Through the Korean keyhole

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Charles Bodhi chews on the seeds of change in Seoul.

When Woongjin took the decision to sell Woongjin Coway earlier this year, few would have expected the significant level of interest amongst investors in what is one of South Korea’s largest water purification companies. After all, the holy grail of the Asian water market has long been China (with India arguably pouting on the sidelines).

Although South Korea is Asia’s fourth largest economy, its society is generally seen as linguistically and culturally distanced from the international market, with a mature economy and a wellmanaged water market with stable demand for, and an abundance of clean water.

As your correspondent prepares to spend a week in this oft-neglected jurisdiction, it is hoped that a view of what really happens on the ground will be gleaned. This month’s column looks at the South Korean domestic market. Next month, I will argue how foreign players can make inroads into the market, based on the insight of market insiders active in the shadowy chaebol fraternity.

The Woongjin sale is an important keyhole through which one can begin to appreciate the workings of a South Korean firm. Unlike most of Asia, many Korean companies (including Woongjin) are laudable for their strong corporate governance and employee loyalty. Woongjin’s employees, for one, were said to have held off calling for wage raises while the parent company prepared for the sale, in order to resolve some of its financial problems. As South Korea’s largest provider of point-of-use water purification products and services, Woongjin Coway enjoys a 50% market share, an operating profit margin of approximately 15%, and a 13,000-strong sales force, most of whom – according to insiders – only go home twice a month.

The overall size of the Korean water market was estimated to be about $10 billion as of two years ago. According to the Korea Water Resources Association, despite its receiving average precipitation of about 1,300mm a year (about 30% more than the world average), its high population density means that per capita precipitation annually is only 2,705m3/ yr – 90% lower than the world average of 27,000m3/yr, and less than half of what falls on an average Chinese citizen.

While most of the water distribution networks in Korea have been fully built out, the water treatment services market is competitive, and the government is fully committed to ensuring a clean environment and respectable industry practices for what is surely one of Asia’s most environmentally conscious electorates. This is also consistent with the tightening of ocean-dumping sludge regulations in early 2006, which meant that high-tech solutions for wastewater and sludge reduction – as well as sewage sludge recycling – have been in high demand. Based on data from the Korean Ministry of Environment, the country treated the sewage from 81.4% of its population in 2004, and is on track to hit its 90% target in 2015.

Against this, however, water tariffs remain low: water expenses constitute only 0.45% of household spending. This has been an important limitation to financing new water investments. Moreover, it is fair to observe that the Korean market – by virtue of its uniqueness in language and its business groupings that are comparable in nature probably only to Japan’s trading houses – can be enigmatic to outsiders unfamiliar with the workings of developed northeast Asian economies.

There also appears to be increasing resentment amongst the Korean populace towards the far-reaching influence of the chaebol, which might imply a degree of socio-political pressure for a change in the way in which Korean conglomerates (which have been the most influential and active participants in the water market in recent years) actually function. Until that happens, however, it is clear that a working knowledge of the local business culture is required if one wants to make sense of just how Samsung, SK, Hyundai and the boys are actually taking the world by storm. Otherwise, South Korea will remain to most people simply a Kim Chi wonderland.