IT Industry Outlook of Korea 2004

Transcription

1 IT Industry Outlook of Korea 2004 Korea Information Strategy Development Institute

2 Copyright c 2004 Korea Information Strategy Development Institute. All rights reserved. No part of this book may be reproduced or transmitted in any form of by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the authors. All requests for permission to reproduce or translate all or part of this book should be made to :1-1 Juam-Dong Kwachon-Shi, Kyunggi-Do, , Korea Phone : Fax :

3 Message from the President In a knowledge-based economy, a nation with a competitive IT industry may well be positioned to enjoy a higher growth rate than other countries. One reason is that information technology increases productivity of capital and labor, two major traditional production factors. Another reason is that knowledge in itself is the productivity driver. As developed countries have advanced into a knowledge-based economy where the creation and utilization of information and knowledge has a pivotal role, the importance of the IT industry cannot be overestimated. With the emergence of PCs in the 1980's and the Internet and mobile communications in the 1990's, the IT industry has contributed greatly to growth of national economies and productivity of other industries. In addition, the IT industry has facilitated creation of new industries such as digital contents and electronic commerce, adding dynamics to economies. It cannot be more true than in Korea. It is a well-known fact that the IT industry is the core for other knowledge-based industries in Korea. Since the 1990's, the IT industry had grown so fast that it accounted for 15.6% of gross national production or GDP in The IT industry of Korea became one of the great success stories in the world. In this report, we studied various aspects of the Korean IT industry including its prospects, importance, and status in the Korean economy. We have also compared the Korean IT industry with those of other countries to present a more objective evaluation on the Korean IT industry. IT Industry Outlook of Korea is an annual report published by the Korea Information Strategy Development Institute. As the third report, IT Industry Outlook of Korea 2004 provides richer contents and improved layout to offer a more objective and insightful look into the Korean IT industry. IT Industry Outlook of Korea 2004 aims to help understand better the Korean IT industry, thus contributing to promoting Korea's IT industry at home and abroad. This report also can serve as a reference guide to development of the IT industry. We welcome any comments or insightful opinions you may have on this report. Thank you. John H. Lee, Ph. D. President Korea Information Strategy Devlopment Institute

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5 Table of Contents MESSAGE FROM THE PRESIDENT 3 INTRODUCTION 9 PART I. THE IT INDUSTRY IN THE KOREAN ECONOMY 1. Current Status of the Korean IT Industry and Its Contribution to the Korean Economy 13 PART II. TRENDS AND PROSPECTS BY SECTOR 1. Overview Market Trends and Prospects by Sub-Sector 25 PART III. INTERNATIONAL COMPARISON 1. Size and Performance of IT Market IT Export and Competitiveness Investment in Technology Development and Innovation Level Human Resources and Labor Market Environment Financing and Start-Up Environment IT Infrastructure 71 CONCLUDING REMARK 77 APPENDIX A. DATA SOURCE FOR INTERNATIONAL COMPARISON 79 APPENDIX B. IT INDUSTRY CLASSIFICATION SYSTEM 80 REFERENCES 83

6 List of Tables Table 1.1 Growth Rate and Growth Factors of Korean Economy 14 Table 1.2 Value-Added from the IT Industry 15 Table 1.3 Production of IT Equipment by Country 17 Table 1.4 Exports by Country 18 Table 1.5 Top Five Export Destinations and Shares for Korean IT Exports 19 Table 2.1 Production Forecast for Korean IT Industry 23 Table 2.2 Export Forecast of Korea's ICT Industry 24 Table 2.3 Sales of Telecommunications Services 25 Table 2.4 Sales Forecast for Facilities-Based Service Market 26 Table 2.5 Forecast for Wireless Communications Service Market 28 Table 2.6 Sales Forecast of Special Communications Service 29 Table 2.7 Sales Forecast for Value-Added Communications Service 29 Table 2.8 Sales Forecast by Broadcasting Service 32 Table 2.9 Forecast for Communications Equipment Market 33 Table 2.10 Forecast for Mobile Handsets Market 34 Table 2.11 Forecast for Information Equipment Market 36 Table 2.12 Forecast for PCs Market 37 Table 2.13 Forecast for Components Market 38 Table 2.14 Forecast for Semiconductors 40 Table 2.15 Forecast for Software Market 42

7 List of Figures Figure 1.1 Growth in IT Industry Production and Its Share of GDP (1997~2002) 14 Figure 1.2 IT Industry Contribution to Real Economic Growth (%) 15 Figure 3.1 Share of IT Industry's Added Value in Total GDP (2000) 49 Figure 3.2 Share of the IT Industry in Total Industrial Employment (2000) 50 Figure 3.3 Domestic IT Market Against GDP (2001) 51 Figure 3.4 IT Exports (2000 and 2001) 53 Figure 3.5 Export and Import Ratios in IT Products (2000 and 2001) 54 Figure 3.6 Revealed Comparative Advantage in IT by Country (in Export / 1995 and 2001) 55 Figure 3.7 Volume of Private Sector R&D in IT (2000) 57 Figure 3.8 Share of Private Sector IT R&D out of Total R&D (2000) 58 Figure 3.9 Ratio of US IT Patents to US$1 billion in GDP (2000) 59 Figure 3.10 Availability of IT Resources (2002) 62 Figure 3.11 Comparison of Salary Level of Engineers (2002, US$) 62 Figure 3.12 Comparison of Engineer Salary Levels (2002, PPP$) 63 Figure 3.13 Impact of Talent Leakage to National Competitive Strength (2002) 64 Figure 3.14 Social Interest in Science and Technology (2002) 65 Figure 3.15 Dependency on External Funding for Corporate Investment (2001) 67 Figure 3.16 Asset Size in Financial Sector As Percentage of GDP (2002) 68 Figure 3.17 Ease of Obtaining Funding Through Loans (2002) 69 Figure 3.18 Volume of Venture Capital Investment in GDP ( ) 70 Figure 3.19 Share of Venture Capital Investment in Cutting-Edge Industries ( ) 70 Figure 3.20 Mobile Phone Subscribers per 100 Persons (2001 and 2002) 72 Figure 3.21 Share of Investment in Telecommunications Sector out of GDP (2000 and 2001) 72 Figure 3.22 Comparison of Mobile Phone Charges (Based on Median Consumer, August 2002) 73 Figure 3.23 Number of Internet Users per 10,000 Persons (2001 and 2002) 74 Figure 3.24 Number of Broadband Subscribers per 100 of Population (June 2002) 75 Figure 3.25 Competitive Landscape in ISP Market (2002) 75

