South Korea remains key market for Europe, but political uncertainties rise

08 March 2018 Consultancy.asia

South Korea remains a strong market for cross-border economic activity from Europe. According to a new survey among executives in the country, South Korea has over the past twelve months become a more important part of the mix of international companies, however, doing business in the country has at the same become more challenging.

South Korea recently held the eyes of the world, hosting the Winter Olympics in February this year. The country also continues to gain airtime for less positive news, as fears mount about its neighbour in the north. Aside from the geopolitical tensions, South Korea remains one of Asia’s strongest economies, recording solid growth of 3.1% in 2017, while exports grew to their highest level yet at $574 billion.

European companies are among the major investors in the South Korean economy, operating a broad-range of businesses. To better understand how European companies are faring in Korea, the European Chamber of Commerce in Korea (ECCK), an association of European companies doing business in Korea, commissioned Roland Berger to assess the sentiment of over 100 company executives, whose total combined workforce is in excess of 30,000 and whose total combined revenues exceed €28 billion.

As per the survey, European executives are keen to conduct business in South Korea, but recognise the need for improvement in terms of the overall business environment in the country. A number of pro-business initiatives have been launched in the country in recent years, but appear to have fizzled out without renewal.

How would you characterize the imporance of Korea in your companies strategy

Nevertheless, the new government has launched several reforms, with objectives of job creation and economic growth, which appear to have positively affected the perception of the country as a centre for business. 

According to the executives surveyed, the Korean market remains important to their wider global strategies, with 44% saying that the country is increasing in importance, up from 37% in the 2016 survey. The number of respondents that say that the country is declining in importance fell to 8% from 16% in the previous year, while those who see the country in the same light stood still at 47%.

The study shows that the majority of respondents believe that doing business in South Korea is a challenging feat, not withstanding recent factors affecting the market, including political uncertainties from recent scandals and a general election. Overall, respondents believe that conditions have become more difficult, although 10% of respondents said that business in the country had become easier.

Respondents were, however, generally content about their business in South Korea, with almost 16% stating that they were very content and 41% stating that they were content. Few companies, 5.6%, expressed considerable discontent in the situation.

Company revenue change for 2017

The research highlights that while companies are pessimistic about business development overall, their companies saw improvement to revenues for the most part, (51%) – with 25% across the various segments saying that revenues had grown significantly. The services sector was the most volatile, with 40% citing a substantial increase while 20% cited a substantial decrease. Consumer goods & retail and financial services were both also able to substantially grow their revenues, at 35.7% and 33.3% respectively.

The automotive sector also comes in above average in terms of revenue increase, although logistics is the star performer, with almost 70% of respondents seeing revenue increase. The machinery/tools segment was the weakest in terms of revenue growth.

However, while revenue is growing almost across the board at companies, many cited discontent with performance in South Korea. Financial services is particularly critical of itself, with 50% expressing discontent or extreme discontent with their performance. Services is noted to express discontent as well, cited by around 40% of the sector’s respondents. Overall, however, most companies are content with their performance – while logistics, consumer goods & retail, and pharma & healthcare are all very content with their performance for 2017.

Performance breakdown

Top five business challenges

The report identifies certain general challenges that remain as obstacles for the growth and development of business in the region. In terms of pro-business initiatives, the reforms seem to be absent from the current administration’s agenda. In addition, the country is plagued by a spike in labour costs, an ambitious regulatory framework, the presence of market access barriers, and restrictive regulations.

In terms of key challenges for 2017, economic growth of Korea is the top-most cited (86%), up by more than 13% on 2016. The rising cost of labour saw a 5% increase from 2016 to 73%. Ambiguous rules & regulations comes in third spot, while market access barriers have moved into the top-5 to number four. Finally, the discretionary enforcement of regulations takes the number five spot, re-joining the survey as a concern (last seen in 2015 also at number five).

Challenges in Korea

The report concluded; "Korea is and remains, despite a number of different challenges, an attractive market for European businesses. New companies are entering the market and companies with operations on the ground expect their businesses to develop positively within the next two years and intend to expand their operation accordingly.”

