OUTLOOK FOR SOUTH KOREA’S CELLULAR PHONE INDUSTRY IN THE PAST YEARS

6.1 SOUTH KOREA’S MOBILE MARKET LED GLOBAL TRENDS

In second-generation (2G) cellular phone technology, South Korea’s government decided to follow the CDMA system specification standard in 1996. Since 2001 South Korea has been the second largest CDMA market in the world. South Korea’s mobile subscriber market grew quickly from 1996 to 2001 because of cellular phone subsidies (Kim, Byun and Park 2004; Lee, Bae and Lee 1994).

Because of its maturing market, South Korea’s mobile subscriber growth rate has begun to decline in recent years. From 2002, the growth rate of its domestic cellular phone market declined to less than 5%. Given the slowing demand in South Korea, SKT, the biggest telecommunications operator there, announced that it’s 3G service would be based on CDMA2000 1xEV-DO technology in November 2002. This allowed mobile operators to expand in data services.

As 3G services have emerged in South Korea, including SKT, KTF, and LGT, most of South Korea’s major mobile operators have followed the CDMA2000 system. Recently South Korea also promoted WCDMA and CDMA2000 1xEV-DO at the same time.

Although the market had matured, the brisk sales of high gross profit margin 3G phones incited domestic vendors to launch 3G phones and multimedia cellular phones to replace existing 2G/2.5G series cellular phones. This allowed them to chase additional earnings growth. Thus, mobile phones with colour screens, cameras, MP3 (MPEG Audio Layer III) players, GPS (Global Positioning System), and TV tuner functions are now quite popular.

Colour display and camera cellular phones accounted for 95% of the total shipments in 2005.

South Korea has been a leader over other cellular phone markets compared to other economies. In 2002, when cellular phones with colour displays, CSTN, or TFT LCD only accounted for 24% of total global shipments, colour cellular phone shipments in South Korea’s market accounted for more than 50%. In 2003, when cellular phones with camera modules only accounted for 15.2% of total global shipments, camera cellular phone shipments in South Korea’s market accounted for more than 50%. SK Telecom (SKT), Korea Telecom Freetel (KTF), and LG Telecom (LGT) have been very aggressive in promoting MP3 player services from 2004 to now, such as SKT MelOn and LGT musicON. As a result, MP3 player cellular phones accounted for close to 85% of total new models in Korea in 2005, while only enjoying a market share of 15% globally (Table 20).

Table 20. The milestones of South Korean cellular phone industry Time Cellular Phone

Industrial Milestone 1983 Start to manufacture

1G cellular phone

2000 Cooperate with Microsoft and Palm

2004 Cooperate with Intel (WiMAX)

2005 Cooperate with Lucent (HSDPA)

Source: Financial statements and newsletters of South Korean companies, IDC.

6.2 DEVELOPMENT HISTORY OF SOUTH KOREAN CELLULAR PHONE FIRMS

This study, about developing economies in settings like South Korea, presents the result of how technology evolves through the initiation stage, the internalisation stage, and the generation stage at the industry and firm levels. In order to promote technological innovation, firms conduct not only in-house R&D, but also form closer technological partnerships with other firms, universities and government research institutes. Through the internalisation process, latecomers can produce their own products and decrease their dependency on foreign technologies for manufacturing products (Chung, Bae and Kim 2003;

Lee et al. 1988).

Table 20 shows development path and catch-up strategies of South Korean cellular phone firms. South Korean firms started to manufacture cellular phones in 1983; later than Nokia (1968) and Motorola (1973). At the same time, South Korea’s industry was establishing a new research infrastructure in the 1980s. Since the beginning of the 1980s, many corporate research institutes have been established which have become major players in South Korea’s innovation system. Many of South Korea’s big enterprises are able to compete with the world’s best enterprises in maintaining technological leadership (Chung 2001). Even so, that is not enough to develop a competitive cellular phone industry. The Base-Band cellular phone solution is a key point.