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9 Introduction The IT industry of Korea has fueled the national economy with its continued innovation. Since the 1990's, the IT industry including semiconductors and telecommunication equipment has contributed more to the economy than any other major industries. In 2002, the IT industry contributed to more than 40% of real economic growth. This report offers a comprehensive view of the Korean IT industry. This report consists of three parts. Part I delivers a general overview of the Korean IT industry. A brief summary of unique structural characteristics of the Korean IT industry is provided. We also examined the impacts of the industry on the Korean economy. Part II discusses the trends and prospects of the Korean IT industry, in particular, sectors of IT equipment, telecommunication service, and software. Part III compares the Korean IT industry with those of other countries to present a more objective evaluation on the Korean IT industry. 9

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11 Part I The IT Industry in the Korean Economy

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13 1. Current Status of the Korean IT Industry and Its Contribution to the Korean Economy 1.1 Current Status of the Korean IT Industry Korea's IT industry saw impressive growth in the 1990s. Production doubled from 88 trillion won in 1998 to 209 trillion won in 2003, and the added value of the IT industry rose 30.4% in 1999 and 26.3% in The valueadded growth rate of the IT industry was only 3.2% in 2001 due to the economic downturn, but the pace picked up again in 2002 to about 25.9%, a far higher growth rate than that of Korea's GDP. The IT industry has accounted for increasingly higher shares of GDP over the last five years, rising from 8.6% in 1997 to 15.6% in The Korean IT industry has been able to overcome the limitations of the domestic market by finding growth opportunities in overseas markets. About 40% of IT production is exported overseas. The total export volume of the IT industry was US$57.8 billion in 2003, or about 30% of Korea's total exports for the year, indicating that IT has become one of the major growth engines for the Korean economy. It was an important factor in Korea's economic recovery from the financial crisis in IT industry's Contribution to the Korean Economy When looking at the contribution of IT by analyzing growth factors by production element 1), the IT industry's contribution to economic growth is found to have risen steadily from 6.2% in the late 1980s to 11.4% and 23.4% in the early 1990s and the late 1990s, respectively. Moreover, despite the serious impact of the financial crisis, IT investment and IT industry productivity showed robust growth in the late 1990s, far surpassing the levels shown in the first half of the decade. 1 Share of IT industry's percentage point in GDP growth rate in line with increase in IT capital input and TFP (Total Factor Productivity) 13

14 1. Current Status of the Korean IT Industry and Its Contribution to the Korean Economy Figure 1.1 Growth in IT Industry Production and Its Share of GDP (1997~2002) (value added amount from IT industry / current GDP) Source : KISDI (2003 b) Table 1.1 Growth Rate and Growth Factors of Korean Economy (in percentage points) GDP Growth Rate (%) Labor Input Capital Input IT Capital Non-IT Capital TFP Increase IT Industry Non-IT Industry Source : KISDI (2003 b) The growth rate of IT was unmatched by any other industry, and though this would be the most obvious reason for the IT industry's high contribution to Korea's real economic growth rate, we should not forget the high value-added ratio of the ICT service and software sector 2), and the fact that a gradual drop in the prices of IT products and services resulted in a surge in real added-value that 2 The inter-industry relations table of the Bank of Korea or BOK shows that the ICT service and software sectors' valueadded ratios were 76.8% and 54.4%, respectively, in In the same year, the value-added ratio of IT equipment was 28.3%, roughly the same level as the manufacturing average of 29.4%. In other words, ICT and software contributed to the qualitative growth of the national economy with their high added value, while IT equipment contributed in the quantitative growth in terms of absolute added-value. 14

15 1.2 IT industry's Contribution to the Korean Economy exceeded the nominal growth. This feat was made possible by the optimal combination of expansion of the domestic market and increase in global IT demand. The global increase in IT demand resulting from technology innovations in computers, the Internet, and mobile communications meant that there were far greater opportunities for the Korean IT industry on the global market, especially in manufacturing. Figure 1.2 IT Industry Contribution to Real Economic Growth (%) Note : 1) KISDI estimation based on BOK s data 2) Figures for 2002 are estimates from BOK. Source : KISDI (2003 b) Table 1.2 Value-Added from the IT Industry Industry Overall Industrial Average Manufacturing Service IT Telecommunications Service IT Equipment Software Note : Recomposed from the findings of the 1998 Inter-Industry Relations Table (KISDI, 2001) Source : KISDI (2003 b) 15

