Brand Confucian

LGT lost their red sparkly shoes and didn’t make the trip from Oz to the “World IT Show.” While I think the no-show was probably a mistake for the brand image, I thought they got a little too much flak for it from the industry press.

Asia Finance issued the following report yesterday. It’s amazing what companies have to put up with in Korea.

Blue is them, Black is me.

LGT Just Feigning R&D

-Company sites cost cutting as reason for ‘IT World Show’ no-show

-LGT Turning away from result-driving R&D investment

Criticism that LG telecom is neglecting Research and Development (R&D) investment while focusing solely on increasing its customer base is on the rise. This is a break from the vision of LG board chairman Bonmoo Ku as it diverges from the high level of aggressive R&D investment he had [previously] ordered for the corporation.

According to the industry (June 23), LG Telecom’s no-show at Korea’s largest IT event, the June 17-20, ‘World IT Show,’ held at the Coex [convention center] in Samsung dong, Seoul has been criticized as directly connected with a lack of commitment to research and development.

Okay, had to break in here for a second. “According to the industry?” WTF? Did the industry demigod prophesy this to him or what? Let me say here that I think this guy’s point is one for every marketing VP to consider when her company starts to tighten the proverbial belt. Not participating in the “World IT Show” definitely has consequences on brand image. But this journalist really sucks at his job – more on that in a minute. Oh, and just a comment on this guy’s writing – it’s so damned opaque that this thing took me 3 hours to convert into (somewhat) readable English.

[The fact] that major LG corp. player LG Telecom was the only no-show while for four days the top domestic ICT industry players including Samsung electronics, LG electronics, KT, and SK Telecom showed off their new technologies and cutting-edge products, was all the more regrettable.

Regrettable? To whom? You, lowly reporter dude? I’d say KT and SK Telecom are probably doing cartwheels. And why would you regret it? Are you an investor? What’s your beef? And don’t give me any nationalistic bullshit response about how it’s regrettable because a Korean company seems to be losing face (although that’s probably bullshit too, and I’ll get to that in a minute).

A source at LG Telecom said regarding [the absence] “Strategic judgment, including the need for cost savings, and no other motivation led to the decision not to participate in this year’s exhibition.” He also cautioned against drawing [any other] far reaching conclusions.

Okay finally, you talked to someone and did a little reporting. Thank you. And maybe you should listen to this guy. It’s like you’re driving the last nail into LGT’s coffin with this report. God man!

However LG Telecom’s failure to appear at domestic and international IT exhibitions large and small and its decreasing profile aren’t 2-day phenomena.

According to an industry insider’s assessment, although [it’s true that] LG Telecom’s investment budget is smaller than its competitors, because new technology is a weakness, LG Telecom has no choice but to shun exhibitions where [direct] comparison with industry competitors is unavoidable.

The industry insider said “participating in a domestic exhibition can require somewhere between 500 million won ($358,000 US) and 2 billion won ($1.5 million US), so it could be a burden,” but then retorted, “But isn’t it [more likely] that LG Telecom’s real Achilles heel is that their lack of a variety of applications would mean that they [simply] would have a hard time coming up with things to attract visitors attention?”

Okay at least you’ve stopped quoting the ubiquitous and omnipresent ‘industry,’ but ‘industry insider?’ Come on, be a little more forthcoming. The title ‘insider’ tells me nothing about his motivations. I doubt he even exists. He could be you, for all I know.

Although I’ve been reading Korean newspapers for a long time now, I still don’t understand how Koreans put up with this malarkey.

Concerns that LG telecom is focused solely on immediate results at the expense of investing in its future are on the rise.

Whose concerns? Who are you talking about? Again with your concerns? Dude, nobody cares!

LG Telecom decreased its [2009 Q1] operating development budget 24% [year on year] from 7.161 hundred billion won ($550 million US) to 5.414 hundred billion won ($416 million US). This year among LG Telecom, KT, and SK Telecom, LG Telecom has decreased its research and development budget by the largest percentage.

