The coming blood battle : China VS SK VS Japan

Nobody really gave a lot attention between these three countries’ relationships that much, but I think the competitive landscape between these three countries can a have a big effect on the global economy in the future, which merits a closer examination.

Let me explain :

Before the 90’s, what drew the attention of many people were the small Japanese people that were successfully undermining the American business; and, adding insult to injury, they were getting richer than the American people, at least in paper value. A case in point is, the land under the Imperial Palace in Tokyo was more expensive than the whole area of California, and other unrealistic; a very well-known tale illustrating the degree of the bubble in Japan’s economy back then. But, after the day of reckoning came along, they never really recovered afterwards. Many corporations lost their edge in the global market due to the stubbornly high yen, and domestic consumption never rose to a level where it can lift the economy back to a high growth track, despite the many efforts of its central bank has taken.

Everybody knows this, but what many people didn’t ask that much was, even though the strong yen acted as a detriment to their price competitiveness overseas, if there isn’t a true alternative of their products out there, wouldn’t people still buy their products?

Unfortunately, the loss in market share culminated simultaneously with the ascent of two serious unknown contenders : China and SK.

And, Americans were complacent back then. Probably, the natural way of thinking goes, if the Japanese firms can’t sell their products anymore, then probably GM and US steel will take back their market share. Well, that didn’t happen, although it clearly did help some U.S. industries with varying degrees.

Conversely, starting from the 90s, and even before that, the South Korean government(company’s haven’t been able to pile up a lot of retained earnings, so company’s CapEx were largely sourced from policy banks and other commercial lenders) invested heavily in semi-conductor, steel, shipbuilding, consumer electronics, and automobiles sector. These five industries, transformed the South Korean economy from a developing country to an advanced economy now. GDP per person in terms of PPP is now almost the same of that of Japan. But, guess what? These five sectors were all previously dominated by Japanese firms. Koreans successfully forayed into these areas by making a timely investment and applying modest research and technology capabilities. Now, Japanese firms mostly operate in high-end areas, and lost its competitiveness in rest of the areas where bulk of the revenues previously came from.

What complicated the landscape was the rise of China, especially after the new millennium. They wanted to intrude in every area where they thought they can compete well. Although it’s early to conclude whether or not they are succeeding right now, in light of their low returns on capital and disruptions causing in the market, it is affecting many Korean and Japanese firms in a serious way.

As Japan successfully shifted their value chain to an upper level, barring companies who are in the same field where the battle is fierce(think Sony, Panasonic, Sharp, etc.,), they will be to some extent immune from the coming blood battle. But, as the pool of money is largely extracted below the high-end products – not everybody in the world can buy expensive ships and Apple smartphones – they won’t be able to derive a high growth rate in the future. In other words, they either have to sell more overseas or consume more internally. But, higher domestic consumption has to come from higher income per person, but my question is, where are they going to get it? Even with BOJ’s money, their economy was not even artificially inflated.

Then what’s the game plan for SK? Even though, SK’s rise greatly undermined many of Japan’s industries, Japan at least built an impenetrable research and technological base, which can be applied to new possible growth industries such as Robotics and other areas.

But it seems that SK still hasn’t been able to move up their value chain enough, GUARANTEEING a direct attack against the Chinese firms. Chinese firms have the formula of success which led to SKs success : Capital and modest technology and research skills.

For China, even though they successfully penetrate into areas where SK and Japanese firms are strong, after observing their expansion strategy, I’m not quite sure; they’ve been expanding their market share at the expense of all players, including THEMSELVES. It’s quite uncertain for how much they will be able to employ this strategy, but the recent restructuring plans announced from the Chinese government and no support offered to one of their troubled biggest solar panel company recently indicates that they are going to operate this game more intelligently in the future.

Assuming that there is no meaningful rises of new industries, I think the competitive dynamics of these three countries will play out like this :

1. Japan will keep remain as a low-growth country, regardless of what the BOJ does due to its limited room for expansion in the global market. Any ascent of new industries, where they can apply their more advanced technologies than the two countries can be a game changer, but it’s unlikely that there will be something emerging in the foreseeable future. In the meantime, their consumer electronics firms will mostly go out of business due to negligible technological gaps from their competitors. This trend could evolve in other areas, and might even challenge the automobile sector as well. These challenges coming from the two sectors can have a long-lasting effect, and can add insult to injury to their bold and aggressive growth strategy taken by the government.

2. SK will be embattled, and they will have a tough ten year. Apparently, they emerged as a resilient and strong player after the financial crisis, but they are grappled with the ailing construction and shipbuilding sector, and the pressures coming from China is getting stronger every year. Their strengths in certain industrial sectors will have to compete in a much tougher environment than before. The game changer would be for them to shift their value chain to upper levels and make inroads into more advanced industries and services sectors, but at this point, successful shift in a ten year time frame seems to be.

3. China will certainly intrude areas where SK and Japan previously had strengths. But due to their resort on low-cost, their successful penetration will come only with a limited success. But, as we can see from SK’s experience, it only took them 10~15 years to become a leading player in certain areas, and the technological gap is rapidly narrowing. If Chinese firms offer better products, and as the perception of global consumers enhances, they could be overtake the position of SK and Japan in a shorter much shorter timeframe than we think right now. But, even though they become successful in consumer electronics or automobiles, it won’t be able to solve their social instability as they just have too many people to take care of.

It became a long post than what I originally thought it should‘ve been, but thanks for reading anyway.

I want to hear from others what they think about this issue. Will China overtake the global market? Will SK be the next Japan? Do you think Japan will never recover? How tough will be for each country?

Thanks