Korea:  Environmental Market Analysis

• Country Overview
• Market Estimates and Analysis
• Competition
• Regulatory Impact

COUNTRY OVERVIEW

Korea is one of the United States' biggest trading partners. Currently, it is our sixth largest export market, bigger than those of Australia, Brazil, China, France, or Italy. Imports to Korea are bouncing back and are expected to show double-digit growth in the months ahead.

The Korean environmental market began to spring back in 1999. Although the environmental market demand suffered considerably since the 1997 economic crisis, the FY 2000 Korea Country Commercial Guide ranked the Pollution Control Equipment sector as the 7th leading sector for U.S. exports and investment for non-agricultural goods and services in Korea. Among foreign competition, the most promising avenues for U.S. participation are sales of equipment and technical expertise, as well as joint venture manufacturing and construction projects.

There are many other outstanding possibilities for U.S. goods and service providers. For instance, Korean electronic commerce is expected to double annually for the next five years. With the expansion of demand, imports from the U.S. for semiconductor equipment are estimated to grow at an average annual rate of 32 percent - from $405m in 1998 - to $931.5m by 2001. The Korean state-owned energy sector (power generation, oil and gas) is being privatized and is providing great opportunities for U.S. energy companies. The Korean government is spending $11b on infrastructure projects (airports, roads, railways, mega-resorts) and is seeking U.S. architectural and engineering expertise.

MARKET ESTIMATES AND ANALYSIS

Korea's most promising subsectors are

• air pollution control equipment (US $699 million)
• water pollution control equipment (US $757 million).

Size of the Environmental Market

Various organizations and agencies have provided the following environmental market size estimates and forecasts.

Size of Environmental Markets in Korea (millions of U.S.$)

The Korea Environment Research Institute (KERI) reports the following breakdown of current and anticipated expenses across environmental media.

Environmental Markets by Environmental Medium (billions of Canadian dollars)

Pollution Control Equipment (millions of U.S.$)

Remediation Services and Equipment by Site Type

Specific Manufacturing Industries

According to the environmental sales opportunity ranking below, those industries with the greatest ability to buy are textiles, medical equipment, and pulp and paper.  Other industries evaluated include motor vehicles, shipbuilding, food and beverage, electronics and electrical products, basic metals and fabricated metal products, machinery, chemical products.

Combining production and profitability data yields our best available measure of industry performance. Consequently, we also have our best measure of industries� ability to buy environmental products and services.

With no values for the X-axis (due to the lack of enforcement data), all industries included in the figure are shown to have an equal motivation to buy. The upper right quadrant normally represents potential buyers who have the greatest combination of both motivation and ability to purchase environmental goods and services. The size of the circles indicates the approximate relative size of each industry.

Korea depends heavily on imported energy sources and raw materials for the production of manufactured goods. Import declines in 1998 due to depreciation of the won and contraction in domestic demand caused severe declines in the production of manufactured goods in 1998. Manufacturing recorded 6.2% growth in 1997; in the first eight months of 1998, however, manufacturing declined 12% compared to  the same period in 1997.

Imported Environmental/Process Control Equipment Market

• In 1999, blowers and compressors constituted 55% (not shown) of all the total market imports. According to Customs officials, some air filtration equipment (mostly removable filters and converters) are included in the blower segment
• Liquid filters and parts constituted the next most significant segment, which includes all types of filters for industrial fluids such as fuels, lubricants, paints, and solvents.
• Gas recovery systems are a smaller but important component as many types of recovery systems are crucial to pollution prevention.
• Electric air filtration and Compressors are the two segments of the imported market that showed positive growth, 7% and 16% respectively, between 1997 and 1998.
• Surprisingly, air filters showed a gain, but this increase may not indicate a trend.
• The liquid filters market is of particular note because of its large size ($110 million) and steep decline (-47%).
• Gas filters and water filters both declined well over 50% and should be viewed as only medium- and long-term potential sales opportunities.

Analyzed by product, most manufacturing sectors suffered severe reductions.

Manufacturing Production Indicies, Original Index:  1995=100

• There were serious scalebacks in the production of items most strongly influenced by the domestic slump such as motor vehicles (-43%), machinery equipment (-31%), electrical machinery and apparatus (-30%), fabricated metals (-27%) and wearing apparel (-31%).
• Production of textiles, chemical products, petroleum and derivatives also declined by 11%, 5% and 13% respectively.
• Production of fabricated metal products and basic metals recorded 27% and 3.7% decline respectively.
• Production of coke, refined petroleum products and nuclear fuel also declined 13% during the firs eight months of 1998.
• Shipping (other transport equipment) and production of telecommunication equipment are the only two sectors that recorded an increase in production during the first eight months of 1998.

In 1997, most sectors showed lower profitability compared to the previous year. Profitability performance is ranked best to worst in the table below.

