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Industry Report

Industry reports, briefs issued by Samsung Economic Research Institute

Prospects for the IT Industry and Korea's Economy

Prospects for the IT Industry and Korea's Economy

KIM Chang-Wook

Aug. 21, 2004

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Despite an overall sluggishness hanging in the air, the Korean economy still managed to grow on the back of strong exports in the IT sector. In the first half of 2004, IT exports increased 49.1% year-on-year to reach US$38.24 billion, while the sector as a whole witnessed a 38.2% increase in the rate of production. This amounted to a rate that was more than three times higher than the rate for the entire manufacturing sector, which registered 12.2% yoy. IT products accounted for 31% of total exports and 12.4% of Korea's GDP at the end of the 1st half of 2004. In this course of development, the Korean economy has grown to depend heavily on the IT sector for its national economic growth.

Recently, longer-term prospects for the IT industry have been somewhat dark, spreading concern across Korean society that a leading performer of the Korean economy may now be weakening. Reports on Intel's second quarter performance indicated an increase in inventory, which prompted skeptical views on the semiconductor industry. Domestic stock market prices centered on IT stocks have been falling since May due to concerns over the slowdown in the growth of the IT industry. Production and shipment of the domestic IT industry decreased 3.6% and 3.9% respectively in June compared to the previous month.

Korea's IT industry experienced periods of stagnation in the past as well, albeit due to different factors. The decline of the IT sector in 1996 is attributable to over-investment causing prices to tumble, and stagnation in 2001 was triggered by a combination of over-investment and slow demand. The impact of the IT industry on the overall economy will depend greatly on the state of the economy.

In 1996, the global and domestic economies did well, as the poorly performing semiconductor industry had a relatively weak impact on the real economy. Production rates dropped slightly from 11.9% in 1995 to 8.5% in 1996. On the other hand, in 2001, saturation of the PC market, the burst of the Internet bubble, and 9/11 terrorist attacks, which took place during global recession, greatly contracted IT demand and deepened the plight of the industry. IT production increased at a rate of 0.7% in 2001, which was a steep drop from the 2000 rate of 16.8%.

The slowdown of the IT industry could prolong the recession of the Korean economy and delay recovery, but much depends on the factors bringing about the decline. The global economy will be able to maintain growth despite high oil prices and US interest rate hikes. The launch of 3G service, digital broadcasting, and rapid growth of the digital home appliances market will guarantee a steady increase in IT sector demand. With these points in mind, the current decline of the IT industry will more resemble that of 1996 than 2001 when over-investment and an increase in demand was soon corrected through short-term adjustment measures. The IT slump is anticipated to have only a modest impact on the Korean economy, where short-term deterioration in performance and weakened exports will quickly be followed by high growth.

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