Finding a Niche in South Korea
Franklin Templeton
Mark Mobius
May 27, 2010
The renewed tensions in the Korean Peninsula sparked off by allegations that North Korea torpedoed and sank one of South Korea’s naval ships, have caused jitters to the markets in the region recently. I think the measures by South Korean President Lee Myung-Bak will, in the long run, probably be positive since it may accelerate change in North Korea and result in a move towards opening up that country.
In the short term, of course, there will be anxiety, which could impact the markets. North Korea has been in a crisis continuously and the tensions have been present since the end of the Korean War. Of course, we can never underestimate the possibility of full-scale war in the Korean Peninsula. Having said that we believe the probabilities are quite low, given the interests of all major parties on both sides to contain the situation. Despite all the geopolitical concerns, South Korea has continued to grow its economy.
Reading the latest news headlines reminded me of my recent trip to South Korea. Landing at the new Incheon airport in Seoul is a pleasure. It’s hard to believe that modern Incheon saw the landing of General MacArthur’s Korean War troops, who risked the extreme tides that could quickly transform Inchon beaches into a muddy quagmire. When I was living in South Korea during the 1960s, I remember being knee deep in the Incheon mud and taking mud baths there.
On this trip to South Korea, we took a three-hour fast train to Pusan to see the operations of various factories in the vicinity. From Pusan city, we first drove to one of the high-tech machine factories that dot South Korea’s countryside and contribute to the country’s industrial and export strength. We looked at the operations of a company that represents the new generation of high-quality, high-tech metal products companies. After a lean 2009, new orders are beginning to come in from U.S. aerospace companies, Chinese railways and Indian power plants. The firm makes very large machines, each costing as much as US$1 million per unit. Domestically, firms like this continue to develop new types of machinery tools that can replace imported machinery tools at cheaper prices. I’m always impressed by their capabilities in building such large precision machinery tools, such as Computer Numerical Control (CNC) gear hobbing machines, required to make products such as mega-ton gears, and CNC high frequency machines, for wind power components.
At another Pusan plant, new orders for industrial fittings were growing. This was our third visit to the factory, and as before, the factory yard was full of finished industrial fittings waiting to be shipped. About 60% of the firm’s components are for petrochemical plants, 17% for ships and drilling rig parts, and the rest for electric power plants. To celebrate a milestone anniversary of its founding, the firm is aiming for an aggressive revenue target by expanding its international presence. In order to tap that market it must be close to major international engineering firms who place orders for plant components, so it has opened a branch in the US. Since power plant construction is a potentially larger market than petrochemical plants, the firm is putting more emphasis on customers in the power plant construction arena, particularly nuclear power plants, where the demanding specifications can be met by the company.
The third plant we visited was also seeing growth in new orders for its products. We learned that the firm had just been granted the ability to supply components for nuclear power plants. For its raw materials, it currently sources steel ingots domestically and imports steel slabs from Brazil and Russia, but in order to increase margins, it plans to build an electric arc steel production facility, which is expected to cut manufacturing costs by 20%.
As always, visiting the heart of the action gives us a real sense of how business is doing on the ground, and I was encouraged to see a pick up in new orders for the South Korean manufacturers in Pusan. They are capitalizing on their strengths to specialize in niche markets.
(c) Franklin Templeton
http://mobius.blog.franklintempleton.com