JinOh Kim (김진오기자 (기자로 자격이 없지만)) jokim@asiae.co.kr

This is my favorite part. By this guy’s calculations, LG Telecom would be a $479 Billion dollar company. He got the math wrong by a factor of 100. Dipshit. Also, I checked the numbers, posted here, and it looks as if LG Telecom usually made an unusually big R&D push during the 4^th quarter of 2008. In fact, if you compare Q4 2008+Q1 2009 to Q4 2007 +Q1 2008, LG telecom actually posted an 8.2 percent increase in R&D spending. So the guy from LG Telecom was right. Sure, they’re cutting back on advertising. But that means one thing and one thing only as far as we can ascertain: they’re cutting back on advertising.

While this guy’s writing style and journalistic integrity are definitely not of the highest caliber, the concern he raises was likely to have been felt by any attendant at the World IT Show. You definitely don’t want your customers saying “What happened, I wonder if something is wrong…hmmm.” Consumers are jittery enough already in today’s economy. And if LG’s sole strategic focus right now is just getting people in the door (which might be perfectly legitimate, by the way), a conspicuous no-show at this exhibition was probably not the right move from a brand-image perspective. Even if they didn’t have much of a ‘wow’ factor with new technology, there’s no reason they couldn’t have piggy-backed with LG Electronics. And hey, as long as you give away some free shit at one of these things, you’ve done your due diligence on the customer’s part.

Banks will roll out the much anticipated 50,000 won note tomorrow. A survey of the English and Korean language press on the event reveals the following interesting predictions on the note’s possible effects. Although a few of them I believe are misguided, each merits consideration from a marketer’s perspective.

Increased convenience

According to the Financial Times, the average Korean withdraws between 110,000 and 120,000 currency each time s/he visits the ATM. What took 11 or 12 notes before can be handled with three. Also, no longer will consumers be hassled with those pesky 100,000 won promissory notes (수표) that require a national ID number and mobile phone number. Most likely a 50 thousand won will replace promissory notes up to 500,000 or even 1,000,000 won.

Less paper and paperwork, more convenience. Fairly straightforward, so far.

Price increases – worries of price increases

Again, the Financial Times reports worries that consumer products manufacturers may increase prices. Most likely, manufacturers will alter package volume to increase value on 30,000-40,000 won products.

That seems reasonable, although frankly, as a marketer, I wouldn’t advise re-packaging initiatives coinciding with the new denominations’ launch. Such projects could easily backfire. Consumers (particularly Korean consumers) aren’t stupid, they’ll notice, and even if value increases, a 15-20 percent increase in packaging size is sometimes unperceivable, or seemingly insignificant. Korean products have been priced with the 10,000 won denomination in mind since its release in 1973. And price is only one variable influencing package volume demand. Consumption rates, average family size, and psychological price-value thresholds also must be given appropriate consideration when determining product volume/quantity. Before marketers and manufacturers jump on the re-packaging band wagon, they’d better do their research.

Increased Consumer Spending

The Korea Herald reports that retailers are hoping consumers will increase spending upon the release of the note – particularly on larger ticket items.

I’m not holding my breath. These retail marketers (I use the term lightly) are neglecting a well documented phenomena called the denomination effect. People are less likely to part with larger denominations. Granted, people will be more likely to spend the 50 thousand won notes than the 100,000 won promissory notes. But these aren’t as widely circulated as the ubiquitous Man-won (10,000 won[note]). Koreans are likely to be more attached to a 50 thousand won note than they are to five – 10,000 won notes. Since consumers overwhelmingly use the 10,000 won note on purchases up to 100,000 won, I predict that consumer spending in cash is likely to decline slightly, but overall will remain fairly constant as credit card spending for purchases of  50,000 – 100,000 won  will likely increase inversely. There is likely to be an initial frenzy spurred by various  ‘50,000 won discount events’ in which retailers actually forfeit margin in an effort to get people to part with these new notes, but after that, I believe things will pretty much go back to normal.