16 1. Current Status of the Korean IT Industry and Its Contribution to the Korean Economy The domestic market expanded due to the rapid adoption of mobile communications service, high penetration of Internet access, and the proliferation of dot-com companies. We should also not forget the impact of government policies that further stimulated the advancement of the IT industry. Some examples of successful government policies include the promulgation of industrial promotion policies that led to the establishment of the Informatization Promotion Fund and policies geared toward promoting competition in the information technology and communications service markets. Demand in IT was driven by deployment of high-speed information communication networks and public policies for wider access to information and the Internet. The introduction of competition into the communications service market encouraged more private investment in IT, lower prices, and improved quality, thus promoting expansion of the market The Korean IT industry in the World The Korean IT industry is considered to be in the top percentile in the global IT market in terms of added value, growth potential, and trade volume, even when compared to other OECD member countries. Among OECD countries, Korea's IT industry is the seventh largest in terms of added value, third in share of the industry out of GDP (2000), third in IT equipment production, and third in IT export volume (2000). Korea's IT industry accounts for more than 6% of both global production and export volume, making the Korea the third or fourth largest global player. 16

17 1.3. The Korean IT industry in the World Table 1.3 Production of IT Equipment by Country (Prospect) Rank Country Total Amount (in US$ M) Country Total Amount (in US$ M) Country Total Amount (in US$ M) (% of Total) (% of Total) (% of Total) 1 USA 313,993 USA 244,982 USA 247,636 (28.10%) (25.25%) (24.71%) 2 Japan 221,623 Japan 194,641 Japan 196,539 (19.83%) (20.06%) (19.61%) 3 South 69,611 China 70,293 China 84,192 Korea (6.22%) (7.25%) (8.40%) 4 China 58,620 South 61,559 South 63,949 (5.24%) Korea (6.35%) Korea (6.38%) 5 Taiwan 48,669 Taiwan 41,289 Taiwan 42,346 (4.35%) (4.26%) (4.22%) 6 Singapore 45,054 UK 37,367 UK 37,938 (4.03) (3.85%) (3.78%) 7 UK 42,370 Singapore 36,359 Singapore 37,875 (3.79%) (3.75%) (3.79%) 8 Germany 37,116 Germany 32,740 Germany 33,261 (3.32%) (3.37%) (3.32%) 9 Malaysia 36,558 Malaysia 30,577 Malaysia 31,584 (3.27%) (3.15%) (3.15%) 10 France 32,874 France 29,191 France 29,737 (2.94%) (3.01%) (2.97%) Total 1~10 906,488 (81.13%) 778,998 (80.29%) 805,057(80.32%) Overall Total 1,117,367 (100%) 970,167 (100%) 1,002,365 (100%) Source : Reed Electronics Research (2002) 17

18 1. Current Status of the Korean IT Industry and Its Contribution to the Korean Economy Table 1.4 Exports by Country Rank Country Total Amount (in US$ M) Country Total Amount (in US$ M) (% of Total) (% of Total) 1 USA 86,652 USA 108,270 (12.39%) (12.42%) 2 Japan 79,851 Japan 97,821 (11.42%) (11.22%) 3 Singapore 58,322 Singapore 71,079 (8.34%) (8.15%) 4 Taiwan 43,284 South Korea 55,496 (6.19%) (6.37%) 5 UK 41,907 Taiwan 55,041 (5.99%) (6.31%) 6 South Korea 40,342 HongKong 54,202 (5.77%) (6.22%) 7 Hongkong 38,999 UK 48,750 (5.58%) (5.59%) 8 Germany 36,599 Germany 44,426 (5.23%) (5.10%) 9 Malaysia 32,518 Malaysia 39,191 (4.65%) (4.49%) 10 Netherlands 31,311 France 36,979 (4.48%) (4.24%) Total 1~10 492,785 (70.47%) 611,255 (70.11%) Overall Total 699,324 (100%) 871,881 (100%) Source : Reed Electronics Research (2002) 18

19 1.3. The Korean IT industry in the World Overall, we saw many changes in the export market over the last few years. In particular, it is interesting to note the rising importance of China. Currently, the top five export destinations for our IT products are the U.S. and East Asian countries. Accordingly, the future prospects for Korea's IT exports are likely to mirror the growth rate of each region. In other words, the U.S. and East Asia will continue to be the markets of importance for Korean IT vendors. The increasing importance of China in exports is welcomed as providing a buffer to absorb any external shock resulting from a downturn in the leading IT markets like the U.S. Despite the recession in the U.S. market in 2001, the growth of China continued unabated. Table 1.5 Top Five Export Destinations and Shares for Korean IT Exports Rank U.S. (29%) U.S. (28%) U.S. (29%) U.S. (31%) U.S. (27%) U.S.(20.4%) 2 Japan (10%) Malaysia (8%) Japan (9%) Japan (10%) Japan (10%) China(15.6%) 3 Malaysia (8%) Hong Kong (8%) Taiwan (8%) Hong Kong (7%) Hong Kong (8%) Hong Kong(11.2%) 4 Singapore (8%) Japan (7%) Hong Kong (7%) Singapore (7%) China (7%) Japan(8.5%) 5 Hong Kong (7%) Taiwan (7%) Singapore (7%) Taiwan (7%) Taiwan (7%) Taiwan(5.7%) Total 62% 58% 60% 61% 59% 61% Note : KISDI estimation based on ITTA's data Source : KISDI (2003 b) 19

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21 Part Ⅱ Trends and Prospects by Sector

