IT Growth Engine Is Sputtering

Concerns about possible damage to Korea’s reputation as the IT juggernaut are being raised after the plunge in growth rate and profitability in the sector over the last ten years.

Korea Exchange (KRX) conducted a survey of 365 KOSDAQ-listed IT companies on their revenue and business profit rate over the last five years, from 2002 to 2006, which suggested that IT businesses are loosing growth momentum in terms of revenue and are experiencing a sharp drop in business profit ratio (the ratio of profit to revenue).

Revenue peaked in 2004, after growing to 132.4378 trillion won from the 90.2343 trillion won in 2002. Since then, it has shown no signs of improvement, holding firm at the 130 trillion won level.

The profit ratio grew to 14.00% in 2004 from 9.80% in 2002. However, the profit ratio in 2005 plummeted to 8.78%, and dropped further to 7.10% in 2006. This means that the profit ratio has almost halved in a mere two years.

The profit ratio for Samsung Electronics recorded consecutive decreases: 20.85% in 2004, 14.03% in 2005, and 13.44% in 2006, and during the same period, LG’s profit ratio also nose-dived: 5.07%, 3.85 %, and 2.31 % respectively.

Experts point to changes in the business environment and industrial structure as the culprit behind the slump in IT businesses.

“Making a profit is becoming more and more difficult for IT businesses as a result of severe global competition and decreasing national IT investment in telecommunications and high-speed Internet networks,” said Choi Moon-seon, an analyst at Korea Investment and Securities.

Yoon Jong-rok, KT vice-president for planning of new projects, insisted, “Without developing the convergence sector, in which IT can be integrated with other industries such as broadcasting, medical services and construction, further growth in the IT sector will be difficult to achieve.”

mikemoon@donga.com aryssong@donga.com