Samsung No. 1 in US Mobile Phone Market; Korean Market Remains Basically Closed

by Brendon Carr

And I think this could quite quickly become a trade irritant if anybody in Washington notices.

The local papers are crowing that in the third quarter tally, Samsung Electronics achieved for the first time the number one sales position in the United States, bumping American phone maker Motorola to number two. Samsung’s share topped 22.4% of the market, the company having shipped 10,600,000 units to American customers. Congratulations to Samsung, which makes good products at generally fair prices, if you buy those products in a market where Samsung faces competition like it does in America.

Motorola sold only ten million, falling to 21.1% of the market. Korean electronics giant LG Electronics snaffled up third place with 9,700,000 phones, for a 20.5% share.

Combined, then, the Korean phone makers have almost 43% of the American market for mobile phones.

How’s it looking on the flip side? How many mobile phones do American companies export to our valued trading partner Korea?

Here’s where it gets hard to take: Zero. That’s right, none. Motorola makes its phones for the Korean market here, having bought a Korean phone maker in 1999. Apple’s iPhone, despite being a smash hit available in Japan and 61 other countries (with 18 more coming soon, including IT powerhouses Ivory Coast, Senegal and Botswana), is not on sale here in Korea. Other big foreign brands are also absent: Nokia is not present here. Sony Ericsson is not present here.

Why? Because Korea maintains a mandatory non-tariff trade barrier against foreign mobile phones, in the form of a local software requirement called Wireless Internet Protocol for Interoperability (WIPI). The WIPI standard is Korea’s 2003 rejoinder to the Japanese i-Mode (vintage 1998), allowing access to a cut-down “walled garden” Internet controlled by the carrier (entry fee to get into the garden, naturally).

WIPI’s largely been a failure from the perspective of encouraging value-added services. Its user experience is terrible—press “1” for Music, “2” to see some actress’ topless photos, “3” to see the Seoul subway map, etc.

But it’s done a great job of protecting Samsung and LG from foreign competition. The reason is that the cost of engineering WIPI into a phone is largely the same, regardless of whether you have a 1% market share or a 50% market share—like Samsung was reported to have in 2006. WIPI is not used in any market other than Korea, which means that anyone wanting to get into the market has to bear the same engineering cost, but can only amortize those costs across a small number of units. That means lower profits, or a loss, for the foreign maker. It tends to reduce foreigners’ interest in the Korean market.

For a phone like the Research in Motion Blackberry (they’re Canadian, not American, but bear with me), or the Apple iPhone, neither of which needs—or wants—WIPI in order to offer their services to customers, any investment in engineering WIPI compliance would be money completely wasted. The last thing that Steve Jobs wants is a service on the iPhone where users have to navigate some kludgey press “1” for this, press “2” for that menu system. Who needs that, when a full Internet browser is available? Yet under current Korean law, these foreign companies who don’t need WIPI have to bear that wasted cost. That’s a classic non-tariff trade barrier.

In case you’re wondering, in Korea the Samsung Anycall Haptic rev. 2 phone goes for US$690 for the 8GB model, US$775 for the 16GB. Rumor has it that the same phone is coming soon at US$199 in America, where Samsung faces a more competitive market. Does anyone think Samsung relishes the idea of Apple bringing iPhone here at US$199 or a similar price point?

Yet “protecting Samsung’s right to gouge Korean customers” is not an idea likely to gain much traction with the United States Trade Representative, especially not now that Samsung is number one in America. Also, it bears mentioning that other American industries are under Korean pressure—General Motors, Ford, and Chrysler are at death’s door, while Korea exports hundreds of thousands of cars to the United States. So I think things are approaching an inflection point on Korea’s trade policy of “We want free access to American markets, while keeping ours closed with non-tariff trade barriers”. Enjoy it while it lasts, guys!

7 Responses to This Entry

1. Whitey on November 09, 2008 @ 4:35 pm

   Good post.  I hope you will consider sending it to one of the local papers “crowing” about Samsung. 

   Lots of foreigners in Korea would be interested to know this situation.

2. steve on November 11, 2008 @ 7:19 am

   Obama’s official transition website is soliciting input from the American public about where he should lead the country:

   http://change.gov/page/s/yourvision

   Right now it seems like the best place to tell him that while he is leading the charge to pry open the Korean car market not to forget the Korean cell phone market. Apple shouldn’t have to compete with Samsung and LG freely in the U.S. while it is kept out of Korea.