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23 1. Overview IT industry production in 2003 is expected to rise to about 209 trillion won, up 11% year-on-year thanks to the increased export for major IT products including semiconductors and mobile handsets coupled with the strong performance of special and value-added service providers. The most notable development in telecommunications service this year is the growth of special services fueled by the introduction of new services such as Internet phone service, higher penetration of the Internet, increasing e-commerce, and growth of value-added services driven by higher demand for high-speed networks. Production of equipment will be pushed forward by rising demand, gradual for PC upgrades in the latter half of the year, increased domestic sales and exports of mobile handsets with color screens and cameras, and wider penetration of LCDs into new applications such as LCD TV. Table 2.1 Production Forecast for Korean IT Industry (at current prices, trillion KRW) ~ 08 Average Growth Rate Telecommunications Service % IT Equipment % Telecommunications Equipment % Information Equipment % Broadcasting Equipment % Components % Software % Total % Growth Rate 11.0% 12.7% 14.4% 12.3% 12.2% 9.9% Note : Figures for 2003 and afterwards are estimates from KISDI. Source : KISDI (2003 b) Encouraged by the introduction of new service, the growth of the post PC market, and expanded digital broadcasting service, production is forecast to record an average annual increase of 12.3% from 2003 to 2008, reaching 373 trillion won by

24 1. Overview Exports of the IT industry in 2003 are expected to rise 25% to US$57.7 billion, thanks to strong demand for mobile handsets, notebook computers, semiconductors, and LCDs that will more than offset a drop in exports of desktop PCs, CRT monitors, and CD ROMs. With the growth of the post PC market, introduction of new telecommunications services, and a rise in global demand for related IT equipment, exports are projected to grow 17.9% a year to reach US$131.8 billion by Table 2.2 Export Forecast of Korea's ICT Industry (in million USD) ~ 08 Average Growth Rate IT Equipment 57,199 70,876 85, , , , % Telecommunications Equipment 18,427 22,991 29,356 37,117 44,969 52, % Information Equipment 10,489 11,320 12,814 14,249 15,703 17, % Broadcasting Equipment 2,366 3,667 5,164 6,212 6,864 7, % Components 25,917 32,898 37,964 42,520 47,282 52, % Software ,243 1,519 1, % Total 57,777 71,644 86, , , , % Growth Rate 24.7% 24.0% 20.4% 17.4% 14.8% 13.3% Note : Figures for 2003 and afterwards are estimates from KISDI. Source : KISDI (2003 b) 24

25 2. Market Trends and Prospects by Sub-Sector 4.1 Overview 2.1. Telecommunications Service Sales of telecommunications services in 2003 are estimated at around 43 trillion 217 billion won, a 3.5% increase over the previous year. Factors contributing to the growth in sales included: growth in facilities-based services owing to steady growth in mobile service and broadband Internet access service; growth in special services led by top money makers of the sector; growth in value-added services fostered by expansion of data network service. From 2003 to 2008, it is expected to grow on average by 5.1% a year to 55 trillion billion won by Growth will be driven mainly by a robust performance of the data communications market resulting from increased wireline and wireless Internet access, emergence of new Internet-related value-added services, growth of special services led by leading money makers of the sector, and an increase in the subscriber base for paid broadcasting services such as cable and satellite TV. By sector, the special service area is forecast to record the highest average growth rate of 9.8% a year from 2003 to 2008 followed by broadcasting service at 8.7%, value added service at 8.2%, and facilities-based service at 3.0%. Table 2.3 Sales of Telecommunications Services (in 100 million KRW) ~ 08 Average Growth Rate Facilities-Based Service 281, , , , , , % Special Service 15,456 17,782 19,880 22,036 23,616 24, % Value-Added Service 33,290 36,300 39,360 41,914 45,305 49, % Broadcasting Service 101, , , , , , % Total 432, , , , , , % Note : Figures for 2003 and afterwards are estimates from KISDI. Source : KISDI (2003 b) 25

26 2. Market Trends and Prospects by Sub-Sector Facilities-Based Service The facilities-based service market is mainly dominated by wireless communications, but with the subscriber base for mobile service market reaching saturation levels, the average growth rate of the wireless communications market is expected to slow down to 3.2% a year from 2003 to Wireline communications, on the other hand, is projected to grow 2.6% a year on average during the same period owing to continuing development of broadband communications technology and wider penetration of the Internet. Table 2.4 Sales Forecast for Facilities-Based Service Market (in 100 million KRW) ~ 08 Average Growth Rate Wireline Telephony 124, , , , , , % Wireless Communications 156, , , , , , % Total 281, , , , , , % Note : Figures for 2003 and afterwards are estimates from KISDI. Source : KISDI (2003 b) Wireline Telephony Service Local, Long Distance, and International Services The Ministry of Information and Communication of Korea is working to introduce a "single unified tariff system for local and long distance calls" to be applied across the country. If the single unified tariff system is adopted, charges for local calls are expected to go up, whereas the tariffs for long distance calls will become lower. This would mean higher revenue for local call service providers as there are no substitutes for local call service. Special service providers are increasingly entering into international call service. The competitive landscape is expected to become much more heated now that the KT has announced that it will lower its international charges. Moreover, a drop in LM (Land to Mobile) charges resulting due to lower mobile tariffs will likely drive down LM revenue. 26

27 2.1. Telecommunications Service Broadband Internet and Leased Line Services The potential demand for broadband Internet service is deemed to be sufficient as seen by the continuing rise in VDSL subscribers. The broadband Internet market is projected to continue to grow upon completion of the presently on-going restructuring efforts, led mainly by major players Wireless Communications Service Mobile Service Mobile telephony service has grown exponentially due to various factors including rapid advancement in technology and a diversifying competitive environment. Mobile telephony is expected to soon account for 99% of total revenue in the wireless communications service market. However, the mobile voice service market is reaching saturation and can no longer serve as a major revenue source. The market recorded modest growth in 2003, and with adjustment in the launch schedule for nationwide 2GHz frequency-based IMT service (originally scheduled to start 2006), chances are it will be some time before the sector could deliver a repeat performance of the dynamic growth we have witnessed over the past few years. Other Wireless Communications Services Advancement in mobile telephony technology led to the development of improved data communication features, thus eliminating the boundaries that made other wireless communications services unique compared to mobile telephony. Wireless paging or wireless data communications services have lost their market bases as a result. In other words, services that can be easily replaced by mobile telephony and those without any differentiating unique features are likely to be ignored by the market and consumers. 27