Increased inflation

Milton Freedman famously posited that “Inflation is everywhere and always a monetary phenomenon.”  Milton’s monetarism, the theory that largely informs fiscal policies the world over (including Korea), and has held relatively true for the past 4 decades or so, holds that inflationary pressures are directly related to the overall supply of money. Any inflation in the next couple years will have nothing to do with currency denomination (unless the new note increases monetary velocity by some exponentially miraculous factor – which it won’t) and everything to do with the hundreds of billions of dollars MB  borrows from kindergartners to spend on the great and ‘green’ economic bailout.

Increased Corruption

This one is by far my favorite. Munwha Ilbo’s Choi Bum obsesses opines on how the new denomination will increase the valuation of black money. You know, that black and vile stuff lining the nooks and crannies of an increasingly morally bereft society. Imagine their glee as shady politicians, mobsters, and pimps consider fattening their bank accounts from ever-thinning envelopes and more portable attaché cases.

After seeing the reporter’s name, I thought the article might be tongue-in-cheek. So I asked a Korean writer friend for a gut check – nope, the dude is officially a crack head.

I’m salivating.

Seriously.

MK reports that the much anticipated iphone release in Korea is scheduled for July.

About 3 months ago I went out looking for a new ‘smart’ phone and found that most ‘smart’ phones available in Korea are really rather dumb. While Haptic from Samsung Electronics has a nice, sleek design, and the LG cookie phone is cute, the content developed by manufacturers and service providers was severely lacking in my humble opinion.

I hope to see the iphone take Korea by storm. With such a large portion of the youth population not only familiar with web 2.0 technology but also with programming, I am optimistic about the application development market in Korea. I hope this platform is the next big thing for Korean nerds so they can showcase their innovation.

I also believe that millions of Koreans – my guess is around 5-6 million – will switch over. This will be huge for KT (formerly KTF) as I think they will take significant market share from SK in the venture. I hope that Apple will stick to its guns and remain with KT exclusively, at least for a while. This is total conjecture, but I’m guessing that the thing that’s been holding the phone’s release up – aside from government regulation, is the pricing arrangement with KT. Although subsidised mobile phone pricing has been available in Korea for some time, companies tend not to offer steep discounts on more popular models.

The pricing model is what I think will make this deal a game changer. A Korean friend of mine who purchased a new cellphone only a month ago is already planning on making switch. Korean consumers change handsets more frequently than consumers anywhere. SK will lose many, many subscribers in this battle. It will be interesting to see what they do to compensate.

One thing I am interested in is how the phone will be marketed. This is where Apple needs to be careful of being too hot-headed. A little market localization is in order. They definately need some local star power… someone not too expensive, but relevant and sofisticated. Hmmm….And in addition to TV and internet, they also need some event marketing. I hope they don’t blow this. It’s the opportunity of a lifetime.

Once I get my grubby paws on one of these things, and after allowing significant enough time to gauge the market response, I intend to write up a full review from the Korean consumer perspective.

 

Asia Economy had the following story on public sentiment regarding the Ssangyong motors fiasco. Once again, everything in blue is my translation. Black text is commentary.

A public survey reveals that 80 percent of Korean citizens opposed governmental use of force in the Ssangyong motors bankruptcy incident.

According to a telephone survey of 1,000 men and women conducted June 15-16 by Hankil Research on behalf of the ‘National Commission for the Proper Restoration of the [Korean] Auto Industry,’ 79 percent of respondents “oppose the use of force at the [Ssangyong] bankruptcy. Those in support of using force numbered 17 percent.

70 percent of respondents indicated that, regarding the current situation, “the government is most responsible because it allowed Ssangyongs sale to Shanghai motors which stole the subsidiary’s technology without any making any investment in the local firm.” Shanghai motors was the largest culprit for 19.9 percent of respondents, and the workers union was faulted by 13.2 percent of respondents.

Twice the number of people (63.1%)opposed resolving the company’s problems through labor firings and layoffs as supported (31.1)such measures.

On whether or not public funds should be used to [bailout] Ssangyong through nationalization opposing opinions stood taughtly at 45.3 percent for and 42.6 percent against.

