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Management Report

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China 10 Years from Now and Korea’s Corporate Response

China 10 Years from Now and Korea’s Corporate Response

KWON Hyuk-Jae

Aug. 7, 2012

Transcript

Welcome to our video program. I'm Hyuk-Jae Kwon from the Global Studies Department.

August 24, 2012 marked the 20th anniversary of diplomatic relations between Korea and China. Relations between the two countries have developed significantly in all sectors-politics, economy, society and culture. To take the example of trade, Korea’s trade with China surged 34 fold from US$6.4 billion in 1992 to US$220.6 in 2011. China has emerged as the biggest trade partner for Korea since 2003 and Korea has become the third largest trade partner for China.

However, even good relations are faced with challenges. Now is the time to predict how China will change in 10 years and upgrade the relationship overall to maintain the beneficial relations built up over the past 20 years.

In this installment, China’s future will be forecast in the four aspects of economy, industry, finance and foreign affairs, and the responses that Korean companies can take.

The rise of the vast consumer market is the first to be mentioned when discussing China’s future. The Chinese government is using urbanization as a key driver of economic growth. By 2020, 16 million rural dwellers, more than the number of residents in Seoul, will become urban residents while the number of large cities with at least 1 million people is expected to reach 220.

At the same time, urbanization and a broader social security system will contribute to a surge in consumption and a shift in the spending behavior from “essential” to “discretionary.” This will cause a remarkable change in the structure of Korea’s export to China from intermediate parts and materials for assembly and export to intermediate and finished goods for end consumers in China.

Second, China’s manufacturing industry will become advanced in terms of high-technology. In the next 10 years, the manufacturing industry will develop rapidly, raising China’s influence in state-of-the-art products and new industries of the future. Relations between Chinese companies and foreign companies will shift from a vertical one to a horizontal, competitive one. Also, production by Chinese companies will increase remarkably. Accordingly, competition between Korean and Chinese companies will further intensify in all sectors, from traditional business areas like home electronics, telecommunication devices and petrochemicals to new strategic business areas like renewable energy.

Third, China will emerge as a financial hub. The large trader and economic powerhouse will emerge as a financial hub in Asia based on its power in the real economy by 2020. The Chinese yuan is likely to emerge as the world’s third major currency after the US dollar and euro, and Shanghai is expected to become one of the top three global financial hubs along with New York and London.

In that case, Korea can expect to see the positive impact of less foreign exchange risks and lower trade costs with China. In addition, if China opens its financial market in line with globalization of the yuan, Korea can enjoy better opportunities to enter into China’s financial industry, while more Chinese capital will find its way into Korea.

The last change will be China’s higher status in global society to set regulations. Already, China’s soft power in Asia and in global society such as the UN, G20, IMF and World Bank has risen rapidly and the trend is expected to accelerate for the coming decade. China will become a key variable in Korea’s foreign policies. Korea will have to pursue a reasonable balance between itself and the G2.

As such, although China’s pursuit of advanced economic power is ridden with many challenges, China will produce significant results 10 years from now. China’s tectonic shift in the market, industry and finance will present Korea with both new opportunity and risks. Korea needs to be responsive to the rise of China, maximizing opportunities while minimizing risks as it has done for the past two decades.

As the massive Chinese market grows, rivals such as Japan and Taiwan are hastening their moves. Taiwan is further developing a “golden triangle” strategy which combines Japan’s technology and China’s capital to enter into the Chinese market. Japan is diversifying its strategies by entering into China in partnership with Taiwanese companies. Korea should establish “complete in China” systems and strengthen its partnership with the Chinese government and businesses.

Moreover, a rapid rise of the Chinese market will offer Korean companies a good opportunity to increase sales. It is critical for them to employ differentiated strategies, developing customized products that consider the regional and demographic characteristics of the vast market.

Chinese companies partner with global companies to broaden their base in the domestic market. The global vacation resort company Club Med partnered with Chinese company Fosun International in opening a large resort near Harbin, drawing popularity. This has some important implications for Korean companies.

China is aggressively upgrading economic cooperation to become an advanced country. It is particularly serious about cooperation with Taiwan. Since the China-Taiwan Economic Cooperation Agreement which took effect in 2011, China has improved cross-strait economic cooperation. Recently, the electronics industry in mainland China suggested joint-establishment of technology standards on smart TVs and sharing of patents with Taiwan.

Korean companies also need to upgrade economic cooperation with China in new business areas and handling of intermediary goods by harnessing various channels, such as the Korea-China free trade agreement. For the past two decades, the two countries have maintained a successful relationship in economic cooperation, overcoming the external shock of the global financial crisis. However, as the conventional cooperation model is increasingly becoming obsolete, re-establishment of the relationship with a new model is necessary. Hopefully, Korean companies can lead the construction of a mutually-prosperous future with the coming 10 years in mind.

Thank you for watching. I'm Hyuk-Jae Kwon.

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