Manufacturing Profitability Indices
January-June 1997 versus January-June 1998

An analysis of production indices, profitability, export orientations and associated trends clearly revealed that various industry sectors have had very different experiences since the onset of the financial and currency crisis. A summary of manufacturing performance is reproduced below.

Best and Worst Performing Manufacturing Industries
Ranked by Change in Profitability

Based on profitability figures during the first six months of 1998, South Korea�s best performing manufacturers include

• Textiles (down 5%)
• Medical Equipment (down 6%)
• Pulp & Paper (down 18%)
• Furniture (down 23%)
• Wearing Apparel (down 24%).

Despite the sometimes dramatic declines in profitability suffered by most segments, the top performers are still relatively better off than their even poorer performing cousins. All other segments saw profitability indices falling greater than 25% in the first half of 1998:

• Motor Vehicle Manufacturing (down 63%)
• Fabricated Metals (down 61%)
• Wood Products (down 57%)
• Publishing (down 55%)
• Machinery (down 54%).

Economic Recovery

The Korean economy is rebounding more quickly than expected in 1999, with GDP expected to rise 5% -6% based on increasing domestic consumption and investment.  Unemployment began to decline in March 1999, and while most of the decline was due to seasonal factors involving construction and agriculture, seasonally adjusted unemployment also declined slightly to 6.4% in May.  The number of newly-established firms rose steadily each month in 1999, exceeding the number of bankrupt firms by a factory of 10 or more.   Wages and income also showed some recovery in the first four months of 1999.   Merchandise exports are expected to show little if any growth, but imports are expected to rise over 20%.  There are concerns that Korea may not be able to sustain robust growh after 1999 unless it continues to implement effective reforms in its financial, corporate, government and labor sectors.

Principal Growth Sectors

Gross Domestic Product fell 5.8% in real terms in 1998, the worst performance since the Korean War.  GDP is expected to increase 5% - 6% in 1999 as the economy rebounds from last year's recession.  Growth in the first four months has been uneven across sectors, with semiconductors, autos, computers, shipbuilding and telecommunications leading the improvement, and other sectors remaining in the doldrums.  With exports weak and investment sluggish, Korea must rely mainly on rising domestic consumption to fuel growth.

The manufacturing sector's output fell 7.2% in 1998, a huge drop from the 6.2% growth in 1997.  Manufacturing accounted for 29.3% of Korea's GDP in 1997.  Heavy industrial output was less affected, falling 5.9% in 1998, while output from light industry fell 11.7%, as many small and medium sized firms went bankrupt.  Among heavy industries in 1998, the electrical and electronic machinery sector, which includes semi-conductors, grew the most, at 12.8%.  Production in all other heavy industry sectors declined in 1998, with the industrial machine sector plunging 46.5%.

Although still well below 1997 levels, the economy showed definite signs of rebounding in 1999.  In the first quarter of 1999, heavy industrial output grew 13.8%, while the decline in light indusrial output slowed to -.2%.  The electrical and electronic machinery sector grew by 29.5% and chemicals grew 5.3%, due largely to exports of semi-conductors and petrochemicals.  Production in all other heavy industrial sectors rose in the first quarter, except for machinery and non-ferrous metals.

COMPETITION

Domestic Competition

Local manufacturers supply a major portion of Korea's rapidly growing environmental market, offering low-cost, medium-tech environmental solutions.  However, as a result of increased enforcement activities and greater recognition of the necessity to invest in environmental protection, demand is growing for more sophisticated equipment.

Foreign Competition

The $400 million Korean imported environmental equipment market was one of the largest markets of all the US-AEP countries in 1998. However, due to the Asian financial crisis, the total market has fallen off dramatically, dropping on average 30% between 1997 and 1998 for all environmental equipment types.

Japan has traditionally been South Korea's principal supplier, with an import market share of around 40%-50% overall, followed by the United States and Germany. U.S. manufacturers have been trying to make inroads, although the lack of prompt after-sales service for U.S. equipment has limited the potential. Only since the Asian financial crisis has the U.S. finally surpassed the Japanese, perhaps mostly due to Japan's own domestic woes.

Imported Environmental/Process Control Equipment Market Share by Country of Origin
1997-1998

The table above shows that U.S. manufacturers maintained a 38% lead market position before and after the crisis. Remarkably, U.S. market share did not shift on a percentage basis even with a 30% drop in the entire import market and a significant increase in price (won). Korean customers reduced demand absolutely instead of shifting to cheaper domestic substitutes. This implies that, at least in the short run, there is some core of U.S. customers with significant brand loyalty.

In the medium and longer term, when Korean production processes are given the time to modify and adapt to external economic conditions, more substitution to domestic equipment will occur if prices for U.S. equipment stay relatively high. U.S. firms are no doubt squeezing margins in Korea to keep market share for as long as possible in hopes of a won recovery. It is a waiting game for U.S. firms pitting the potential long-term benefit of market position against the short-term cost of reduced or even negative margins.