This survey had a 95 percent reliability with a ±3.1% standard error.

Reporter Hyeshin Ahn (안혜신) ahnhye84@asiae.co.kr

Is it sad that Ssangyong motors is going through bankruptcy and has to lay off a bunch of its factory workers? Most certainly. But layoffs are sometimes necessary to keep a company afloat. Companies need to be able to downsize when they’re in a crunch, without fearing psychotic labor unions.

And as for the whole thing being the fault of government? Well that is just more protectionist bull-shit.

Ssangyong management knew, or damned well should have known, what they were getting into when they decided to sell their shitty little company to Shanghai motors. I’m sick of hearing this load of turkey shit about how Shanghai didn’t invest any money and stole Korea’s technology. That’s not necessarily how it works people. I’m sure Shanghai motors invested all they were planning to invest on the initial purchase. After that, they saw it as local management’s job to get their act together and make the company profitable again.

It may sound harsh, but it’s a perfectly legitimate way to do business. Not to mention the international model. As a subsidiary, Ssangyong was responsible for turning a profit and repatriating it to Shanghai. That’s the way it works my friends. As for stealing technology, how can you steal something you’ve legitimately purchased?

Responsibility for the failure of Ssangyong lies chiefly with the local management, then Shanghai motors.

Responsibility for the current labor fiasco also lies with local management – they fucked up communication with their employees and have just been total idiots about their labor policies – but mostly with the labor union. Again, the government is off the hook.

All of this aside, the human suffering aspect of this story is what is most tragic. These poor workers, through no fault of their own, have lost their jobs - truly a travesty. But to make matters worse, they are lied to and rallied by a self-serving, vindictive, un-productive, and un-principled labor union that on the whole is serving as the biggest obstacle for business to move forward and the laborers to find new work.

Money Today reports ‘public official’ as the #1 employment choice for job seekers in Korea. This according to a survey of 1,153 job seekers conducted by online education and employment portal Eduwill. The group collectively favored employment by the government as a public servant at 20.1 percent of all respondents.

 

 

 Other prospective occupations fared as follows:

 

Public Servant (공무원) 20.1%

Regular office worker (일반사무직) 17.6%

Skilled professional (기술직) 10.8%

Finance professional (금융직) 8.9%

Educational professional/teacher (교육직, 교사 교직원) 7.5%

Marketing/Advertizing  (마케팅,홍보직) 7.3%

Sales, including business start-ups, (창엄을 포함한 영업직) 5.4%

 

 

 

Interestingly (although not surprisingly) respondents differed by sex, reinforcing deeply held cultural gender norms.

Men

Public Servant (공무원) 22.7%

Skilled professional (기술직) 16.1%

Regular office worker (일반사무직) 14.2%

 

Women

Regular office worker (일반사무직) 22.9%

Public Servant (공무원) 16.3%

Educational professional/teacher (교육직, 교사 교직원) 11.3%

Although not mentioned in the report, I would venture to guess that the gender split also applied to the marketing category as it has been my experience that marketing is predominately considered a ‘soft science’ in Korea so to speak, and women make up a larger portion of the marketing and advertizing work force (though not at the executive level, but that’s another story)

Reasons for field choice fell into the following broad categories:

Job Security 36.7%

Salary Level 20.6%

Job Satisfaction 17.1%

Career Prospects 13.8%

Even though MB has harped on the ‘smaller government’ string and has, to a certain extent, cut government bureaucracy down (though I wouldn’t yet say ‘to size’), It seems that sentiment is that that government positions are at least more solid than positions in the corporate sector. I suppose this is understanding considering the current economic situation, but frankly, once you get hired into corporate Korea, it becomes damned hard for your employer to get rid of you.

Biggest perceived obstacles to attaining career goals were:

Lacking foreign language skills 35.7%

Lack of prestigious academic affiliation 20.6%

I’d have to agree with the foreign language skills obstacle. In this global marketplace, communication with foreign companies, employees, and governments is more important than ever. Academic affiliation is important too, but sadly, in Korea, it tends to be less based on academic (and later professional) merit, and more on a perpetual system of academic cronyism.