28 2. Market Trends and Prospects by Sub-Sector Table 2.5 Forecast for Wireless Communications Service Market (in 100 million KRW) ~ 08 Average Growth Rate Mobile Telephony 154, , , , , , % Wireless Paging % TRS 1,030 1,240 1,432 1,578 1,706 1, % Wireless Data % Others 1,250 1,294 1,346 1,399 1,455 1, % Total 156, , , , , , % Growth Rate 5.9% 5.0% 4.0% 3.1% 2.4% 1.6% - Note : Figures for 2003 and afterwards are estimates from KISDI. Source : KISDI (2003 b) Special Communications Service Overview This sector is still posting high growth. As of the end of 2002, the number of special services was 419, and there were 362 service providers. However, as of February 2003, the number of service providers across the country dropped to 358. Data from Seoul Post shows the number declining from 324 to 318. In fact, the number of company registration cancellations surpassed that of registrations during the same period. Still, the special service market is expected to grow on average 9.8% a year until It will exceed 2 trillion won by 2006 and become almost a 2.5 trillion won market by

29 2.1. Telecommunications Service Table 2.6 Sales Forecast of Special Communications Service (in 100 million KRW) ~ 08 Average Growth Rate Class 1 International 2,504 2,456 2,510 2,929 3,237 3,433 Others 4,466 4,778 5,142 5,824 6,324 6,645 Class 2 8,770 10,378 11,762 12,938 13,800 14, % Class 3 2,219 2,626 2,976 3,274 3,492 3,632 Total Growth Rate 18% 15% 12% 11% 7% 4% Note : Figures for 2003 and afterwards are estimates from KISDI. Source : KISDI (2003 b) Value-Added Communications Service In 2002, value-added communications service sales totaled 3 trillion 27 billion won and are estimated to have risen 10.0% in 2003 to 3 trillion 329 billion won. Going forward, online information offerings, overall service provisioning (PC communications service), and Internet access service are expected to sharply decline, but this downturn will be more than offset by the accelerated growth of IP (Information Provider) service and rising demand for high-speed data networks. The value-added communications service market is projected to grow at an average annual rate of 8.2% to 5 trillion won by Table 2.7 Sales Forecast for Value-Added Communications Service (in 100 million KRW) ~ 08 Average Growth Rate Data Network Service 5,500 6,000 7,260 8,914 11,005 13, % Online Information Provider 22,000 24,000 25,400 26,400 26,800 27, % Others 5,790 6,300 6,700 7,000 7,500 8, % Total 33,290 36,300 39,360 41,914 45,305 49, % Note : Figures for 2003 and afterwards are estimates from KISDI. Source : KISDI (2003 b) 29

30 2. Market Trends and Prospects by Sub-Sector Data Network Service In the network service market, demand for circuit switch, packet switch, and other types of low-speed services will remain flat or decline while demand for high-speed data network services like ATM and VPN services are likely to pick up further. Although low-speed data network services like packet switch X.25 based public data networks and circuit switch (Co-LAN) presently account for the bulk of sales, the rapid adoption of multimedia platforms will reduce the demand for existing text transmission-oriented low-speed networks. The VPN market in Korea is still in its infancy. The strong growth is expected thanks to the rapid expansion of Internet based enterprise operations and the need to outsource network management and build WANs at low cost Online Information Service Internet access services (PC communications, 014XY, data network InfoShop) are expected to increasingly be replaced by broadband Internet access service, so they will continue their downward spiral for the next 4 to 5 years. On the other hand, Internet consumer portals, online games, and e-commerce are expected to continue to grow strongly while wireless Internet offerings are predicted to grow in popularity, rising 20 to 30% on average for the next 4 to 5 years Broadcasting Service Total sales for the Korean broadcasting service sector in 2003 are estimated to have reached 10.2 trillion won, encouraged by the high growth in the broadcasting program provider (PP) segment. Despite the economic downturn, total sales of various broadcasting media still rose sharply thanks to especially strong sales in PP, particularly from home shopping networks. The challenge of the global economic recession is still very much present, but robust sales from home shopping channels and additional revenue streams created from adoption of T-commerce, two-way interactive services, and digital 30

31 2.1. Telecommunications Service broadcasting services are expected to drive growth in total sales of broadcasting services from 2003 to During this period, sales are expected to grow 8.7% per annum on average to reach 15.5 trillion won by Terrestrial (Over the Air) Service Advertisement is an especially cyclical industry. The first thing companies do when faced with any downturn is to slash their advertisement budgets or delay advertising. Advertising revenue accounts for a huge share of revenue in terrestrial broadcasting service, making this the most vulnerable sector to economic conditions. As long as consumer spending remains weak and the domestic economy is sluggish, no large increase in advertisement revenue can be expected for terrestrial service providers. However, should the pace of slow recovery be maintained, terrestrial service revenue should rise by around 7.4% per annum on average from 2003 to 2008 to exceed 5.3 trillion won by Cable Broadcasting Cable TV The number of subscribers has increased sharply since the recent conversion of cable community antenna TV service providers into SOs (System Operators). However, revenue has not increased at the same rate as the subscriber base because the subscriber fee for the converted subscribers is still the same as that for cable community antenna TV service. Sales are nevertheless expected to pick up from the latter half of this year with the launching of digital service, and the subscriber base is also expected to grow steadily. Cable Community Antenna TV Service Cable community antenna TV service revenue is likely to decline as a result of a drop in the number of subscribers due to the conversion to SOs and strong challenges by competitors that are introducing low-priced channel packages. 31

