Olajide Olutuyi, Founding Partner, Greentouch Consulting Inc., Canada

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Subjects of Interest

  • Frontier and Emerging Markets
  • Private Sector Development
  • Sustainable Development

South Korea and Samsung provide the way forward for Nigeria 22 Dec 2016

In October, Samsung had to permanently discontinue the production and sales of its flagship Galaxy Note 7 smartphones. The decision was taken after several recalls of the phones due to complaints of exploding batteries and incidents of the phones catching fire. This piece is neither about the company's recent predicament, nor is it about my personal opinion of the South Korean manufacturing giant's smartphones. (As for my opinion, I am often taunting colleagues and friends, including my spouse, that their favourite brand is inferior to the iPhone).
    
In this article, I like to explore the significant impact that the world's largest manufacturer of smartphones has on the economy of South Korea, ranked the 11th largest economy in the world in 2015. According to South Korean Ministry of Strategy and Finance, Samsung accounted for 23% of the country's Gross Domestic Product (GDP) in 2012, while Hyundai Motor Company contributed 12%.

South Korea is the fourth largest economy in Asia, with a GDP per capita (PPP) estimated at $36,500 in 2015, according to the CIA's World Factbook. Other economic data on the country show unemployment rate decreased to 3.7% in October 2016 from 4% recorded in the preceding month. Inflation rate was 1.3% in October, the highest rate of inflation since February this year. The latest World Economic Forum's Network Readiness Index (NRI), which determines the level of a country's information and communication technologies, ranks South Korea third in Asia, after Singapore and Hong Kong. South Korea also has the world's fastest internet speed and highest smartphone ownership rates.

Following the end of the Korean War that ended in 1953, something remarkable began to happen in South Korea. Family-owned firms such as Samsung and Hyundai entered into alliance with the South Korean government. This meant that the companies were protected from competition, got access to cheap loans and they eventually grew into global conglomerates. While North Korea essentially wallows in poverty and seclusion from the rest of the world, South Korea has flourished into one of Asia's most affluent and export-oriented countries in less than a generation.

South Korea's family-owned conglomerates – also known as chaebol, meaning 'business family' in Korean – have helped in no small way in the development of the country's economy.  While some school of thought may not agree with the way the government has supported these chaebols, the fact remains that the policy worked for the country. Indeed, the world has benefited from the successes of South Korean companies.

Once tagged a poor country, just as many countries in Sub- Saharan Africa are today, South Korea has risen to become one of the world's major economies and a leading exporter of cars and consumer electronic goods. Globally, the country ranks very high in education, job security, ease of doing business and healthcare. Companies like Samsung have played a significant role in the country's advancements. Founded in 1938 by Lee Byung-chul, the company started as a small trading company with 40 employees. Over the next three decades, the company diversified into other areas, including food processing, textiles, insurance, securities and retail. It made a foray into the electronic business in the 1960s and into construction and shipping industries in the mid-70s. The company employs 370,000 people across offices in over 80 countries.

Nigeria has much to learn from the storied industrialisation of the Asian Tigers, particularly South Korea. Nigerian President Muhammadu Buhari acknowledged in May that the country's dependence on oil was a costly mistake. By failing to diversify its economy, Nigeria is currently hit by its first economic recession in more than 25 years, largely caused by the slump in oil prices in the international oil markets.

Speaking at a ceremony in honour of former Iranian Ambassador to Nigeria, Saeed Koozechi, Buhari said “We made a terrible mistake by becoming a mono-product economy hinged on oil and we are now in a volatile situation, due to the crash in oil prices. We have seen the benefits of diversification which helped Iran to survive many years of sanctions and still come out strong. We are now fully committed to economic diversification." The president said much of what Nigeria imports would be produced locally to eliminate the country's huge import bills and reduce the risks of revenue shocks as a result of volatility in the global oil markets.

The vulnerability of the Nigerian economy to the global oil markets is anti-development. It is unlikely to have a diversified modern economy that spirals into recession because of a downward trend in commodity prices. But if, indeed, data shows that the Nigerian economy is diversified, there must be structural deficiencies in the economy. The 2016 third quarter GDP growth report recently released by the National Bureau of Statistics indicates that the oil sector contributed 8.19% of total real GDP, while the non-oil sector contributed 91.81% to the nation's GDP. Further analysis of the latest GDP report shows that services sector contributed 50.24% to aggregate GDP, while the agriculture sector contributed 28.65% and industries contributed 21.11%.

While the Nigerian economy is diversified to a degree, however, the non-oil sectors suffer from low productivity. As such, the oil sector accounts for more than 70% of government revenues and over 90% of the country's exports. Measures must be put in place for other sectors to contribute their quota – in terms of exports and revenue – to the growth of the economy.  

As the Q3 2016 GDP data identified that the economy went deeper into recession with negative GDP growth rate of -2.24%, real GDP growth of the manufacturing sector contracted by -4.38% year-on-year. Under the manufacturing sector, the cement sub-sector contracted by -6.26% in Q3 from -5.48% in Q2 2016, while Food and Beverage and Tobacco sub-sector contracted by -5.75% in Q3 from -5.53% in Q2. Other activities under manufacturing also showed varying degrees of contraction.

The government can employ the South Korean model of supporting well-known companies in the manufacturing sector and providing substantial government support to them. They are very easy to identify. Their track record and past performance under previous harsh conditions should be some of the criteria for eligibility. A company such as Berger Paints has been operating in the country since 1959; PZ Nigeria has been in operation since 1899; Beta Glass since 1974 and Livestock Feeds since 1963. There are several others in the sector that need government support, through patronage and access to finance.

Suffice to state that the support must not be focused on cronies of the incumbent administration. Notwithstanding the foresight and enterprise of Africa's richest man, Aliko Dangote, his companies have received support from successive Nigerian governments.  The same support must be extended to other companies. Like the Chaebols of South Korea, government can implement policies that provide support to these manufacturers as they expand into conglomerates and become major exporters of their respective products to other sub-Saharan African countries and beyond.

Nigeria's GDP in 1975 was $27.8 billion, surpassing South Korea's GDP of $22.8 billion. 40 years later, South Korea's GDP at $1.38 trillion in 2015, was almost three times the size of Nigeria's $481 billion GDP of last year. Samsung Group's affiliate companies produce a fifth of South Korea's total exports. Samsung Electronics' mobile devices alone account for 2% of South Korean exports, $177 billion in revenues last year.

Although the Samsung Galaxy Note 7 debacle is likely to negatively impact South Korea's GDP growth in 2016, the country is home to several other leading global brands like Hyundai Motor Company, LG Electronics, Kia Motors, Korean Air, among many others.  The world is the oyster of several Nigerian companies if the Buhari administration can provide the boost in terms of improvement in business environment, funding and access to markets.