What I see in these numbers is tremendous opportunity for students of business in Korea. Only the gutsiest students with the strongest constitutions seem to be going the corporate route. Sure, we are still likely to see millions of the incompetent flock to the government sector (and this sincerely means headaches for everyone), but sifting out that chaff leaves more cream for the business sector. If only more of them were looking seriously at global companies instead of all-mighty Samsung…

And women are representing in this cadre nicely. Looking at these numbers, I can’t help but garner a slightly brighter glimmer of hope for sex equality in Korea.

The following article pushed several of my libertarian buttons. I’ll try not to get too worked up about it, but provide a fair and balanced counter argument. The blue text is my translation of the original article, and the black text is my own.

 

Stop the Foreign Technology Leak-Hole

Kyunghyang news

 

-42 exposures in 2008, an increase of 31 percent over 2007

-No regulation stopping leaks of core national technologies through M&A deals

 

The recession is increasing worries about industry technology leakage. This is because executives unsecure about employment are easily tempted to change companies, and the possibility of domestic firms being merged with or acquired by foreign firms is increasing.

 

Okay, the leaking of industry technology is a big deal, no question. And firms have a right to expect protection from intellectual property or trade secret theft. But let’s not confuse illegal trade secret theft with completely above-board M&A transactions. Korean firms go willingly into M&A transactions for their own selfish (and by that I mean good) reasons. The technology that such firms possess, and chose to sell to other parties (whether foreign or domestic), belongs to those firms alone. Such technology is not some intangible ‘Korean’ asset possessed by the Korean people as a whole by default due to the fact that the firm was originally established in Korea.

 

In the June 11th report, “The daily increasing severity of trade secret leakage,” Samsung Economic Research Institute (SERI) explained that the number of exposed trade secret theft cases has rapidly increased 31 percent from 32 cases in 2007 to 42 cases in 2008. The number of exposed trade secret theft cases increased around 1-3 cases annually from 26 cases in 2004, but as the economy worsened last year such cases increased dramatically. Had these trade secrets [actually] been leaked, [the report] estimates probable damages also increased from 1.3 trillion won (1.08 billion USD) per incident in 2004 to 1.9 trillion won (1.58 billion USD) per incident in 2008.

 

The report indicates that security and executive employee management systems development pale in comparison to technological advancement and that the probability of trade secret theft is high. [The report identifies] avenues of possible trade secret leakage including ‘internal agents’, ‘M&A deals’, and ‘joint ventures.’

 

Again, perfectly legal M&A deals, and joint ventures have no place in this list. And what about those ‘joint ventures’ anyway, wouldn’t a foreign firm have just as much claim to technology that was developed collaboratively?

 

Cases of current or former employees offered bribes or exceptionally attractive salary packages or promotions for stealing technologies are typical.

 

From 2004-2008 former employees contributed to 56 percent and current employees to 27 percent of exposed trade secret theft cases. In particular, as companies striving toward globalization increase overseas production and research facilities, they are beginning to see cases of foreign-subsidiary employee trade secret theft. Recently a mid-sized company’s ‘hydrogen storage alloy’ technology was leaked by employees receiving cash awards of 200 billion won (16.6 million USD) and high level promotions [from competitors.]

 

Now this is the kind of blatantly malicious trade secret theft against which companies need to protect themselves. However, if Korean firms, the Korean government, and the Korean press insist on conflating the issue to include completely legitimate instances where technology has transferred via legal merger or acquisition, they undermine their overall credibility on the matter.

 

Instances of trade secret leakage in merger or acquisition processes were also not few. In early 2000, Korean firms Sewon Telecom , Maxon Telecom, and Bellwave Telecom which had significant Chinese operations became largely insolvent as Chinese firms acquired mobile technologies through the acquisition of Korean firms Hyndai Syscomm (handset manufacturer), and Gigatelecom.

