive industry. Information Technology Services In Information Technology (IT) services, there exists a huge opportunity for export. Looking at global trade of IT services, many countries are far ahead of Korea in exporting their IT services. In fact, Korea ranks close to last among OECD countries in its exports. Since Korea is also a large market for IT services, this means that Korea is probably the world's biggest importer of IT services. Even Korea's biggest IT services firm lags the world leaders in its exports. "LG-EDS," an information technology unit of the LG Group, has been exporting since the 80's and currently has a large portion of its business from overseas. It has been a much larger growth driver for its business than its domestic business. "Samsung SDS," a system integration arm of the Samsung Group, while having just started to export last year, has large market potential. The key success factors in this industry are human assets, proven solutions and globalization. Korea has real assets for each of these success factors. Korea, aside from Japan, is the biggest IT market in Asia and is one of the leading countries in terms of Internet technologies. Tourism The tourism industry also displays a great potential for Korea. Tourism is not regularly thought of as a knowledge-intensive service industry like IT services. In this industry, Disney is a best practice in exporting their knowledge. But what we can learn from the Disney example is that accumulated knowledge in basic things like operations, marketing, and park design, are highly valuable and very exportable. For Disney, exports are increasingly becoming an integral part of their operations. With continuing expansion into Japan, Hong Kong and EU, exports will likely continue to drive growth for Disney. Everland, an amusement park in Yongin, South of Seoul, arguably the Korean version of Disney, has recently started to export its knowledge. In 2000, Everland sold its knowledge of theme parks to Discovery Land in Taiwan for $1 million as a first step in upgrading its capabilities. If Disney's experience is any indication, Everland's potential also looks attractive. The opportunities for Everland look bright. From admission fees to character sales to lodging and other related merchandising, it is not unreasonable to imagine that Everland can begin to export its knowledge and experience base to the rest of Asia and ultimately the rest of the world in the near future. In addition to operations knowledge, Everland can begin to export its marketing knowledge in its brands, characters and park layout. Clearly, Korea has many assets and unique advantages of running an amusement park in Korea that can be sold throughout the world. In 1996, Joong-Ang Development Co., a subsidiary of the Samsung group, specializing in entertainment and social services, announced its plan. In concert with Samsung Group's management of humanity, integration and globalization, Joong-Ang has made a commitment in developing 3,700-acre land into a world-class total destination resort complex for the 21st century.

This is the third in a series of articles summarizing a report entitled "Korea: Knowledge Exporting Nation" prepared by Bain & Company under contract with the Ministry of Commerce, Industry and Energy.

To identify relevant industrial policies, policy makers should first listen and learn from the real actors, the businesses. In this spirit, four selected manufacturing and service industries such as automotive, tourism, IT services and biotechnology have been viewed in depth. Korea enjoys distinctive assets in each of these industries and can become a major knowledge exporter if it successfully addresses a set of common challenges.

Automotive
In the auto industry, for example, there is much opportunity outside of manufacturing the car alone. When a typical customer buys a car, the total ownership cost of that car is much greater than the purchased cost alone.

Other opportunities like accessories, financing, insurance and maintenance represent far greater revenue opportunities than the actual price of the car. Currently, most of these needs are met through other business entities through different channels and business means.

The challenge for Korean industries is to take advantage of these opportunities to expand their profit pool. As many of us know today, selling a base model car is just not enough to propel this industry into the 21st century.

Furthermore, in the automotive industry, knowledge drives higher profitability. This can be illustrated by looking at the profitability of different types of vehicles. A base model automobile can yield up to a 10 percent operating margin.

In fact, many of the cars being sold under $10,000 are commanding much lower margins than that. The real profit in selling automobiles comes from the option pricing and packaging such as air conditioners and CD players, which command higher margins. The highest profit generators are in other high value added options like navigation systems, which can command even higher margins, up to 50 percent.

"Telematics" is a good example of a high value added option that can drive higher profitability. Telematics is an in-dash system, which links the driver to the rest of the world through Internet, and wireless communication. This is an adjacent industry, which combines knowledge based manufacturing industries and knowledge based service industries to widen the profit pool of the automotive industry.

Information Technology Services
In Information Technology (IT) services, there exists a huge opportunity for export. Looking at global trade of IT services, many countries are far ahead of Korea in exporting their IT services.
In fact, Korea ranks close to last among OECD countries in its exports.

Since Korea is also a large market for IT services, this means that Korea is probably the world's biggest importer of IT services.
Even Korea's biggest IT services firm lags the world leaders in its exports. "LG-EDS," an information technology unit of the LG Group, has been exporting since the 80's and currently has a large portion of its business from overseas.

It has been a much larger growth driver for its business than its domestic business. "Samsung SDS," a system integration arm of the Samsung Group, while having just started to export last year, has large market potential.

The key success factors in this industry are human assets, proven solutions and globalization. Korea has real assets for each of these success factors. Korea, aside from Japan, is the biggest IT market in Asia and is one of the leading countries in terms of Internet technologies.

Tourism

The tourism industry also displays a great potential for Korea. Tourism is not regularly thought of as a knowledge-intensive service industry like IT services.

In this industry, Disney is a best practice in exporting their knowledge.

But what we can learn from the Disney example is that accumulated knowledge in basic things like operations, marketing, and park design, are highly valuable and very exportable.

For Disney, exports are increasingly becoming an integral part of their operations. With continuing expansion into Japan, Hong Kong and EU, exports will likely continue to drive growth for Disney.
Everland, an amusement park in Yongin, South of Seoul, arguably the Korean version of Disney, has recently started to export its knowledge. In 2000, Everland sold its knowledge of theme parks to Discovery Land in Taiwan for $1 million as a first step in upgrading its capabilities. If Disney's experience is any indication, Everland's potential also looks attractive.

The opportunities for Everland look bright. From admission fees to character sales to lodging and other related merchandising, it is not unreasonable to imagine that Everland can begin to export its knowledge and experience base to the rest of Asia and ultimately the rest of the world in the near future.

In addition to operations knowledge, Everland can begin to export its marketing knowledge in its brands, characters and park layout. Clearly, Korea has many assets and unique advantages of running an amusement park in Korea that can be sold throughout the world.

In 1996, Joong-Ang Development Co., a subsidiary of the Samsung group, specializing in entertainment and social services, announced its plan. In concert with Samsung Group's management of humanity, integration and globalization, Joong-Ang has made a commitment in developing 3,700-acre land into a world-class total destination resort complex for the 21st century.