Thomas White Global Investing
South Korea
South Korea Stamp
January 25, 2013
A Postcard from the Asia Pacific
South Korea: Chaebols go shopping in Europe

A high-rise in Seoul

The South Korean economy seems to be on a comeback trail and is poised to grow at a modest rate this year.

South Korea’s economy, which did not have much to cheer about last year, seems to have left the worst behind as it ushered in the New Year. Manufacturing activity, the mainstay of the economy, managed to edge past the magical mark of 50 on the HSBC Purchasing Managers’ Index  during the month of December. Fourth-quarter GDP increased compared to the year-ago period, though the full-year growth figure came in at a meager 2%, the weakest reading since 2009, according to a Financial Times report. Still, the country’s big corporations or chaebols, seem undeterred by the weak export demand and subdued domestic sentiment. Some of the companies have forayed into Europe, taking advantage of the low asset prices triggered by the Euro-zone debt crisis and the strength of the South Korean domestic currency, to snap up some of the prized firms on the European continent. 

Though some of these Korean companies have suffered in the current economic climate, they are usually known for their resilience, having come out reasonably unscathed from the 2008 financial crisis. The export boom in recent years also saw them amass rich cash reserves. This “rainy day” strategy seems to have come in handy for corporations such as Samsung Electronics, which acquired CSR’s handset operations in Britain. The electronics and consumer durable goods producer also bought a 3% stake in Dutch semiconductor manufacturer ASML, besides purchasing Swedish semiconductor maker Nanoradio. Not to be left behind, another South Korean firm, SK Hynix acquired Italy’s Ideaflash, while Hanwha Group purchased German solar-cell maker Q-Cells. In the construction and power sector, Doosan Heavy Industries & Construction bought a U.K. water treatment firm as recently as November 2012. Overall, Korean companies spent $1.34 billion in European acquisitions alone during 2012, taking the total value of Korea’s outbound deals to $8.1 billion in the year, according to a report in Mergermarket quoted by the Financial Times.

The overseas takeover deals by Korean firms showed a divergent trend from recent years when most of the investments were targeted at companies operating in the property and natural resources sectors. Korea National Oil Corp.’s $2.88 billion acquisition of British oil company Dana Petroleum in 2010 is a case in point. However, the recent transactions show the eagerness of South Korean firms to snap up companies as an easy way to acquire core technology.

The government has also jumped on the acquisition bandwagon by roping in the National Pension Service, considered the fourth largest pension fund in the world. The entity had taken a 12% stake in Britain’s Gatwick airport in 2010. Besides the chaebols, small privately-held companies have made investments in the European luxury goods market as Korean cosmetics maker Amore Pacific purchased French perfume brand Annick Goutal, while Samsung’s fashion arm bought Italian luxury company Colombo Via Della Spiga.

Actually, what set the stage for the country’s increasing trade relations with European countries was the EU-South Korea Free Trade Agreement signed in July 2011. Needless to say, the partnership has benefited both parties. Korean car imports to the EU rose 41% last year as of June 2012, while EU exports to South Korea jumped 16% in 2011, Reuters reports. According to the European Commission website, the European Union’s first-ever trade deal with an Asian country eliminates duties on nearly all trade in goods. For instance, European pharmaceutical companies such as Novo Nordisk benefit from the lifting of tariffs on pharma exports to South Korea.

But South Korea’s rendezvous with Europe does not eclipse the importance of its trade ties with China, its biggest partner. Though Korean companies, especially the car makers, benefited for a while from the Japan-China standoff over the disputed islands, a sustained economic recovery in the Middle Kingdom is all the more important for the export-dependent economy. Thankfully, the positive signals emanating from China, such as the third consecutive month of expansion in manufacturing activity, are heartening for its neighbor.

Luckily, the change of guard in South Korea’s government has given a fillip to the slowing economy. The newly-elected female president has struck the right chord over the need to maintain China as the country’s chief trading partner and her intent to honor all prevailing free-trade agreements. These current developments, together with the chaebol European safari, are likely welcome signposts ahead for the South Korean economy.

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