32 2. Market Trends and Prospects by Sub-Sector Satellite Service Commercial service was launched in 2002 with subscriptions to basic channels reaching 500,000 households. Total sales are estimated to have been about 78.8 billion won. As satellite service providers are expected to introduce low-priced packages matching those offered by cable TV operators, a rise in subscribers and sales is anticipated. However, the rise in revenue will likely be only slight because of the intense competition between cable TV and satellite service. Sales revenue for satellite service is expected to grow at an average annual rate of 29.8% to reach 649 billion won by Program Providers (PP) PPs are offering their programs not only to cable TV networks, but also satellite channels. The availability of more channels for programming will accelerate growth of the business as well as sales, and the move toward digital by cable and terrestrial networks will mean higher demand for contents. All in all, the future of PP looks very bright. We should recall, however, that 80 to 90% of PP's sales come from home shopping channels and that their share in the total is increasing. We should also note that many PPs still have a way to go before reaching break-even. Table 2.8 Sales Forecast by Broadcasting Service (in 100 million won) ~ 08 Average Growth Rate Terrestrial 36,716 39,451 42,390 45,547 48,940 52, % TV 32,938 35,401 38,065 40,919 43,988 47, % Radio 3,778 4,042 4,325 4,628 4,952 5, % Cable Broadcasting 10,326 11,229 12,021 12,657 13,335 14, % Cable TV 9,464 10,411 11,244 11,918 12,633 13, % Cable Community Antenna % Satellite 1,759 3,166 4,907 5,889 6,301 6, % Program Provider 52,753 57,501 62,676 68,317 74,465 81, % Others % Total 101, , , , , , % 32 Note : Figures for 2003 and afterwards are estimates from KISDI. Source : KISDI (2003 b)

33 2.2. IT Equipment 2.2. IT Equipment Communications Equipment Table 2.9 Forecast for Communications Equipment Market (in 100 million KRW for production / US$ million for exports and imports) ~ 08 Average Growth Rate Production 379, , , , , , % Exports 18,427 22,991 29,356 37,117 44,696 52, % Imports 3,391 3,345 3,354 3,289 3,217 3, % Balance 15,036 19,646 26,002 33,828 41,752 49, % Note : Figures for 2003 and afterwards are estimates from KISDI. Source : KISDI (2003 b) Production The growth of communications eguipment sector was fueled by higher domestic demand for equipment for broadband networks and wireless Internet coupled with increases in domestic sales and exports of mobile handsets. In 2003, the proliferation of telecom services and increased equipment replacement will cause the market to expand 18.2% to 37 trillion 99.3 billion won. Domestic sales and exports of color screens and camera-embedded handsets are also expected to steadily rise owing to rising exports of broadband Internet-related products and wider introduction of cdma x and GPRS services. Production of Korean communications equipment is expected to rise steadily at an average annual rate of 16.7% through The growth drivers will be rising export volume of mobile handsets and growing demand for equipment resulting from network upgrades in line with wider usage of broadband Internet and introduction of IMT-2000 service. Exports and Imports Encouraged by robust exports of mobile handsets, exports of communications equipment are expected to rise 38% in 2003 to US$18.43 billion. Korean flagship products like mobile handsets and broadband subscriber network related equipment are very competitive on the global market and have 33

34 2. Market Trends and Prospects by Sub-Sector secured a strong international foothold. As of 2003, mobile handsets accounted for 67.3% of all communications equipment exports, and the figure is expected to rise to 79% by Exports of communications equipment are expected to rise at an average annual rate of 23.5% through Mobile Handsets Table2.10 Forecast for Mobile Handsets Market (in 100 million KRW for production / US$ million for export and import) ~ 08 Average Growth Rate Production 255, , , , , , % Exports 12,406 16,586 21,636 27,887 34,713 41, % Imports % Balance 12,317 16,462 15,464 21,519 27,784 34, % Note : Figures for 2003 and afterwards are estimates from KISDI. Source : KISDI (2003 b) Production The production of mobile handsets rose 12.7% in 2003 to 25 trillion 524 billion won. The global demand for handsets rose in 2002 after the introduction of handsets with color screens and service upgrades. Sales of handsets with color screens and cameras are expected to increase in both Korea and overseas due to the proliferation of CDMA x and GPRS services. In the first quarter of 2003, LG Electronics emerged as the fifth largest global handset maker with a market share of 5.2%, and Samsung Electronics is holding third place with a market share of 12.3%. The rise of major Korean makers will help further improve their global market image and lead to an increased market share for Korean-made handsets. The rising interest in handset replacement in Western Europe and the Asia- Pacific region is also expected to lead to higher demand for feature-laden color screen handsets, the stronghold of Korean handset makers. Leveraging the strengthened brand awareness and product development capabilities, production by Korean handset manufacturers is projected to rise at an average annual rate of 19.4% through

