A Nation in Decry?

Ha-Joon Chang  is a Seoul born Cambridge (Wikipedia says ‘heterodox’) economist who was given 750 words to sum up the UK’s woes in the Saturday Guardian A Nation in Decay, 9/3/13.  Gosh, a  doomful title, reminiscent of the ‘80s!  Chang’s remedy occupied only 275 words (I will come back to this in part two of this blog).  But first, his credentials for advising us.

While many of the demographic reading the Puntios blog had our formative years during Britain’s dramatic downwards spike as a volume manufacturer in the 1980s, and the accompanying but uneven revival of capitalism under Maggie, H-JC (born like me in 1963) was witnessing the continual march of his country towards the technological Premier League.

We insufficiently respect South Korea.  With noisy neighbours for ever invading or threatening, this plucky nation (a bit like Asterix’s Gauls) seems indefatigable.  Maybe it’s their magic potion of kimchi (I note that H-JC is a fan of Branston Pickle, still UK owned).  Whatever, his country’s population is within 6% of that of England, its size a little smaller and its GDP is catching up nicely ($1.6Tr to England’s $2.7Tr).  And they are undistracted by a glitzy financial services sector.  This week the Samsung Galaxy S was launched and is tipped to eclipse the iPhone, ultimate product of our age:  ‘nuff said?

I visited Korea in the early ‘90s on Corning LCD glass business, accompanying my customer Philips.  We North-West Europeans gulped as we took a post-shochu breather along the perimeter of a square mile of Gumi’s factories, churning out every consumer good ever thought of.  We were there to visit Samsung-Corning (JV)’s brand new glass factory.  Samsung & Goldstar had decided that active-matrix LCD (are you looking at one now?) was going to make the leap from laptop display and annihilate the CRT for TV use.  They were right.  On that assumption, they had decreed that the special glass needed on which to manufacture the world’s largest area integrated circuits (for that’s what LCDs are) must be made ‘next door’; most convenient, most practical, most predatory.  On a return visit to Europe, I took the Korean guys to see the world’s largest in-line vacuum deposition kit (we named it the Berlin Wall) at Leybold.  “Ship it” – after a cursory inspection:  it was the biggest and gave lowest unit cost.

It was instructive at the time (1992) to see the FT’s list of the 100 leading UK/US/Japanese companies.  Corning’s favourite business measure at the time was Return on Equity, ROE (=ROCE).  Even in difficult times, upper quartile UK/US industrials were managing 14-15% ROE.  Equivalents in Japan were managing 4-5%.  The favoured measure in Japan/Korea at the time was ‘market share’ – profitability could come later, and it did.  Investment was single minded, rather like my cat after a mouse.  It’s not to say that some better financial discipline and transparency wouldn’t have come amiss.  H-JC refers to the Korean devaluation of 1997 and Japan got really quite tied up in knots too (China has learnt from observing these wobbles).  However, the ‘good animal spirits’ of Korea weren’t put off their main mission – retain leadership.  Powerful positions in LCD, memory and mobile phone are now accompanied by healthy ROE:  Samsung at 14% cf GE 11%.  Compare Barclays Bank at a lowly 7.8% (and that’s before their cost of capital is taken into account).  Healthy manufacturing has nothing to be ashamed of versus banking.

So, the message from South Korea should be that applying a consistent strategy can work well in the long run, but you need ‘someone’ to be prepared to tolerate lowish returns for an extended period; good things happen later if your techno-market judgement was sound.  H-JC has presumably absorbed the lessons from the success of Korea.  What is his suggestion for the UK economy and our industrial ‘decay’.  What are the lessons for anyone trying to ‘do their bit’ at the start-up end?