Japanese manufacturers are under the same pressure and hold the second place in terms of market share. Unlike U.S. manufacturers, Japanese manufacturers lost about 4% in market share to Germany, France, and Switzerland.

Air Filtration and Control

In most of the other US-AEP countries, Japanese manufacturers completely dominate the air filtration and control equipment markets. In Korea, however, the U.S. had a slight edge over Japan in the air filtration/control markets in 1997 and increased that edge 8% even in the declining market. This indicates that U.S. manufacturers have developed some customer loyalty and may be in a good position to reap the benefits when the Korean economy improves.

Both Japan and Germany lost market share between 1997 and 1998. Switzerland and France dramatically increased its market share from 2% to 7%, respectively; France increased its market share from 2% to 5%. While these two competing countries are small, they achieved something of a coup:  they increased not only market share but also absolute sales in down markets in the middle of a currency crisis. These countries are adapting to the new economic conditions well in this market segment and should be investigated to determine the basis behind their sales success. This information could be very helpful for U.S. firms wishing to retain their current Korean customers.

Imported Air Filtration, Compressors, and Blowers Markets
1997-1998

Water Filtration

While the U.S. has maintained market share in water filtration equipment during 1997 and 1998, it is a shallow victory in light of the precipitous decrease (-59%) in absolute sales. Imported water equipment sales are down by over 50% for both Japan and the U.S., and an astounding 80% for Germany in the same period. None of the smaller importers fared much better.

Imported Water Filtration Equipment Markets
1997-1998

REGULATORY IMPACT

After more than a decade of rapid growth, South Korea took its first tentative steps to alleviate pollution problems in 1977 with adoption of the Environmental Preservation Act. The Environmental Administration was established under the Ministry of Health and Social Affairs in 1980. As per capita income grew in the 1980s, public demand for a cleaner environment brought about sweeping changes in environmental legislation. In 1987, the South Korean government announced a long-term Master Plan to develop a comprehensive environmental infrastructure.

Environmental enthusiasm also was heightened by efforts to spruce up the country for the 1988 Olympics. The government established stricter environmental standards, conducted environmental impact assessments, designated "counter measure zones" and implemented a "polluter pays" policy. Some progress was achieved in municipal solid waste and in cleaning up the Han River running through the heart of Seoul.

Not until 1989 was the Environmental Administration elevated to cabinet level to the Ministry of Environment (MOE). MOE coordinates functions in environmental policies among different agencies. Approximately 13 ministries and administrative units of the central government other than MOE have overlapping responsibilities for policies and programs related to the environment.

The following chart identifies government agencies and their  environmental responsibilities.

Environmental Agencies in South Korea

In 1991, the government announced its 5-year "Environmental Preservation Mid-term Comprehensive Plan," involving a total investment of $11 billion. The government initially moved very slowly on the plan. When faced with 6%-7% economic growth in 1991-1993 -- a slowdown by regional standards -- the government eased pressure on industry. Thus, during this period, little was done to implement legislation.

However, the desire to comply with international environmental standards such as ISO 9000 and ISO 14000 and mounting public pressure spurred environmental spending. The government began adopting a progressively tougher stance with more time-bound environmental regulations and greater enforcement.

Following are the South Korean government's environmental objectives by 2001:

• Reduce the average level of SO2 pollution in Seoul to 0.01 ppm
• Raise the sewage treatment ratio to 65% nationwide
• Reduce the level of BOD at the Chamsil monitoring spots of the Han River to 1.5 mg/liter
• Raise the sanitary treatment ratio of domestic waste at landfills to 92%
• Increase the recycling ratio of domestic waste to 20%
• Expand the Natural Ecosystem Conservation Areas to cover 5% of the country's total land area by 2005.

Green Vision 21

In 1996, the government launched Green Vision 21, its blueprint for environmental priorities in the next century. The government announced investment requirements totaling an estimated $70 billion (60 trillion won) for the next decade. The bulk of expenditures will go to wastewater treatment, waste disposition and treatment, and water supply infrastructure. The program is intended to raise South Korea's environmental standards to a par with Western industrialized countries.

The government aims to increase the rate of municipal wastewater treatment to 80% for the country's 44 million people, up from  less than 40% now.  The government also plans to increase rural water supply to 50% from the current 15%. Over 60%, or around $58.5 billion, of total investment is due to come from public spending, while the private sector will account for the rest, or about $37.5 billion. As part of the overall program, the MOE plans to establish a $20-million environmental trading and technology park.