35 2.2. IT Equipment Exports and Imports Exports of Korean made handsets are expected to rise 33.1% in 2003 to US$ billion, and they are forecast to rise 27.5% a year on average through Exports of CDMA handsets will be helped by the increased adoption of CDMA technology in North America, China, and South America coupled with higher CDMA handset demand in China, India, and Vietnam. Moreover, exports to Europe, where GSM is the de facto standard, is also expected to be robust with expansion of GPRS service and rising demand for color handsets. However, global players like Nokia and Motorola along with many Japanese handset makers are beefing up their CDMA businesses, so price competition will intensify and could drive prices lower. At the same time, China is currently one of the major export markets for Korean handsets, but the improved competitiveness of Chinese handset makers could cloud the future of exports to China. Small and medium-sized handset makers with relatively smaller consumer bases in Korea might find it difficult to secure new markets and revenue sources because they have lower brand awareness as their sales mostly come from OEM and ODM manufacturing. In the camera phone market, which currently accounts for the largest share of handset revenue, Japanese handset makers are beginning to advance into Korea. They will likely be tough competitors in light of their success in the Japanese market. Korean small and medium-sized handset makers will need to go head to head against these Japanese makers for market share. 35

36 2. Market Trends and Prospects by Sub-Sector Information Equipment Table 2.11 Forecast for Information Equipment Market (in 100 million KRW for production/ US$ million for export and import) ~ 08 Average Growth Rate Production 247, , , , , , % Exports 10,489 11,320 12,814 14,249 15,703 17, % Imports 4,392 5,022 5,636 6,200 6,913 7, % Balance 6,097 6,298 7,718 8,049 8,789 9, % Note : Figures for 2003 and afterwards are estimates from KISDI. Source : KISDI (2003 b) Production Encouraged by rising demand for notebook computers, LCD monitors, and other major items in and out of Korea, production of information equipment is forecast to rise 3.3% in 2003 to around 25 trillion won. Although demand for desktop PCs is slowing, the proliferation of wireless communications is fueling demand for notebook computers. In other words, sluggish exports of desktop PCs will be offset by growth in notebook computer exports. Future production of information equipment is projected to rise at an average annual rate of 10.9% through 2008, encouraged by rising demand for LCD monitors in and out of Korea as well as higher production and exports of peripherals due to an expansion of the storage device market. Of all types of storage devices, HDD is increasingly being used in new information appliances like personal video recorders and digital video recorders. In optical storage devices, DVD and dual function combo type products are expected to be in especially high demand. Exports and Imports Despite the sharp decline in exports of desktop PCs and CRT monitors in 2003, overall exports of information equipment are expected to rise about 11.6% to US$10.5 billion, thanks to increased international sales of Korean notebook computers and LCD monitors. Exports to the U.S. and Taiwan will decline, while exports to the EU, China, and Japan are expected to rise. The trade balance is also expected to improve in 36

37 2.2. IT Equipment the latter half of the year thanks to a lull in the SARS outbreak, modest recovery of the U.S. economy, and the seasonal pick-up in sales for the year-end holiday shopping season. Going forward, a steady rise in exports of LCD monitors, storage devices, digital multi-function ("all in one") products and notebook computers will result in average annual growth of 10.5% through 2008 for total information equipment exports. Among other factors, the growth drivers are expected to be rising demand for notebook computers as replacements for desktop PCs though the PC lifecycle is becoming longer and the increased prevalence of mobile Internet devices such as PDAs PC Table 2.12 Forecast for PCs Market (in 100 million KRW for production/ US$ million for export and import) ~ 08 Average Growth Rate Production 61,585 68,790 77,114 85,982 94, , % Exports 1,412 1,458 1,507 1,563 1,627 1, % Imports % Balance 1,005 1,049 1,081 1,117 1,162 1, % Note : 1) PC includes desktop and portable PCs. 2) Figures for 2003 and afterwards are estimates from KISDI. Source : KISDI (2003 b) Production PC production in 2003 is projected to decrease by 15% owing to the decline in domestic demand. Although the introduction of new products like Microsoft's Media Center, Intel's Centrino, and Springdale are by themselves not sufficient to sharply increase consumer demand, however, they will peak interest and have a positive impact on sales. PC production is expected to rise modestly by 10.9% a year on average through The high growth enjoyed in the past is not likely to return because the PC market in leading countries is saturated, the lifecycle of PCs is becoming extended, and new editions of Microsoft Windows no longer create as much new demand for new PCs. 37

38 2. Market Trends and Prospects by Sub-Sector Exports and Imports Despite the downturn in desktop exports, notebook exports have been strong. Total PC exports this year were adversely impacted by the war in Iraq and SARS, and they are expected to show negative growth. In the future, flat demand in the U.S. and Europe the main export markets for Korean-made PCs means that a significant increase in PC exports is unlikely Components Table 2.13 Forecast for Components Market (in 100 million KRW for production/ US$ million for export and import) ~ 08 Average Growth Rate Production 780, ,010 1,007,733 1,123,623 1,271,941 1,399, % Exports 25,917 32,898 37,964 42,520 47,282 52, % Imports 27,860 33,065 37,364 41,549 46,742 51, % Balance -1, ,066 - Note : Figures for 2003 and afterwards are estimates from KISDI. Source : KISDI (2003 b) Production In 2002, component production rose a tremendous 25.3% to 66 trillion won. Production benefited from the steady recovery in DRAM prices in the first half of the year after their steep plunge in 2001 and the increase in market share of Korean companies. Higher demand for LCDs also helped increase production in Korea. A nearly 60% price drop in LCDs accelerated demand for LCDs as replacements for CRTs. LCDs have now expanded into new applications like LCD TV, resulting in a 54% year-on-year increase for large screen TFT-LCDs in the global market. In 2003, fueled by higher demand for semiconductors and LCDs and coupled with focused efforts by Korea companies to explore new markets, production is expected to reach 78 trillion won, a 17% increase over Despite the initial prediction of growth really taking off in 2003, geopolitical risk factors like the war in Iraq in the beginning of the year and the recent the North Korean nuclear crisis are hampering the recovery in demand. 38

