In 2020, the Korean film “Parasite” won the Oscar for Best Picture, becoming the first non-English film to receive the highest award in Hollywood. In 2021, Netflix’s original Korean drama “Squid Game” topped the global charts. For decades, Korea has transformed its image from a producer of Samsung, Hyundai and LG products to a vibrant exporter of entertainment and culture. But after the “Miracle on the Han River”, what are the new strategies and investment opportunities for this former Asian tiger? In this market report, we will analyze and explore the prospects of the Korean market from multiple perspectives.

Summary

• Korea is currently the fourth largest economy in Asia, with a significant role in various sectors such as semiconductors, automobiles, entertainment and shipbuilding.
• In 2020, Korea recorded its first negative population growth, triggering widespread concern in its society. The latest data also shows that the average fertility rate of Korean women of childbearing age has fallen below 0.8 to 0.78, a historical low.
• Korea’s economy is highly dependent on exports, and like other exporting countries, Korea is more affected by external demand.

The Miracle on the Han River

After the end of the Korean War, Korea was an extremely poor country with nothing to offer. Korea followed Japan’s post-war development model in its early days, establishing an export-oriented economic development direction through labor exports. In the 1970s, when the United States was mired in the Vietnam War, Korea seized the opportunity for development. Korea exchanged a large number of military orders from the United States for sending troops, and obtained technology transfers from several Western countries through loans, ushering in a huge development.

With the recovery of the economy and the continuous improvement of infrastructure, Korea expanded its development fields to capital-intensive industries such as steel, shipbuilding, non-ferrous metals, automobile manufacturing and electronics, achieving a comprehensive upgrade of its industries. With the technical and economic support of advanced countries such as the United States and Japan, Korea also quickly entered the Western and Japanese markets, and its GDP grew rapidly at a rate of 7-8% per year; during this period, Korea developed from one of the least developed countries to a developed country, creating the world’s fastest record of per capita GDP growth from 1980 to 1990. This period was called “The Miracle on the Han River”.

The Lowest Fertility Rate in the World

The glory of “The Miracle on the Han River” and the Asian Tigers is gone. Korea faces more challenges: Korea’s fertility rate has been ranked last for several years. The latest data shows that the average fertility rate of Korean women of childbearing age has fallen below 0.8 to 0.78, a historical low. Theoretically, if immigration is not taken into account, a country needs a total fertility rate of 2.1 children per woman to achieve generational population replacement levels and prevent population shrinkage.

In 2020, Korea recorded its first negative population growth, triggering widespread concern in its society. According to data from the United Nations World Bank, Korea is among the economies with per capita GDP above $30,000, it is also the fastest aging country: aging will bring pressure on public spending on health care and pensions, while young people as the main force of labor force will directly affect economic development due to their shortage.

The Korean government has also been making efforts to improve fertility rates: infants under one year old can receive 700 thousand won per month subsidy, infants under two years old can receive 350 thousand won per month subsidy, and there are plans to increase subsidies continuously. Since 2006, it has spent $200 billion on related projects, but it still cannot reverse the trend of declining fertility rates. As a single-ethnic country with a relatively exclusive culture, there is also a lot of uncertainty about whether to supplement labor force through foreign immigration.

Korean Market Hotspots

Korea is currently Asia’s fourth largest economy with a significant role in various sectors such as semiconductors, automobiles, entertainment and shipbuilding. Especially this year’s AI wave led by ChatGPT has driven many industry adjustments and reshuffles, and also given enterprises new growth opportunities.

Semiconductor Supply Chain

Since this year due to global demand reduction Samsung’s mobile phone business and foundry business have been cold but stock prices have been rising all along mainly because artificial intelligence driven by Nvidia graphics processor GPU demand surge while adopting AI server will increase all types of memory demand - Samsung’s memory business (dynamic random access memory DRAM) market share more than half thus driving market expectations for Samsung’s future growth.

Among memory chips HBM high-bandwidth memory (a high-performance DRAM dynamic random access core based on 3D stacking process initiated by Samsung AMD and SK Hynix price is 6 times that of ordinary DRAM) is widely considered to play an important role in AI development the logic behind it is that artificial intelligence can not bypass Nvidia’s GPU graphics processor and high-performance GPU can not leave HBM high-bandwidth memory.

