If one looks at the state of the electronics market today it is easy to see which are the leading brands. In the smartphone segment, The market leaders are Apple and Samsung, followed closely by Huawei. TVs have LG ruling the roost, and many other consumer electronics are dominated by such companies. But what is the similarity between all these companies? Samsung, LG, KIA and Hyundai are all South Korean products.
There is a heavy price that consumers in their home country of South Korea have to pay to support home efforts. Consumer prices in Korea have historically been higher for other countries, a trend that continues to this day.
Even as the currency of the country, the Korean Won has increased its strength against other currencies, the price of the products still remains high. Join us as we take a look into why consumer electronics are priced higher in Korea and the effect of it on the market.
Stringent Regulation Creates Room For Uneven Logistics
The philosophy of regulators in South Korea is to adopt a strictly protectionist policy when it comes to consumer electronics. Nowhere else is this clearly seen than in the consumer electronics sector, as heavy import taxes are levied on those wishing to buy foreign electronics to use.
Instead, regulators wish for more value to be created inside the country, both in the form of production facilities and consumer sentiment. This has led to a very stringent import system, putting a tap on the otherwise voluminous import growth that Korea experienced with the rise of smartphones.
The regulations to the import system not only require additional taxes but also need the companies to jump through hoops of distributors and wholesalers. The presence of such a “healthy” middleman market has led to the creation of an unreasonable logistic network. This leads to added distribution costs in the country, especially for importers.
Protectionism As A Growth Strategy For Local Companies
While this explanation makes sense for imported products, shouldn’t home players have an advantage? That is precisely what protectionism aims to bring to the table. Simply put, such regulations allow Korean companies to gain an edge when playing at home.
For example, if Apple is selling a phone at $1,200 for a profit of $200 in the US, Samsung might also be selling a similar phone at a similar price point, $1,200. The situation changes when the market moves to Korea, as Apple will have to pay heavy import taxes as per regulation. Say the import tax is set at $200 for this particular product. This will push up Apple’s expenditure per device to $1,200, pushing them to increase the price to $1,400 to maintain their profit margins.
Samsung, however, has a strong advantage over Apple in this example. As the company has manufacturing facilities in South Korea, their need to pay import taxes is removed. This will allow them to continue selling their $1,000 phone at $1,200 without any impact on their profits. At this point, if Samsung decides to set Apple’s price as the market norm, they can increase the price of their phone to $1400 as well. This means that what Apple is losing in the form of import taxes, Samsung profits directly.
This collection of regulations itself create a healthy environment for South Korean manufacturers to compete at home while managing to stay relevant in the face of rising globalisation. However, there is one party that will not stand to benefit from this, with that being South Korean consumers.
Due to constantly being asked to pay higher prices, the consumers also have an increased ‘willingness to pay’ for products. This has led to a culture of keeping up with the “latest and greatest” in technology, with many Koreans buying new phones as and when they come out. This, in turn, has created a booming second-hand market for electronics in the country. In reality, however, there exists one reason beyond everything else that has put South Korean consumers in limbo.
The Rise Of The Chaebol
After the end of the Korean War, the government looked to rebuild the industry of the nation by creating relief funds and cheap loans to businessmen. This was around the time when protectionist measures were also implemented.
The combination of these factors, along with the need for Korea to rebuild after the war, proved to be potent and integral to the economic growth of South Korea in the coming years. It also created an environment where businesses with connections to each other, leading to a market where two-thirds of it was held by so-called chaebols.
Chaebol is a Korean term that refers to a large group of companies connected to each other, creating a monopoly that spans over markets. However, the transition to democracy reinvented the relationships between chaebols and the government, leading to politicians beginning to rely on them for power. Today, the chaebol system is present in companies such as Hyundai, LG and Samsung, who operate in a varied number of sectors in Korea when compared to their international operations.
The chaebol system is also partially responsible for the system of distribution and wholesalers who have disrupted the operations of other, external companies. Even the protectionist stance of the government’s regulation could have come from the chaebol, as they wield significant economic and political power.
Even as the system is poaching the wallets of regular citizens, it is beginning to deconstruct itself as newer governments take a more stringent approach to regulate these organisations, pointing to the hope of a brighter future for consumers.