The authors continued, "Nevertheless, it needs to be stated that the evaluation of business performance does vary considerably from one industry to another. Industry sectors with positive performances and outlooks are, among others, logistics, consumer goods & retail, and pharma & healthcare.”

According to a recent study by PwC, CEOs in Asia Pacific are generally more positive about their growth outlook.

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Economic boom will see 500 million Indians enter middle-class within a decade

18 April 2019 Consultancy.asia

India’s economy is projected to grow at a base rate of 7.5% annually to 2030 according to an analysis from Bain & Company, with 500 million people moving into the middle- and high-income bracket over the period.

India has boomed in recent years, buoyed by a growing population and rapid economic development. Today the country is the world’s second largest in terms of population and sixth largest in respect to economic clout – with its economy still growing as one of the world’s fastest, at 7.5% in 2017. As incomes have risen, millions of citizens have moved up into new consumer categories.

An analysis from Bain & Company for the World Economic Forum shows that the future is also bright for the country according to long-term fundamentals, with a growing GDP of which around 60% is domestic private consumption, insulating it to a degree. There is also a healthy savings rate, at around 22% of income, and a large working age population, with a median age of 28 years.Evolution of household income in IndiaThe Indian economy is projected to enjoy strong growth in both the low and high case scenarios considered in the analysis. The base case will see economic growth stable at 7.5% on average until 2030, with just a 1% degree shift either side of this figure for the lower and the higher case scenarios. The effect of growth for the base case is an additional 500 million middle- and high-income earners added to the economy to 2030, with 50 million fewer in the low case scenario – pushing the share of upper-middle and high-income earners to 48% of the total population.

The firm’s projection of income growth would see consumption spending increase from $1.5 trillion to a massive $5.7 trillion by 2030. The growth is largely driven by a huge increase in the country’s middle class households, which are set to expand by 140 million, while the high-income earners are set to grow by 21 million – together a 51% increase on 2018. The middle class will see its share of total consumption increase from 30% to 47%, while around 25 million people will be rise out of poverty, with total poverty decreasing from 15% to 5% of the population.Indian population statisticsUnlike much of the developing world, India is ageing slowly, with a current median working population age of 28 which is set to rise only slightly, to 31, by 2030. The effect is that by 2030 the country will have the largest working age population at the youngest relative age. The rural population has also shrunk considerably since 2005, falling from 59% of the population to 51%.

The developed rural population has grown slowly over the same period, from 13% to 15%. The urban population meanwhile has increased from 28% of the population to 34%. Urbanisation is also set to continue. By 2030, the rural population is projected to decrease further, to 44%, with developed rural only growing by 1% in the period. Urban development is projected to hit around 40% by 2030.

The ongoing urbanisation and rising incomes will lead to further consumer shifts. With considerable changes to income distribution across India, growth in the middle class segment is expected to see around $2 trillion in incremental spending on affordable mid-priced offerings, while a further $2 trillion will be shifted to more premium product lines as consumers trade up.Consumer spending shifts in IndiaBain notes that buying behaviour will shift in line with both trading up as well as in new category spending. In food for instance, around 25% incremental spending will shift towards more premium goods, while around 32% will shift into health and organic food stuffs.  Personal care meanwhile is set to see considerable premiumisation, at 59% of incremental spending, as well as a broadening of product categories.

“India will continue on its path as one of the world’s most dynamic consumption environments, propelled by five major drivers: income growth; steady and dispersed urbanisation; favourable demographics; technology and innovation; and evolving consumer attitudes,” states the report. “As these drivers move India forward, many stakeholders have the potential to shape the country’s positive consumption future.”

It concludes: “The time is ripe for these stakeholders to come together and address head-on the most pressing societal challenges facing India today – skilling and job creation, socio-economic inclusion of rural India, and building a healthy and sustainable future for its citizens. Collaborative efforts to address these challenges will unlock the full potential of a young, connected and thriving nation, and establish India as a model for fast-growing consumer markets of the world.”