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According to market forecasts from 2023 to 2027 HBM’s annual growth rate can reach 76% memory industry will have $19 billion scale in 2027. In addition HBM is in a state of extreme scarcity high price and profitability currently Samsung’s HBM-PIM is not fully formed while SK Hynix’s HBM3 has become Nvidia’s exclusive supplier occupying a certain advantage in the early stage of competition. However Samsung’s scale and production capacity enable it to expand its market share in 24 years and currently Samsung expects to start shipping HBM to graphics processor customers in the fourth quarter of this year.

From a stock price point of view SK Hynix has risen 50% this year while Samsung has only risen 25% so Samsung is relatively cheap compared to its competitors. In addition the current semiconductor industry is still in a state of oversupply close to the bottom of the cycle so it is more reasonable to build positions at the current price. In addition Samsung is larger and more diversified than SK Hynix and has stronger bottoming ability if the memory chip business is not as expected.

Pop Entertainment Industry

In recent years more and more Korean pop artists have moved to the European and American markets and Korean Wave has also been known by more people in the global entertainment industry. The popularity of Korean Wave in a short time is inseparable from its economic foundation. As one of the industries that the Korean government vigorously develops, the cultural industry naturally also attracts more investors’ attention. As a business model driven by fans, its market potential is similar to other major sports events.

The current Korean pop music industry is relatively highly concentrated, with the top four entertainment companies accounting for more than 70% of the industry, namely HYBE, JYP, SM and YG. Taking YG’s popular girl group Blackpink as an example, their current global tour will have a total of 66 performances, each selling for about $175 to $25,000, close to the level of NBA playoffs tickets; JYP’s girl group TWICE will hold 38 concerts in 2023.

However, due to the change of trends and artist contract issues, it seems that no entertainment company can maintain its artists’ popularity for a long time; this is also one of the risks of the entertainment industry, such as Blackpink’s recent news, three members did not renew their contracts with YG, directly leading to YG Entertainment’s stock price plummeted by 13% on the same day, the company’s business value is too concentrated on a few core artists (similar to superstars in sports events).

Korea’s current entertainment industry model is very complete and mature, KPOP’s popularity in more countries and regions indicates that this field still has corresponding development potential. From a longer-term development perspective, Korea’s popular entertainment industry will depend on its influence in Western mainstream culture, whether it can maintain and expand its momentum.

Tourism Retail Industry

China resumed group travel to Korea after many years, which is undoubtedly a positive for Korea’s tourism industry; Chinese tourists contribute a high proportion in Korea’s tourism retail industry: although China issued a ban on group travel to Korea in March 2017, Chinese distributors’ sales in Korean duty-free shops have been increasing since then, reaching 60% of the total sales in Korean duty-free shops by 2019, and became their main sales target during the epidemic period. Therefore, Korea’s tourism retail is largely affected by Chinese tourists’ activities.

Considering the current weak macroeconomic situation, it is expected that Chinese tourist volume will recover to pre-epidemic levels after 2026, and the return of Chinese tourists can partially offset the decline in demand from distributors in duty-free shop sales.

China’s tourists mainly focus on beauty products cosmetics and fashion products KPOP culture popularity also directly brings benefits to these categories; Korean News Agency August 10 comprehensive industry news said duty-free shops and cosmetics brands are also preparing products and promotions for China’s upcoming long holiday including cooperation with China mobile payment service providers.

Ideas and Suggestions

In the long run, Korea’s economy faces similar challenges as other East Asian economies, such as low fertility rates and population aging. In this AI wave, Korean semiconductor companies have also seized some opportunities through their own positioning. Due to the rising geopolitical tensions between China and the US and the military alliance between the US and Korea, Korea’s main growth points in the future may focus on areas that generate revenue from the US.

Another factor that worries investors is the impact of high interest rates and the Korean real estate market: the full-rent model in a high-interest-rate environment has caused turmoil in the entire real estate market, and Korea’s household debt situation still needs to be improved. Korea’s economy is highly dependent on exports, and although it has a relatively obvious rebound and recovery in the post-epidemic era, it will continue to be under pressure due to the current high oil prices and weak demand from China.

The epidemic has led to a significant increase in retail investors investing in Korean stocks, who now account for almost one-third of Korea’s voting population. Therefore, government policy support will also have a greater impact when investing in Korea: such as additional policy measures for the general election in April 2024, which may partially boost the Korean market.