It is true that the factors mentioned above promoted the entry of Korean suppliers, but the question remains why Korean FPD fi rms actually switched to domestically made components and machines. Given that user fi rms could procure products of excellent quality and performance from abroad and they may have the preconception that the quality and performance levels of products made by latecomers is low, latecomer suppliers would appear to have had limited opportunities to enter the market. In addition, considering that Samsung and LG have imple- mented global procurement strategies and the quality level they request of suppliers is higher than other FPD fi rms, 10 it would appear that a challenge for Korean suppliers was to overcome the barriers to securing Korean customers. Th e question then becomes: Why have Korean FPD fi rms come to procure components and machines domestically rather than from abroad since the mid-2000s?
One factor is Korean FPD fi rms’ eff orts to improve their cost com- petitiveness. In the mid-2000s, the spread of LCD televisions was
9 A wide range of R&D was eligible for support, including LCD components and materials, LCD equipment, OLED emissive layer materials, OLED transport layer materials, OLED infection layer materials, OLED sealing materials, OLED components, and OLED equipment. Korea’s Ministry of Commerce, Industry and Energy (MOCIE) provided 33.5 billion won of funding for R&D through an FPD-related equipment consortium over 3 years starting in 2004 (Mitarai 2011 , p. 169).
10 Th e author’s interviews at local subsidiaries of two Japanese FPD components and materials fi rms in Korea on 7 September 2012.
important in increasing the demand for LCDs, 11 which in turn made reducing the manufacturing cost of LCD panels an urgent matter (Tanaka 2005 , p. 51). Th e most important issue in this eff ort was reducing the cost of components and materials, which accounted for around 60 % of the manufacturing cost of LCD panels for televisions. Th erefore, Korean FPD fi rms endeavored to reduce panel costs by localizing components, materials, and equipment (Tanaka 2005 , p. 35). Another important pur- pose behind Samsung’s localization of OLED components, materials, and equipment was to strengthen its bargaining power by preventing foreign fi rms from becoming an exclusive supplier ( Chemical Journal (in Korean), 3 January 2011, p. 33). Even though some LCD materials supplied by exclusive suppliers were expensive, they did not satisfy the customers’
needs and had to be upgraded 12 (KEIT 2013 , pp. 21–2). According to an executive at Samsung Display, in the OLED market, they are mak- ing eff orts to strategically localize materials so as not to repeat the same mistakes that they made with LCDs ( Electronic Times (in Korean), 16 May 2014).
However, even though Korean-made products are priced lower than Japanese-made products, 13 Korean FPD fi rms need to consider not only procurement price but other factors as well when selecting suppliers. Th ey have to support the improvement of suppliers’ technological capability to a level at which the supplier can satisfy the required specifi cations and costs, especially for new entrants. Moreover, as described below, taking into account that Samsung and LG localized components, materials, and equipment by attracting Japanese suppliers to relocate to Korea, while acknowledging Korean FPD fi rms’ eff orts to reduce procurement costs,
11 Th e number of LCD televisions for sale in the world was only one-fi fth of that of cathode-ray tube televisions in 2004.
12 For instance, polishing sheets supplied by one foreign supplier were originally developed for met- als and had problems such as scratching. In major foreign fi rms with diversifi ed products, the LCD components and materials businesses did not have suffi cient fi nancial resources for new technology development and sustainable upgrading because of the low percentage of LCD-related products to total sales (KEIT 2013, pp. 21, 29).
13 Although the relative price changes based on the prevailing currency exchange rate, Korean-made LCD equipment was 20–30 % cheaper than equipment of the same model made by Japanese fi rms in 2012 (the author’s interview at a local subsidiary of a Japanese FPD equipment fi rm in Korea on 5 September 2012).
is one reason for enabling Korean suppliers to grow rapidly, we still need to examine the factors behind the Korean FPD fi rms’ decision to take on the long-term cost of improving the capabilities of new Korean suppliers.
It should be noted in this regard that the Korean government has exerted pressure to curb ‘growing economic disparity 14 during the low-growth periods’ since the 2000s. One area of focus is the disparity between large companies (chaebols) and SMEs, which can be seen as a disparity between export-oriented producers and domestic demand- oriented producers.
During the 2000s, since the earnings gap between large companies, which made the transition from imitation to innovation and are continuing to grow, and SMEs widened, it was important to take political measures to spread the benefi ts of large companies’ growth to SMEs. Th e chaebols’
preference for Korean suppliers can be interpreted to be a response to the government policy against economic disparity.
Th e Korean government began taking various political measures to cor- rect disparities after President Moo-Hyun Roh assumed offi ce in 2003.
Th e Roh government believed one factor in economic disparity was that major exports were not linked with an expansion of domestic demand because of the structural reforms that took place after the Asian currency and economic crises. It was thought that this problem could be solved by constructing a new growth model which diff ered not only from the exist- ing development model established under the military government but also from the Anglo-Saxon-style economic model pursued by the struc- tural reformers (Special Planning Team For Participatory Government Briefi ng 2009 , pp. 13–4, 20). Th us, after about 2005, the government implemented a policy of ‘Mutualistic ( sang-seng ) Cooperation between Large and Small Companies’, also known as the ‘Shared Growth’ policy.
In May 2005, President Moo-Hyun Roh presided over a Conference for Mutualistic Cooperation between Large and Small Companies.
He announced a plan to the heads of the seven major chaebols, includ- ing Samsung and LG, and the owners of SMEs to aggressively promote the Mutualistic Cooperation policy as the top priority of the government
14 In Korea, economic disparities have widened between large companies and SMEs, between export-oriented and domestic demand-oriented producers, and between regular and non-regular employees. In case of disparities between companies, this refers to gaps in such performance indica- tors as sales growth rate, profi tability, and R&D investment.
