Starting today, Free Press Journal is beginning a special segment, ‘India and its neighbours’, through which we will look at the country’s business relationships with neighbouring nations, history behind the alliance as well as the future prospects. We begin by taking an in-depth look at trade associations between India and South Korea
The NDA government’s initiatives to bolster reforms are making India a more attractive investment destination. At the same time, international geo-political events are also enhancing India’s position as an investment destination. A major beneficiary of both these developments is the strengthening of India-South Korea relationship. While the NDA government is wooing South Korea, that country’s decision to allow the US to deploy a sophisticated missile defence system THAAD (Terminal High Altitude Area Defence) on its land to protect it from North Korea has upset China, a major trading partner. China is South Korea’s biggest trade partner and is threatening to boycott South Korean goods. Experts believe that in the current scenario it is unlikely that South Korea would bow down on the THAAD issue, and would rather look to diversify and increase its trade with ASEAN countries and India. It’s an opportunity in the making for India. As a result, South Korean companies located in China have begun to diversify their operations in countries like Vietnam and India. This could mean a surge in the number of Korean companies operating from India.
FPJ spoke to H.E. Soung-eun Kim, South Korea’s Consul General in Mumbai, to get a feel of South Korea-India economic relationship, challenges today and prospects ahead.
He explained how South Korea’s first investment turned out…
The First Investment: Big Hit but…
The first South Korean company to invest in India was Daewoo in the auto sector in 1998. Since its launch in 1998, Matiz, the new small car of this Korean auto major, garnered a dozen major awards, including ‘Best Small Car of 1999’ from BBC’s Top Gear magazine. All these accolades were topped in April 2000 when the Matiz entered the Guinness Book of Records for the most fuel efficient car, smashing the long standing record held by the Holden Barina since 1991.
About 75 per cent of the content of Matiz at the time was being made in India, except the engine and gearbox which came from South Korea. Daewoo’s investment in Daewoo Motors India Ltd. (DMIL), whose plant is located at Surajpur in U.P., near Delhi, involved investments of a colossal Rs 4,300 crore – the single largest foreign direct investment in the automobile industry in India at that time. This included facilities for making one lakh passenger cars, 15,000 commercial vehicles (buses and LCVs) and three lakh engines, transaxles and other components annually.
DMIL was not only making the Matiz for the Indian market but was also exporting it to West Asia and European destinations, including Italy — the bastion of the small car. Exports of Matiz started from August-September 1999 and 1,170 units were dispatched abroad till March 2000. In 2000, the April-May export figure had already surpassed 700 units and for the whole year a figure was close to 4,000 units. The company was also making engines and gear boxes for the Cielo for export back to Korea.
But all this fizzled as Daewoo on account of the ASEAN crisis and its operations were was bought over by General Motors USA.
Other companies like LG and Samsung followed DMIL into India and have firmly established a foothold in these markets. But it was a different story for the Korean Steel giant POSCO. The company’s investment was supposed to be the biggest single investment at Rs 520 billion (worth USD 12 billion at that point of time and valued at USD 7.98 billion at the current exchange rate). Posco’s Orissa project was to build a 12 million ton per annum steel plant but it failed due to local politics bringing to the fore the fact that the Central and the State government were not on the same page on the project. As of now POSCO continues with its relatively smaller scale local operations from Gujarat and Maharashtra.
Where are the new opportunities coming up?
Indian Defence Sector
India plans to have 2 minesweepers per naval dock yard and there are plans to build such minesweepers within India with South Korean assistance. A total of 20 minesweepers (for 10 ports) are expected to be built initially at the Goa Shipyard.
Another important collaboration in the pipeline in the field of defence manufacturing is building 100 units of self propelled Howitzers. They are being built in collaboration between Hanwha Techwin (formerly Samsung Techwin) and Larsen and Toubro. It is a modified version of the K9 Thunder and will be produced by this joint venture for the Indian Army.
A look at the major sectors attracting FDI equity inflows from South Korea reveals that Metallurgical Industries is on top
Where are the problems / hindrances to investment?
According to Kim, South Korea’s Consul General in Mumbai, the biggest hindrance is the often mentioned ‘Red Tape’, Land acquisition and Labour laws are other vexatious issues.
But according to him opportunities are shaping up…
The threat of a Chinese boycott of South Korean goods has led to the Korean corporate world seeking out alternative markets. One of the most promising alternative markets is India. Further government actions in India on the reforms front are making it attractive investment destination.
In which sectors do South Korea companies usually invest?
According to the South Korea Government’s Industrial Initiative, five key industries – shipbuilding, steel, petro-chemicals, automobiles and electronics – have been targeted by its government. It is usually in these sectors that the Korean companies have invested globally.
A comparison of FDI inflows into India from South Korea and all countries
How is the trade relationship between India and South Korea?
The trade is more in favour of South Korea and new products/commodities need to be identified to reduce the trade deficit. Also the Comprehensive Economic Partnership Agreement (CEPA) between India and the Republic of Korea is the first such free trade agreement signed by India with an OECD country.
It was signed in August 2009 after over three years of negotiations and came into effect on January 1, 2010. It is an agreement between two countries at different stages of development. Korea, on the one hand, is an export led industrialised country with a strong manufacturing base. India, on the other hand, is a fast developing economy with a large domestic market but whose external trade measures are much smaller in relation to its GDP.
What more imports are possible from India? What could help trade in the future?
Some of the additional imports possible from India are bauxite and tyres. Reduction of tariffs would be a positive step to boost trade.
Which other sectors are South Korean companies active in but lack visibility?
Construction is one such sector. South Korean companies actively bid for infrastructure projects like Metros in different cities; Sea Link (Bandra—Borivali) in Mumbai and also the Sewri-JNPT Trans Harbour Link.
Another sector is banking. Already you have South Korean banks expanding their activities in India.
What kind of ships do South Korean companies make? Will they be bidding for making ships for India?
South Korea makes ships like bulk container carriers, LNG ships and would definitely be there in case there is any such opportunity in India.
Any new sectors in India which have attracted the attention of South Korean companies?
Many South Korean banks have already come or are in the process of entering into India. Some names are Woori Bank, Shinhan Bank, KEB Hana Bank and KB Kookmin Bank. In the financial sector, Mirae Asset Management has already been in India. Recently, the Korean Development Bank signed an MOU with SBI to have a desk in its main branch. Korean companies have also enjoyed a significant presence in home shopping and there are a few Korean logistics companies in the mid and small segment level.
Are South Korean companies into Smart City projects?
Yes, Korean companies are very much there for Smart city projects. They have two models, one for green field projects and the other for brown field projects.
How trade between India and South Korea grew from 2009 to 2016
Any specific project for South Korean companies which did not take off in India?
There was a plan to develop an exclusive zone for Korean companies in Rajasthan but it failed due to the location and connectivity problems.
Would Korean companies find the concept of Coastal Economic zones exciting?
Yes, definitely. It would be something to look forward to as we participate in such projects.
What would be the average South Korean industrialist’s wish list to make business conditions better in India?
Most industrialists believe that the Indian Government is on the right track with reforms. But more reforms are required to address land acquisition and labour market flexibility. Industrialists also believe that consistency in policy is very important for investors. It is therefore heartening to see that the Central-State policy is on same page in Maharashtra where South Korea has significant investments.