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KIM Jung-Woo

Making Korean SMEs Stronger through Globalization

KIM Jung-Woo

Nov. 12, 2010

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In Korea, the shorthand way of denoting the importance of small- and medium-sized enterprises (SMEs) is "9988." It means that SMEs account for 99% of the nation's companies and 88% of the manpower in the economy. Still, in terms of globalization, this main pillar of the Korean economy lags overseas peers. In the early 2000s more than 40 % of Korea's total exports were shipped by SMEs. In 2005, that fell to the high 30 % and has stayed there.

Going abroad is a proven option for SMES that have displayed the ability to navigate new environments to boost earnings. Those that export more than half their output enjoyed faster gains in their operating profit to sales ratio, according to a survey by the Small & Medium Business Administration and the Korea Federation of Small and Medium Business. SME manufacturers in this exporter group saw their operating profit to sales ratio jump to 8.28% in 2008 from 3.05% in 2005. Meanwhile, domestic-demand oriented SMEs saw the figure rise only modestly over the same period.

While expansion to foreign markets creates its own risks, SMEs obviously miss potential opportunities if they do not at least consider exporting. So they first need to adopt a global mindset. Among the aforementioned SME manufacturers, some of them realized at an early stage that their growth would be limited if they totally relied on domestic sales. Prime examples are Aurora World that became the world's third-largest stuffed toy and gift manufacturer, and Simone, an original design manufacturer ( ODM)-based handbag manufacturer in the global high-end handbag market.

Service firms have also ticketed themselves for global destinations. Bibigo, a popular Korean food bibimbap (rice mixed with assorted vegetables) chain, succeeded by tailoring to global customers' diversified tastes. Opening its first overseas store in Beijing in August 2010, Bibigo plans to open 1,000 outlets around the world by 2015. Caffe Bene, meanwhile, will be the first Korean-coffee specialty store to open an overseas chain. It will soon open the chain in Manhattan, the heart of business and entertainment in New York City .

Sectors for advancement have not remained in only foods. Hair salons Lee Chul Hair Kerker and Park Seung Chol Hair Studio, Korea`s first laundry and dry-cleaning franchise Cleantopia, optician shop Davich Optical, and ink cartridge refill franchise Ink 1009 all have overseas outlets and plan to expand. The two hair salons and Davich Optical are targeting Shanghai ; Cleantopia has plans for Beijing and Los Angeles ; and Ink 1009 is considering Sydney and Istanbul .

For SMEs that may not be able to launch a full-scale overseas push, links with multinational companies could be used as an entry point. That approach would afford them time to build up overseas exposure and credibility. Telechips, which produces audio chips for vehicles, for example, supplies Hyundai Motor and Nissan Motor of Japan . Many Korean SMEs are also making contracts with Germany's BMW.

Riding along with companies operating in overseas markets also enable SMEs to obtain information about those markets as well as reduce direct costs and risk. Sewon Precision used an idle US plant of Hanjin Corporation, saving 37% in storage costs, while Hanjin Corporation also used idle facilities and created additional income. When electronic component provider Galaxia Device planned to advance into China, it learned about purchasing, ways to cut material costs and product diversification from the Center for Large and Small Business Corporation under the Federation of Korean Industries, a business lobby.

As for new industries and products, they require different approaches. Along with high marketability come high risks. Therefore cooperation among companies is crucial, starting at the early stages of overseas advancement.

In the high-speed electric vehicle sector, SMEs and large companies collaborated in developing key components of "Blue-On," Korea's first full-speed electric vehicle, with some 130 companies in cooperation. In the environmental sector, an agreement on co-prosperity for green environment industry was signed between large companies of SK Energy, Korea's major energy company, and Korea Environmental Industry and Technology Institute and 10 SMEs that developed key environmental technologies.

Korea's import-dependent components and materials industry can also expect a win-win potential from close ties between related companies. Finished goods makers and component makers can jointly develop key components and materials to substitute imports and raise competitiveness of SMEs. Hyundai Mobis, Korea's top auto parts maker, built a technology test center equipped with advanced equipment in China and disclosed the technologies to their suppliers. As such, in their early stage of developing components for large companies, SMEs can utilize R&D infrastructure of large companies and boost synergy with these large companies.

SMEs can undergo difficulties while becoming a global player due to a lack of information, weak brand power and lack of overseas sales networks. To improve the SMEs' chances of success outside of Korea, the government should provide SMEs with information on markets and potential risks, while actively publicizing SME products as "Made in Korea " brands. Yet the most important is for SMEs to build a competitive edge on their own. They must continuously develop technologies through active R&D and maintain these technologies to succeed in the global value chain. When this key competitiveness is coupled with their experience and infrastructure, SMEs will have better foundation for globalization.

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