 

This is a perfect example where Korean firms with tentative foot-holds in the Chinese market simply lost market share to a local firm which acquired technology legally through legitimate M&A transactions.  Sewon, Maxon, and Bellwave wouldn’t maintain bitching rights if the M&A in question involved an American or European firm. Actually such bitching rights never existed. If they couldn’t compete in the Chinese market on their own, or by leveraging joint venture operations with local firms, frankly, that’s their own damned fault. Now, these companies might have legitimate concerns about trade barriers levied by the Chinese government that impeded their natural competitiveness in the Chinese market, but such concerns are unrelated to the trade secret issue.

 

Also Shanghai Motors, which acquired Korean subsidiary Ssangyong motors, is accused of leaking core technologies including hybrid diesel technology to China. Besides these cases were also 6 cases in the past 5 years of technologies leaked during joint research ventures where Korean scientists or researchers were invited overseas.

 

“Accused of leaking?” Give me a break. Shanghai Motors can’t ‘leak’ trade secrets they legitimately purchased. And as for the scientists, again, if the foreign company or university was funding the project, just the fact that a Korean brain participated in the research process doesn’t mean that the Korean public has any claim on technology developed on a foreign firm or university’s dollar.

 

According to Sungbae Park, executive researcher with SERI, “From a national perspective, Korea has designated ‘core national technologies’ but has no regulation addressing the leakage of these technologies when the companies that hold them are subject to mergers and acquisitions,” and “We should note that the US and Japan have a regulatory apparatus that allows for [the government] to block mergers and acquisitions of domestic firms by foreign entities.”

 

By Sukgi Kim skim@kyunghyang.com

 

I will admit that there may be certain technologies that warrant protection for national security reasons. The U.S. would be loath to allow a foreign firm to acquire a sensitive defense contractor like Boeing or Lockheed Martin. It is a good idea for Korea to set up a regulatory apparatus that allows it to review proposed M&A deals for possible threats to national security. But if that regulatory apparatus starts throwing out deals involving telecommunications firms or car manufacturers, the WTO is going to get righteously pissed off. In the US case, the regulatory apparatus Park is referring to is most likely the “Foreign Investment and National Security Act of 2007,” which was set up after previous regulations had failed to flag an M&A deal that essentially put a Dubai firm in charge of all US imports and exports in 6 major US ports – an obvious national security concern. The US doesn’t squabble about telecom, chip manufacturer, car manufacturer (actually the Obama administration actually required foreign acquisition of Chrysler by Fiat in order to allow the company to remain solvent) M&A transactions because the US still believes in a free-market system.

 

So what does Korea need to do to maintain competitiveness? The report, for all its intellectual backwardness, does have some good suggestions for firms concerned about trade secret threats which I echo:

 

1.      Treat your employees better. Reward performance commensurate with its value so that employees are proud to work for your firm and aren’t tempted by illicit offers (which you can’t stop from occurring).

2.      Establish a mechanism by which M&A deals can be reviewed and altered/rejected by the government in cases pertaining to national security. (The report includes technologies in this list, such as automobile and telecom technology which I would think are most likely not key to Korea’s national security. But having a regulatory body in place to make decisions (as opposed to leaving the matter open to the court of public opinion) about what does and does not constitute national security is a smart idea.

 

To this, I would add the following (note that the list for corporations is longer, because frankly, this is a matter to be dealt with by savvy business leaders, not national regulators):

 

1.      For the government:

a.       Fund the hell out of Korean technology and research universities, and demand only the best from all higher level educational institutions.

b.      Vigorously prosecute instances of trade secret theft and punish offenders harshly. Don’t back down from prosecuting Chinese companies and taking such issues up with the WTO.

2.      For companies:

a.       Fund the hell out of employee development programs. Create lucrative incentives for technology employees to be innovative.

b.      Create less hierarchical and more performance-based systems for promotions (kudos to Samsung here, which has done better than any other Korean firm in this department).

c.       Create joint programs with Korean universities to retain Korea’s best talent.

d.      Scout the best talent from foreign firms

e.       Get out there in the market and do your own foreign M&A shopping – that equilibrium can work both ways.  

