The news last week that Apple (NASDAQ:AAPL) won a landmark case against Samsung for patent infringements came just in time — for an overdue update on the South Korean economic situation, that is.
I don’t know what Apple ultimately will collect from this showdown, or what bans it can enforce on Samsung’s products, as those familiar with civil lawsuits know that parties usually don’t play nice with the options handed them. Still, Samsung has done a remarkable job of giving a full-court press on Apple, so this is only a minor setback.
Namely, 68.1% of smartphones shipped in the second quarter of this year were powered by Android, a jump of more than 15% since last quarter. The increase has been driven primarily by Samsung shipping more Android smartphones in the quarter than the next seven vendors combined, causing Apple’s iOS-driven iPhones to drop from 23% to 16.9% in the same period.
Talking about South Korea always demands discussing Samsung, as the company Lee Byung Chul founded in 1938 is South Korea’s biggest business group today, generating about 20% of Korea’s gross domestic product of $1.16 trillion; for comparison Apple’s estimated sales of $155 billion for 2012 represent a much smaller “bite” of U.S. GDP of $15.6 trillion.
Samsung controls more than 80 companies that make everything from defense equipment to oil tankers and household appliances. The mammoth size of the company relative to the size of the South Korean economy has now given Korea the nickname “Republic of Samsung.”
But it is not Samsung’s courtroom issues that are worrying investors right now. Domestic household debt is rising as the economy is slowing, which can create plenty of problems for Korean financials and the local property market. Household debt is now 89% of GDP, much higher than the OECD average of 77%.
The Korean economy has “export leverage,” similar to many Asian economies, and this leverage has shifted toward China from the U.S. in the past 10 years. Namely, China is the No. 1 export destination and accounted for 24.2% of Korean exports in 2011 while the U.S. accounted for 10.2%. China also is the No. 1 import destination with 16.5% of imports, while America’s share is only 8.5%.
Korea runs a consistent current account surplus, which sounds good at first glance, but not when the Chinese economy is slowing.
With increasing exposure to China, South Korea is similar to Australia in the sense that its economic fate is more and more decided by what goes on the mainland. Ironically, the largest South Korean company and the largest company by market cap in the famous MSCI Emerging Markets Index — Samsung Electronics — has less leverage to China, as its emerging global presence has meant rapid market share gains. (Apple had similar great operational performance in 2008-09 with a struggling U.S. economy.) It also is ironic that Samsung Electronics has no ADRs and is out of reach for many U.S. retail investors.
Many of the Korean ADRs available to U.S. investors are financials. KB Financial Group (NYSE:KB), Shinhan Financial (NYSE:SHG) and Woori Finance (NYSE:WF) all have various exposures to the above-stated economic slowdown and domestic over-leveraged consumers, while steelmaker Posco (NYSE:PKX) has exposure to a slowing Chinese economy.
The good news is that South Korea’s government debt-to-GDP of 34% still is low by developed-world standards, as the country has the most advanced economy in Asia after Japan … whose government debt-to-GDP of 211.7% can only be characterized as the next ticking time bomb in global finance after the eurozone crisis.
South Korea looks to be in decent shape to withstand the present economic downturn, the worst of which probably has not come yet. The local stock market tends to be more volatile that developed markets, and regularly gives investors the opportunity to buy emerging global brands.
Ivan Martchev is a research consultant with institutional money manager Navellier & Associates. The opinions expressed are his own. Navellier & Associates holds positions Apple and Woori Finance its clients. Investing in non-U.S. securities including ADRs involves significant risks, such as fluctuation of exchange rates, that may have adverse effects on the value of the security. Securities of some foreign companies may be less liquid and prices more volatile. Information regarding securities of non-U.S. issuers may be limited. This is neither a recommendation to buy nor sell the stocks mentioned in this article. Investors should consult their financial adviser prior to making any decision to buy or sell the aforementioned securities