39 2.2. IT Equipment Korean companies have made concentrated efforts to make inroads into small sized LCDs, which up to now had been dominated by Japanese makers. Future potential for production growth is likely to come from exploring new markets. Exports Component exports in 2002 rose 14.8% to US$22.2 billion. Although exports of semiconductors posted better than expected results for the year thanks to the rebound in DRAM prices in the first half of 2002, growth in exports suffered a mild setback in the latter half because of the anxieties in the U.S. over the Iraq war and overall downturn in the telecommunications service sector. In 2001, the prices for TFT-LCDs plummeted due to fierce competition between Korean and Taiwanese makers, causing LCD exports for the year to fall 23%. In 2002, Korean companies stayed a step ahead of Taiwanese competitors by starting operation of fifth generation production facilities before them. This feat allowed Korean companies to solidify their market leadership. Despite the continuing drop in prices, LCD exports rose over 40%. Component exports in 2003 are projected to rise 16.5% to US$25.9 billion. In the beginning of the year, geopolitical risk factors like the North Korean nuclear crisis and the war in Iraq along with the levying of countervailing tariffs against Hynix by the U.S. and EU dampened hopes for growth in exports. Semiconductor exports took a substantial hit in February but are poised for recovery in the latter half of the year, thanks to shift to DDR RAM, which is in turn driving up the price. In LCDs, Korean companies already enjoy competitive a edge over Taiwanese makers in price and quality, and with Taiwanese makers postponing the start of fifth generation production facilities to early next year, the global market share of Korean LCD makers is expected to increase from 43.5% in 2003 to 45% in Imports Imports of components in 2002 rose 13.8% year on year to US$22.6 billion. Unlike 2001, when the global drop in demand coincided with the recession in the PC market, increased exports of DRAMs the flagship product for Korean semiconductor makers resulted in increased imports of semiconductor related products. 39

40 2. Market Trends and Prospects by Sub-Sector Component imports are expected to increase 22.8% to US$27.9 billion in Demand for imported components will rise in the latter half of the year as result of growing exports of semiconductors and parts, and seasonal factors. Increased exports of LCD-based products will mean that demand for LCD component imports will remain strong for the time being. However, relocation of production facilities for LCD products to China, increased production by Korean LCD makers, and replacement demand for imports due to aggressive forays into the small sized LCD market makes any drastic increase in LCD imports not very likely Semiconductors Table 2.14 Forecast for Semiconductors (in 100 million KRW for production/ US$ million for export and import) ~ 08 Average Growth Rate Production 364, , , , , , % Exports 20,008 25,258 30,057 33,363 38,368 42, % Imports 21,899 25,815 28,913 31,804 35,303 38, % Balance -1, ,144 1,559 3,065 4,139 - Note : Figures for 2003 and afterwards are estimates from KISDI. Source : KISDI (2003 b) Production Semiconductor production in 2002 rose 25.3% to 30 trillion won. Much of the increase was due to the rebound in DRAM prices throughout the first half of 2002 and the expanded market share of Korean makers. DRAMs are the major product of Korean chipmakers, and production of them rose 36.75%, in contrast to only 1.77% growth for the global semiconductor industry and 5.34% growth for the memory sector. Semiconductor production in 2003 is forecast to rise 19% to 36 trillion won, helped by an increase in new demand and replacement of flagship products in the DRAM area. Despite such growth, full recovery of demand still has not yet been realized because of the concerns over geopolitical risk factors like the breakout of war in Iraq early in the year and the more recent North Korea 40

41 2.2. IT Equipment nuclear crisis. The delayed recovery of the PC market the largest buyer of semiconductors, and the drop in consumer demand and investment in Asia after the SARS epidemic are also hampering growth in production. Exports Exports of semiconductors for 2002 climbed 17.2% to US$16.7 billion, mainly because of the rebound in the DRAM price. Semiconductor exports were predicted to be sluggish in the first half of the year because of weak demand during the slow season and price cuts, but the rise in the DRAM price resulted in a better performance. In the second half, a more robust export performance was anticipated with the recovery in demand arising from the coming replacement cycle for PCs and greater demand for increased memory in PCs, but poor consumer sentiment in the U.S. stemming from the Iraq war and the downturn in the telecommunications service sector caused exports to flatten out. As a result, the share of semiconductor exports out of total exports increased only slightly from 9.5% in 2001 to 10.3% in 2002, indicating that semiconductors can no longer be a major engine of growth for Korean exports as they were in 1995 to Semiconductor exports in 2003 are expected to rise 19.3% to US$20.0 billion. In the beginning of the year, exports were hurt by geopolitical risk factors such as the outbreak of war in Iraq and the North Korean nuclear crisis coupled with levying of countervailing tariffs on Hynix by the U.S. and EU. However, after experiencing a sharp decline in February, exports of semiconductors have started to show signs of recovery thanks to a rise in prices resulting from the change in the flagship model from DRM to DDR RAM. Imports In 2002, import of semiconductors rose 14% year to US$17.8 billion. Unlike 2001, when the global downturn in demand resulted in a recession in the PC market, strong exports of DRM the main semiconductor model for Korean makers led to more imports of semiconductor related products in Despite the increase in production and exports, the decline in DRAM prices resulted in a US$1 billion trade deficit, which indicates that higher prices for DRAMs are also important for maintaining a balance in trade along with increased production. Semiconductor imports are forecast to increase 22.6% to US$21.9 billion in 41