Date
16 January 2017
The battery explosion of Note 7 could affect Samsung’s sales of new products in the future. It has already tarnished Samsung's brand image and shaken consumer confidence. Photo: Bloomberg
The battery explosion of Note 7 could affect Samsung’s sales of new products in the future. It has already tarnished Samsung's brand image and shaken consumer confidence. Photo: Bloomberg

When Samsung sneezes, South Korea catches a cold

Samsung has been mired in numerous reports about the explosion of its Galaxy Note 7, including one incident in Hong Kong.

At the same time, Hanjin Shipping Co., whose largest client is Samsung, has applied for bankruptcy protection.

Six hundred containers of Samsung products, primarily electronics and electrical appliances, are stuck in Shanghai.

Samsung’s annual sales account for more than one-fifth of South Korea’s gross domestic product (GDP). Hanjin is the country’s biggest shipping company.

Is South Korea suffering from a streak of bad luck, or are these recent troubles part of a deeper problem?

South Korea is already grappling with lackluster growth before the Note 7 explosions and Hanjin bankruptcy.

The country heavily depends on exports which have dropped for 19 straight months before a moderate rebound in August.

In the first eight months of the year, exports fell 8.7 percent from the year before.

During the period, handset shipments slumped 18.1 percent while display panel exports fell 6.8 percent.

South Korean electronics are gradually losing market share to cheaper Chinese products.

Samsung fell out of the top five brands in China’s handset market in the second quarter.

The South Korean government has warned that exports and overall economic growth will further suffer in the second half.

Sluggish exports have also taken their toll on Hanjin Shipping.

The country’s largest and the world’s seventh largest container shipping line filed for bankruptcy protection on Aug. 31.

Hanjin has expanded dramatically over past decade, along with surging exports of South Korean electronics.

But its practice of heavy borrowing to finance growth backfired when sales of leading brands like Samsung and LG began to slow in recent years.

At the end of last year, the company’s debt ratio was 850 percent .

Total debt was equivalent to 152 times EBIT (earnings before interest and taxes).

That means it would take 152 years for the company to pay off its debt even excluding interest expenses.

South Korean President Park Geun-hye said the government has no choice other than to let Hanjin go bankrupt.

The government has long supported the country’s big corporates.

Since the 1980s, economic policy has almost been shaped around the business development of companies like Samsung and LG, which benefit tremendously from support in capital, labor and R&D.

By investing heavily in the electronics industry, this collaboration model used to work very well.

But at the same time, it also tied the South Korean economy to a few conglomerates. The whole economy would be in trouble if one or two of them failed.

The battery explosion of Note 7 has already tarnished Samsung’s brand image and shaken consumer confidence.

That is set to affect Samsung’s sales of new products in the future.

It might also mark a turning point for the world’s largest handset maker.

If that is the case, it also spells big trouble for South Korea as a whole.

Certainly, South Korea has done a good job exporting its pop culture in recent years.

However, the sector only contributes 3 percent of GDP, hardly comparable with the 60 percent contribution from exports.

This article appeared in the Hong Kong Economic Journal on Sep 21

Translation by Julie Zhu

[Chinese version 中文版]

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RA

Hong Kong Economic Journal columnist

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