Investment Funding Requirements for Green Vision 21
U.S.$ billions

Air quality management continues to increasingly gain attention in South Korea. The government's main targets are to install desulfurization facilities, expand the air quality monitoring network and increase the supply of clean fuel. Major industries such as power plants, refineries, cement and steel industries are the largest potential customers for reducing emissions, as well as almost all of South Korea's manufacturing companies. Polluters must now comply with a 1990 law that covers 26 different kinds of gases and particulates. The law's allowable emissions were tightened in 1995 and 1998. South Korea is already the world's eighteenth largest producer of greenhouse gases, and it will likely become the tenth largest by 2000, according to the Korea Energy Economic Institute.

Public Sector Environmental Spending

Despite slowdowns in environmental spending, the government remains a significant customer for environmental companies. From 1992 to 1996, environmental spending as a percentage of GNP grew from 0.21% to 0.59%, then leveled in 1997.

Environmental Budget of the Central Government Account
100 million won

The total budget for Korea's environmental projects in 1998, including construction of incineration plants in Hwasung, Namyangju, and Uyjungbu, was 1542.1 billion won (US$963.8 million at 1,600 = 1 US$), with details as follows:

• Construction of drinking water facility: w 724.8 billion (US$453 million at w 1,600 = 1 US$)
• Improvement of national water quality: w 312 billion (US$195 million)
• Waste management, including construction of incinerator: w 266.7 billion (US$166.7 million)
• Research and development for environmental technology: w 238.6 billion (US$149 million).

According to a June 1998 USDOC/ITA report, MOE's Water Policy Division planned to invest W 23 trillion (USD 16 billion) to improve water quality between 1998 and 2005. The government plans to spend the bulk of the allocated budget on new treatment facilities. The plan also specifies environmental spending goals in six areas:

• Construction of sewage treatment facilities: W 12 trillion (USD 9 billion)
• Construction of new sewage lines: W 8 trillion (USD 6 billion)
• Construction of sewage treatment facilities in rural areas: W 888 billion (USD 634 million)
• Construction of night soil treatment facilities: W 506 billion (USD 362 million)
• Construction of wastewater treatment facilities from livestock farms: W 472 billion (USD 333 million)
• Construction of industrial wastewater treatment plants, especially in local industrial complexes: W 561billion (USD 401 million)
• Construction of drinking water facilities: W 725 billion (USD 518 million)
• Improvement of the nation's water supply: W312 billion (USD 223).

MOE stated that government spending on the environment between 1997 and 2001 will be 32 trillion won:

• Nearly 41% for water quality projects
• 32% for air quality projects
• 17% for solid waste-related projects.

Since early 1997, Korean regulators have begun experimenting with economic incentives. Previously, generators that exceeded emission standards were subject to punitive emission charges. Starting from January 1, 1997, "basic charges" were added as a kind of environmental fee. Environmental Improvement Charges were levied against construction projects and diesel-powered vehicles not to penalize but to force a recognition of measurable environmental costs associated with certain activities.

Public sector spending covers a number of environmental concerns including:

• Waste/Recycling
• Environmental Impact Assessment
• Air
• Odor
• Noise and Vibration
• Water/Wastewater
• Marine Water
• Toxic Substances
• Industrial Waste

The Korean government insists that regulatory enforcement efforts will continue to be emphasized despite the economic difficulties faced by the public and private sectors. A downturn in public sector environmental investment due to economic conditions might leave regulators wanting to shift the burden of environmental protection to the private sector. The government has stated its intentions -- and in some cases, has acted -- to strengthen certain areas of enforcement. Programs to reduce vehicle emissions, encourage recycling and reduce waste, for example, have been pursued even during the continuing economic crisis.

However, enforcement efforts may be compromised as private industry�s ability to pay the costs of compliance is reduced. Reductions in enforcement activity are unlikely to be easily measured or publicly advertised. It is therefore especially important to monitor changes in enforcement activity. Industrial polluters should be questioned regarding not only their recent enforcement experience, but also their expectations regarding future enforcement. It is their expectations about enforcement that will determine their levels of investment in environmental technologies and services.

In recent years, Korean politics has shifted toward granting greater autonomy to regional governments, which has contributed to the difficulties of maintaining a consistent and comprehensive system of policy and enforcement.  This has resulted in some conflict over environmental and developmental policy, and has led the central government to begin emphasizing the societal aspects of environmental protection. In discussing policy directions for 1997, MOE was already referring to "tapping the spirit of volunteerism" and "encouraging industry to take advantage of environmentally-friendly production processes." These may all be significant and worthwhile efforts, but they do not bode well for high levels of near-term private sector investment in environmental solutions.

Nonetheless, public policy will probably drive significant public investment. In 1996, the government adopted an action plan that required the government to set an example by adopting the type of environmentally sound practices that it intends to enforce in the private sector. Included are practices related to energy conservation, recycling and the use of environmentally friendly goods.

Click here to open the Environmental Market Analysis Addendum for Korea.

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