Secret 3: Rapid Expansion into Emerging Markets

The third key to the dramatic rise of Korean conglomerates on the global stage is their rapid expansion into emerging markets in recent years.

"Ten years ago, Samsung and Hyundai rarely had significant investment overseas, but now Samsung, Hyundai, and LG have all quickly gone global," says Goldman Sachs' Goohoon Kwon.

In 2009, a record 70 percent of Korea's exports went to emerging markets. A Goldman Sachs report noted that more high-tech products were sold to BRIC countries (Brazil, Russia, India and China) last year than to the United States, Japan and Europe for the first time ever. Just five years ago, the picture was reversed, with Korea shipping five-times more high-tech goods to the three advanced economies than to emerging markets. 

Korean companies have also proven to be adept at quickly identifying "local" needs in new markets. LG long had a reputation for selling cheap home appliances, but it has recently relied more on innovation. Last summer, it teamed up with universities and health authorities in India to develop an ultrasonic air conditioner that can get rid of the mosquito that carries dengue fever, and the appliance has become a big hit.

Two years ago, it released a plasma TV in the Middle East with embedded software containing all 114 chapters of the Koran. The 42" plasma TV, which comes with a hard disk and can even recite the Koran out loud, sold for only slightly more than other flat-screen TVs and gradually became a hot item. The innovation helped LG capture a 40 percent share of the plasma TV market in the Middle East in 2009.

The only problem for the chaebols is that their growth model has limitations, as Kung Ming-hsin, the vice president of the Taiwan Institute of Economic Research, contends.

"Korean companies can become the world No. 1 in mass-produced standardized commodities. But they are not capable of using innovation to dominate the globe. That's why South Korea cannot produce companies like Intel," Kung says. 

In the field of smartphones, for example, the technology of Taiwan-based HTC remains superior to that of Samsung and LG. In the North American battleground for LCD TVs, U.S.-based Vizio, an affiliate of Taiwanese TV maker Amtran Technology, has held its own against Samsung. Learning from the example set by Acer Inc., Vizio has farmed out its manufacturing to concentrate on brand marketing and actually outsold Samsung, which does everything itself, in the U.S. market in 2009.

"Taiwan is one big Samsung. But the whole of Taiwan does not use the power of one conglomerate to maintain control. Instead, it must rely on industry consensus where divisions of labor naturally emerge in every area and become the source of Taiwan's overall strength," says Acer founder Stan Shih, who has always opposed Taiwan's following the Korean model.

"Taiwanese people can still sleep at night, but Koreans can't," Shih says, "because South Korea only has Samsung and LG. The moment something goes wrong at Samsung or LG, South Korea is finished. Taiwan has a lot of Samsungs, so I don't care if one of them has a problem. That's the Taiwan model. The reason it's the more correct model is because it captures the spirit of democratic politics and diversity."

Translated from the Chinese by Luke Sabatier