 

 

According to this piece from Yonhap News, Korean college graduates are pining for part-time work. Work applications from so-called college graduate “white hand” (대졸백수)  candidates (”white hand” is a mildly derogatory term for students who have completed a four-year university degree but have been unable to secure permanent employment) comprised 29 percent of new 2009 applications at Part-Time Heaven (알바천국). A year ago, just 9.93 percent of part-time applicants at PTH had university educations.

 

May in particular saw an extreme increase in the number of college grads willing to work part time with 72 percent more 4-year degree job seeker applications, and 41% more graduate-level applications.

 

While I concede that this trend has certainly been influenced by the global recession as companies are hiring fewer and fewer workers, my take is that this is more evidence of the difficulty strict labor standards places on the work force in general. Archaic Korean labor standards which make downsizing and firing employees extremely arduous force companies to be more picky over full-time employee hires – and they often settle for loyalty over talent.

 

The increase in part time and seasonal work applications also speaks to the fact that companies are hiring part time workers and temporary people who, except for the strict labor standards, would be regular full time employees because labor regulations dealing with temporary workers are more lax.

 

The Korean government and the Korean labor unions need to wake up and see what pain and difficulty they are really causing. The simple fact of the matter is that Korea’s arcane labor regulations hurt companies and employees. Companies are unable to hire the talent needed. Capable workers are unable to get decent employment, and the costs of labor are sky-high.

 

As I’m no Korean law or labor expert, I will leave my opinion at that and refer you to Mr. Brendon Carr, who posts at Korea Law Blog, and has this interesting piece on Korean labor standards. Also check out his free Korea Employment Law FAQ, which I found quite interesting as a foreign expatriate.

 

In related news, the Korea times reports that 58 percent of men and 50 percent of women graduating from Korean universities also bear an average of 7.08 million won ($5,900) in student loan or other debt. These poor kids are hitting the job market at the worst possible moment. On top of that, thanks to arcane government regulations, psychotic unions, and increased competition, the cards are decidedly stacked against new workers. Something has got to give if Korea is going to remain a vibrant economy in years to come. Labor standards must change.

 

MK English News (by 매일 경제) reports that the “Nation’s velocity of money showed its worst performance in the first quarter of 2009,” and that “In short, the real economy failed to benefit from a massive injection of capital by the government and monetary authorities to save the faltering economy.

‘In short’ – to put it bluntly – such a conclusion is itself short-sided. While the real economy might not have benefitted from the government’s massive capital injection (and only time will tell whether this is or is not the case) measuring the efficacy of the strategy half way through the execution by the monetary velocity is akin to measuring the health of a stroke patient by how fast he can run a kilometer. Sure monetary velocity is connected with the overall health of the economy, but not in such a causal way as to form the basis of a terminal prognosis. I’m just glad that Ms. Hong’s not my doctor. “I’m sorry madam, but your husband didn’t complete the test in the allotted time, I’m afraid there’s no hope. Never mind that his faculties have all returned to normal, a 15 minute kilometer means that he’s basically dead.”

 

Here is the article in full with a few comments.

The nation’s velocity of money showed its worst performance in the first quarter of 2009.

In short, the real economy failed to benefit from a massive injection of capital by the government and monetary authorities to save the faltering economy.

According to the Bank of Korea (BOK) on June 7, Korea’s velocity of money plunged to 0.687 in the first quarter of 2009, marking the first 0.6 range since record- keeping began.

Velocity of money is calculated by dividing Gross Domestic Product (GDP) with M2 which illustrates the speed of money circulation in the market.

This she’s got right, although it might be helpful to define M2: money and close substitutes for money – i.e. cash, cash equivalents, savings deposits, time deposits (CDs) of less than $100,000 value.

In terms of quarter, velocity of money has consistently maintained a 0.8 range since 2000. However, the figure declined from 0.807 at the 2007-end to 0.778 in Q1 of 2008, followed by 0.748 in Q2; 0.703 in Q3; and 0.6 in Q1 of 2009.