South Korea’s government decided to cooperate with Qualcomm (U.S.), the biggest CDMA IC design house, to develop CDMA cellular phones in 1991. The CDMA standard, just behind GSM, is the second most widely-used 2G standard in the world. This decision helped South Korean firms capture market share, such as the U.S. and China markets. This was the same strategy used by some of the large cellular phone firms, such as Ericsson and Nokia, changing alliance formations over the industry life cycle in response to changing organisational needs and industry imperatives (Rice and Galvin 2006).

South Korean cooperation with Qualcomm produced mobile services based on CDMA, CDMA2000, CDMA2000 1x, and CDMA2000 1xEV-DO technologies, step by step from 2G to 3G after 1996. Because the design platform had been developed by Qualcomm and South Korea’s cellular phone market is closed, operators always place an order with local vendors such as Samsung or LG as a first priority. As a result, South Korea’s CDMA series cellular phone manufacturers developed their brand names based on how quickly the domestic market grew. On the domestic cellular phone market share side, the condition whereby South Korean firms were market leaders remained almost unchanged after 2G. There were more than fifty cellular phone manufacturers in South Korea in 2003, including Samsung

Electronics, LG Electronics, Pantech & Curitel Communications (spun off from Hynix Semiconductor), and other small and medium-sized companies.

6.3 SOUTH KOREAN CELLULAR PHONE MAKERS’ GLOBAL MARKET SHARE AND EXPORT VALUE

Figure 11 and Figure 12 show the South Korean cellular phone makers’ global market share and export value. On the global market share side, from 1998 to 2005, Samsung and LG very quickly achieved remarkable global market share. They even hit a market share of over 20% of total global shipments in 2005 and were only behind Finland’s Nokia.

According to cellular phone maker data, Samsung, just behind Nokia and Motorola, was the third largest company by market share in 2005, with LG having the fifth largest market share.

Figure 11. South Korean cellular phones’ worldwide market share by shipments Source: Dataquest

On the cellular phone export side, before 1998 almost no cellular phones were exported from South Korea. Since the beginning of 1999, the cellular phone export value from there began to increase dramatically, especially in CDMA series cellular phones. Aside from CDMA phones, Samsung Electronics, LG Electronics and Pantech & Curitel, the first three cellular phone domestic brands, also developed GSM/GPRS/WCDMA cellular phone products at the same time. In 2005 the export value of South Korean cellular phones reached US$12.94 billion, with a 71.69% share of total production value and a growth rate of

0 % 20 % 40 % 60 % 80 % 100 %

S o uth K o re an O t he rs

O th ers 99 .2 0% 98. 80% 96 .30 % 9 6. 80% 93. 40 % 93 .1 0% 89. 80% 84 .60 % 8 4. 40% 80. 80 % 79 .9 0%

S out h K orea n 0. 80% 1 .20 % 3. 70% 3. 20 % 6 .6 0% 6. 90% 10. 20% 15 .40 % 1 5. 60% 19. 20 % 20 .1 0%

1 995 199 6 1 997 199 8 19 99 2 000 200 1 2 002 200 3 20 04 2 005

13.61%.

Figure 12. South Korean cellular phones’ export value and total value Source: KISDI

0 400 0 800 0 1 200 0 1 600 0 2 000 0

E x p ort V alue P rodu c tion V a lu e

E xp o r t Va lu e 5 0 9 4 4 9 8 5 2 1 ,5 0 3 3 ,6 5 5 5 ,4 9 7 6 ,9 6 8 9 ,7 8 5 1 0 ,0 2 5 1 1 ,3 8 6 1 2 ,9 3 6 P r o d u c tio n Va l u e 8 0 8 1 ,4 0 3 3 ,0 6 1 5 ,1 3 3 8 ,9 7 3 1 0 ,5 7 6 1 2 ,3 0 3 1 4 ,5 5 8 1 5 ,1 7 4 1 6 ,5 4 0 1 8 ,0 4 5 1 9 9 5 1 9 9 6 1 9 9 7 1 9 9 8 1 9 9 9 2 0 0 0 2 0 0 1 2 0 0 2 2 0 0 3 2 0 0 4 2 0 0 5 Million US$

CHAPTER 7 INTRODUCTION SOUTH KOREA’S CELLULAR PHONE