(MOCIE 2005a ). Th us, reinforcing business relationships between large exporting fi rms and SME producers of parts and materials was key to achieving this objective (MOCIE 2005b ). 15
In March 2006, the Act to Promote Mutualistic Cooperation between Large and Small Companies was legalized. On an industrial level, in November 2006, an Agreement on the Mutualistic Cooperation for Development of Equipment and Materials Industries for Semiconductors and Displays was concluded between the minister of Korea’s Ministry of Commerce, Industry and Energy (MOCIE) and representatives of six large companies: Samsung Electronics, LG Electronics, LG Philips LCD, Samsung SDI, Hynix Semiconductor, and Dongbu Electronics.
Th e main points of this agreement included large companies conceding to provide a 150 billion won fund to support capital investment in SMEs and ensuring to purchase from or sign cooperation memoranda of under- standing with SMEs. Moreover, the agreement introduced systems for evaluating and authenticating the performance of Korean components, materials, and equipment, and promoted joint development projects for basic technologies for next-generation equipment (MOCIE 2006 ).
In addition to these measures, the Korean government has instructed large companies to achieve a set domestic procurement ratio 16 in order to encourage them to purchase components, materials, and equipment made in Korea. Furthermore, items are only deemed to be domestically procured when more than 50 % of the components and parts constituting the product are produced in Korea. 17
In order to comply with these policies, Korean FPD fi rms proposed to Korean small and medium-sized suppliers that they conduct new product development with the assurance that the FPD fi rms would purchase the resulting products, especially in product categories that depended highly
15 Another factor causing the economic disparity between large companies and SMEs was the unfair subcontracting transaction. Th erefore, the aim of this policy was also to remedy the unfair transac- tion practice.
16 According to our interviews with an employee of a Korean FPD fi rm (the author’s interview at a Korean FPD fi rm in Korea on 2 August 2013), the target domestic procurement ratio set by the Korean government was 70–80 % by the end of the 2000s. Th e ratio seems to include procurement from foreign-owned factories located in Korea.
17 Th e author’s interviews at the local subsidiaries of a Japanese equipment components fi rm and a Japanese FPD equipment fi rm in Korea on 5 and 24 September 2012.
on imports. For example, Korean suppliers MCK, Toptec, and Viatron accepted a proposal from Samsung that provided conditions for purchase, and succeeded in developing a polishing sheet, indium tin oxide (ITO) sputtering module equipment, and super grain silicon (SGS) crystalliza- tion annealing equipment for eighth-generation (G8) manufacturing lines in 2008, 2010, and 2012, respectively (KEIT et al. 2013; KEIT 2014).
Th is was accomplished by obtaining government subsidies 18 and coopera- tion from Samsung. As a result, in the case of polishing sheets, which had been exclusively supplied by foreign fi rms, Samsung procured its entire demand from Micro Chemical Korea Co., Ltd. (MCK) (KEIT 2014, p. 27).
LG also converted 40 % of its polishing sheet demand to MCK’s product.
Additionally, Samsung urged Korean equipment suppliers to procure core components domestically and strongly requested Japanese suppliers that manufacture core components which are diffi cult to procure domestically to set up production bases in Korea. 19 Th ese facts show that large compa- nies made eff orts to comply with the government’s instructions.
Th ese actions imply that the Korean government’s focus on long-term development was an attempt to put the brakes on large companies that began global procurement in pursuit of short-term profi ts after the Asian economic crisis. At that time, the chaebols complied with the government policy against a backdrop of intensifying pressure for reform and public criticism against the chaebols that began in the 2000s. After the Asian economic crisis, the focus on government policy for chaebols moved from restricting economic power concentration to improving corporate governance controlled by the families (Abe 2005 , p. 41). As the Roh government took an anti-chaebol stance, many drastic plans for reforming
18 Th e Korean Small and Medium Business Administration (SMBA) has implemented a ‘new prod- uct development business on condition of procurement’ to support the development of SMEs in line with the procurement demands of large companies for joint development of technologies, improved technological capability, and consolidation of SMEs’ sales routes. Th is support business originated from ‘an agreement on technology development for national defense’ with the Ministry of National Defense in 2002 and then played a role in promoting mutual cooperation between large companies and SMEs after 2005. For a product development project proposed by a user (or a large companies), the program could provide SMEs up to 500 million won of subsidies over 2 years. Th e Korean government had invested about 210 billion won and supported more than 1000 SMEs’ technology development projects by 2010 (KEIT 2010 ).
19 Th e author’s interview at a local subsidiary of a Japanese equipment components fi rm in Korea on 5 September 2012.
the chaebols were proposed, although few were ever enacted. In 2006, although it failed to pass in the face of strong opposition from the ruling party and business circles, a bill was submitted to the National Assembly that proposed to ban shareholdings between affi liated companies (Endo 2012 , p. 35). Th is practice, known as ‘circulation investment’, enables owners and their families to control chaebols with relatively small investments. A civil movement accusing the chaebols of unfair practices has formed and the number of shareholder lawsuits fi led has grown. Th ese trends have infl uenced the reform of the chaebols’ corporate governance since the crisis (Koo 2009 , pp. 68–71). Under such pressure, while the chaebols had nothing to lose by following the ‘Mutualistic Cooperation’
policy, there were many disadvantages to rejecting it. 20
Th us, in order to cope with government policy as well as reduce procurement costs, Samsung and LG have been actively selecting Korean products when procuring LCD components, materials, and equipment since about 2006–2007. 21 Consequently, the opportunities for Korean components, materials, and equipment suppliers to grow in the domestic market have expanded.