Another indicator, money multiplier–M2 divided by reserve money– sharply declined from 26.5 in October to 26.3 in November, 24.2 in December of 2008 and 22.5 in January 2009. The figure managed to edge up to 23.1 in February, but slid back to 22.4 in March 2009.

Here it would be prudent to explain what the money multiplier really is. The money multiplier is a measure of the total amount leverage from an initial money deposit at a given reserve requirement (the amount of money that can be loaned (or created)based on a certain deposit amount). And yes, the money multiplier is calculated as M2 divided by the reserve amount. If this indicator is dropping, either the reserve level has been elevated, or M2 has declined. But wait…

Velocity of money has been slowing down primarily due to a surge in money supply amid negative growth of the real economy.

Another reason behind the declining velocity of money is reluctance in the banking sector to lend. Banks have increased lending to small-and mid-sized companies as advised by governmental policy, but aggregate loan severely lags behind the previous year. Bank’s lending to corporate sector rose by 3.2 trillion won ($2.5 billion) compared with April of last year which is a third of last year’s 10.9 trillion won ($8.6 billion).

[Yen-mi Hong/ JYK]

So basically here, Hong has explained how the money multiplier indicator has gone down. M2 has increased, but reserve levels at banks are uncommonly high. In effect, the government has released money to the banks, but they aren’t lending it out again.

In order to explain why Ms. Hong is using the wrong measure to judge the efficacy of the Korean government’s stimulus package, let’s look at what a capital injection is actually supposed to do. First, some basic economic monetary theory (don’t worry, I’m no economist, so I will keep this really basic).

GDP is defined as:

GDP = consumption + gross investment + government spending + (exports − imports)

In a recession situation where consumption, investment, exports and imports are all down, government uses two primary methods to bolster GDP

1.      Increase G (government spending). If the government spends on things like tax cuts, development projects, and handouts, the funds spent by the government are theoretically multiplied as they change hands, increasing consumption and possibly even investment (e.g. tax cuts produce increased consumer spending, development projects increases funds going to workers who participate in the economy)

2.      Cut the primary interest rate. In order to stimulate lending, the monetary authorities (the Fed in the US and Bank of Korea in Korea) will cut the rate at which they lend money to banks. Savings are then theoretically passed on to credit consumers – both individuals and corporations, who increase spending – in turn increasing consumption, investment, and possibly exports.

Now the question of velocity:

The relationship of velocity to GDP is defined in the following relationship:

 

 

 

Where nQ is nominal GDP (GDP adjusted for inflation), M is the supply of money in terms of M2, and V is monetary velocity.

Both government spending and interest rate cuts are designed to increase overall GDP. However, both also have the tendency to increase the overall money supply (M).

Hong is quite right in her assessment that the velocity “has been slowing down primarily due to a surge in money supply amid negative growth of the real economy.” However, her conclusion that “the real economy failed to benefit from a massive injection of capital by the government and monetary authorities” based on depressed monetary velocity fails to recognize what the primary purpose of government stimulus is.

Velocity has been shown to peak and decline just before or during a recession, and velocity decline generally outlasts the real-economy recession. Below is a historical chart of US monetary velocity which I borrow from a fantastic article on monetary velocity by Goldseek.com that illustrates this point well.

 

 

 The real question is: “to what extent will the stimulus buoy GDP.” For that I’m afraid the jury is still out.

What does this velocity talk mean for businesses? Not much really. I’d think the Korean consumer confidence index, which is at a 2-year high, or manufacturer sentiment, which is at a 7-month high would be a more useful indicators of the near future. While Korea is definitely not out of the woods, and the real economy may not have bottomed out just yet, most economists are cautiously optimistic. As for monetary velocity, banks will loosen their hold on funds, individuals and companies will increase their appetites for credit, and M2 is likely to increase dramatically over the short term. As GDP recovery will follow more slowly, monetary velocity is likely to remain low for some time. Frankly speaking, I don’t give a flying fuck, and neither should you.