Korea’s Logistic Roles in Northeast Asia

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A key note Address
at the Seoul Meeting of the IBC Forum in 2004.

 

As we are well aware, the economic conditions in Northeast Asia are undergoing a great change, characterized by the emergence of China as a giant economic power house in the world. In particular, China has become the sixth largest economy in the world in terms of GDP in 2001. There is a report that if measured on a purchasing power parity basis, China already stands as the second largest economy in the world after the U.S, in the same year.

By virtue of the rapid increase in trade and investment, China is now said to be becoming the “Manufacturing Base of the World.” As a matter of fact, a number of Chinese products are already dominating the world market. For example, China’s shares of the world market in 2000 were 36% for TV sets, 50% for air conditioners, and 24% for washing machines. The other side of the coin is that Japan and Korea, unable to compete with Chinese products, are worrying about “Industrial Emptiness,” resulting from the transfer of the production base to China in the form of direct investment.

The rapid growth of the Chinese economy reminds us of the enormity of the potential market in China. Given its population of 1.3 billion and rapid increase and diffusion of income, China’s potential market is almost unlimited. For example, if the whole population in China were to choose to consume one more egg daily per person, as income increases, 57 million tons of feed grain would be needed, which is equivalent at present to the total amount of grain production in Sweden. It is a well known fact that as household income increases in developing countries, the consumption of dairy products is bound to increase at a faster rate than income. According to the projection of the Chinese government, grain imports will reach 175 million tons in 2025. The day will come when the export capacity of the grain producing countries will be strained. As another example, the Chinese government proudly announced that China had the second-largest number of Internet users in the world at the end of 2002, yet the Internet users in China represent only 2% of the total population, compared with the USA’s 45%, South Korea’s 21%, and Japan’s 15.5%, which means that the potential market for telecommunication equipment remains virtually untouched.

The great economic potential is not confined to China but also found in other areas of Northeast Asia as well. Russia’s Siberia, Mongolia, and North Korea are known to be treasure troves of mineral resources of every variety, not to mention their water, forests, agriculture, land, and people.  In particular, Siberia has about 32% of total world natural gas deposits.

At present, Japan depends on the Middle East for 85% of its oil imports, and the dependency is about 77% for both Korea and China. Hence the exploration and use of natural gas from Siberia will be inevitable to reduce the unilateral dependency of the three countries on Middle-East oil, for the sake of energy security.  The pipeline network connecting supply sources in West and East Siberia with China, Korea, and Japan has been under discussion for years among the countries concerned, which, I believe, will eventually materialize into a regional development project with the participation of multinational companies.

There are several other areas in which regional cooperation is particularly important. One is the development of the transportation network in Northeast Asia. The scheme of the Asian Highways proposed and accepted by ESCAP in May 2002 is an example. The Trans Siberian Railroad (TSR) and the Trans China Railroad (TCR) will eventually be connected to Japan via the Korean peninsula. Currently North and South Korea are working together to connect two main lines of the Korean railroads to the Siberian railroads that lead to Europe through the TSR. When the connection is completed, it will take 17 days to transport cargo from Japan to Finland, compared with 30 days in the case of maritime transport. Korea also can reduce shipping time by more than 17 days to reach Europe by switching from the marine route to the Siberian railroad. Establishing an electricity network and a telecommunication network are other pending issues. All these regional cooperative ventures have been under discussion among the countries in the region, on both government and private levels.

In short, the expansion of trade and investment, exchange of technology, development of natural resources, and building up infrastructure in Northeast Asia all call for the active participation of multinational companies as well as the governments in the region. Indeed, international companies will have a lot to do in this part of the world in the years to come. It is, therefore, high time for multinational companies to ask themselves where to locate their regional production bases, where to set up their regional distribution centers or calling centers, or their regional headquarters, and how to allocate their managerial resources among countries in the Asian region for optimum operations.

In this regard, let me now turn to consider what Korea in general and Incheon in particular can offer to foreign companies looking for business opportunities in this part of the world. As you know, Korea is situated in the center of Northeast Asia—surrounded by Japan, China, and Russia’s Siberia—and it opens toward the south to the rest of the world. This suggests that Korea could become a logistic center for Northeast Asia. In fact, this has been a natural course of development. For example, Busan has already become the third-largest port in the world in terms of the volume of container throughputs, mainly owing to the increase in China’s trade volume. Busan and Kwangyang ports are likely to become maritime centers for transshipment of heavy cargo from and to other East Asian ports, while Incheon becomes a center for transporting lightweight high-tech products by air and by ship. Incheon harbor is one of the main ports in the Yellow Sea Economic Sphere, and container traffic between ports around the Yellow Sea is on a rising trend.

Incheon Airport is already the second largest in the world in terms of volume of cargo throughputs. The two Korean airlines currently serve 28 cities in China and 38 cities in Japan; by comparison, Japanese airlines serve 3 cities in Korea and 25 cities in China. There are 43 cities in the region with populations of more than one million each that can be reached in a 3 hour range from Incheon Airport.

John Naisbit, in his best selling book Megatrends Asia, wrote that the air traffic for tourism in the world is expected to grow by more than 7% per annum, and the Asian share will increase from 39.2% in 2000 to more than 50% by 2010. Therefore, the increasing role of Incheon Airport in the passenger traffic will give further impetus to the development of the logistic and business center in the Incheon area.

On the whole, Incheon seems to be well situated to become a logistic center for Northeast Asia, given the strategic combination of airport, harbor, and the gateway to the land transportation network that will eventually connect to the Trans Siberian Railroad and to the Asian Highways in the near future. Incheon is close to Seoul, which is a large consumption and production base to support the functions of Incheon as a logistic hub.

The City of Incheon has been working to develop its area as a world-class logistic center, including its IT park, its teleport, and its business and distribution centers. I was informed that the Gale company in the US and the City of Incheon signed a contract for a $12.7 billion investment project in March last year. In promoting its interests, Incheon is keenly aware that it must create the most favorable business environment and living conditions in its area and attract as much foreign investment as possible. Fortunately, the Korean government designated Incheon as a Free Economic Zone toward the end of last year, which will offer minimum restrictions, quick administrative services, tax incentives, and the utmost facilities needed for business operations by foreign companies.

However, much remains to be done by the central and local governments, and it is a great challenge to people and organizations working for a renovated logistic center in this city. First of all, they have to figure out what to do to make the Free Economic Zone really functional, so that it meets the expectations of investors at home and abroad.

Obviously, they need the best knowledge, information, and advice that can be derived from the experiences of the well-known logistic centers around the world and from professional expertise in the field of multinational business and free economic zones. This is why the International Business Forum has organized this meeting, with the participation of such distinguished guests as we have here this morning—to whom I would like to extend my cordial welcome and gratitude.

I am confident that this seminar will shed much light on many issues confronting policy makers of both the local and the central governments, as well as the business community in the Incheon area, and thereby help the people of the City of Incheon realize the necessary conditions needed for a world-class Free Economic Zone in Korea.

Thank you