3. Dan on November 12, 2008 @ 2:59 pm

   Well, look at it this way. GM, Ford and Chrysler aren’t dying because Korean government imposes heavy tariffs nor is it because Hyundai and Kia are just too good at taking the Big 3’s marketshare.  Their quality and service just wasn’t competitive enough and acquisitions like Landrover, Jaguar, Saab, Daewoo etc. were simply a terrible strategy. Their insistence on big SUVs and trucks hurt them and poor marketing and design didn’t help either.
   Anyone who’s closely following the numbers for the Big 3 would know that even if the entire Korean market runs solely on the Big 3’s cars, their annual deficit wouldn’t disappear.

   How about cell phones? WIPI may be one of the non-tariff trade barriers that blocks or impedes competitions from entering the market. But so what? How about Xerox with protective patents back in 80s? How about IBM? How about Microsoft? Why is 90 some percent of Korean computers are run on WIndows (and the rest on Mac OX)?
   Creating a barrier to entry is not a novel idea. It’s an Econ 101 concept.  Free trade doesn’t mean no barriers. Like Brendon pointed out, other cell phone providers do not WANT to adopt the WIPI standard—not because they are unable but because their cost-benefit analysis shows that it is simply not profitable. Many foreign pharmaceutical companies do not bother entering the US market because meeting the FDA standard is just too costly. But again, so what? It’s how the market works. You go into the market if there’s profit. You don’t if there’s none.

   When we talk about unfair trade practice through non-tariff barriers, one adequate example would be the Anti-dumping and countervailing duties that the U.S. uses on all its Free trade agreements. There are literally hundreds of law review articles on the issue but the gist of it is: government should not distort the free competition and the doctrine of laissez-faire by applying manipulative non-tariff barriers.  Such non-tariff barriers do not give companies a choice of entering or not entering the market. It simply punishes companies as the government sees fit. That’s a distortion.

4. David Barch on November 13, 2008 @ 9:41 am

   Brendon,

   Korea’s tried and true use of non-tariff barriers is fundamental to any understanding of the country’s admittedly impressive and successful drive toward economic development, but it also goes to the heart of the debate over whether to renegotiate the stalled Korea-US Free Trade Agreement.

   Whatever one’s views on that sad agreement (and my own are that it’s terrribly flawed, needs to be renegotiated, and that the U.S. negotiators really did get rolled on that one), it’s striking how quickly Korea’s bureaucratic and media elite have moved to bash the incoming U.S. administration on any talk of renegotiation.

   Incredibly, just as President-elect Obama and President Lee were chatting on amicably about bibimbap and kimchi, Deputy Minister for the FTA Lee Hye-min categorically ruled out renegotiation, Trade Minister Kim Jong-hoon declared that renegotiation would not take place, and even the Korea Herald saw fit to lecture Frank Januzzi, the incoming administration’s Korea expert, on the need to take a “broader perspective” and pass the FTA as is. All in all, pretty cheeky behavior from an ostensible “ally.”

   My own thinking is that when a country really, really, REALLY doesn’t want to renegotiate a trade agreement, chances are the reason is because it knows it got the better deal.

   Cheers,
   DLB

5. Linkd on November 13, 2008 @ 1:42 pm

   Sometimes in the course of business a company will find itself with a lot of inventory - which it has invested a lot of money to produce - but no cash on hand. Or else a company might be facing bankruptcy and can project its own demise, say, within the next 2-3 quarters. Before going down, its owners/Board will naturally try to convert all inventory to cash asap. The idea behind anti-dumping laws is that a company wanting to grab some quick cash shouldn’t be able to disrupt the market and undermine the prospects of companies that are going concerns. The rule of what constitutes a ‘dump’ is any price that is below the cost of production. Just because one country can produce steel cheaper than another, it isn’t a dump to export it, so long as the price exceeds production cost. (Of course there’s cheating, as in all things that involve money).

   This seems to make some sense. What if Hynix semiconductor were broke and so dumped a year’s worth of microchips on the market at below-cost prices? Makers of consumer electronics products would snatch them up, but in the process Texas Instruments, AMD, TSMC, Toshiba and Samsung lose out on a year’s worth of cash flow, which can be crippling in an industry requiring constant reinvestment.

   A final point regarding Dan’s understanding of free entities operating in a free market: he forgets the consumer. There are any number of ways governments can intervene in particular product markets and create inefficiencies (note that an inefficiency is always someone’s profit source). But the one thing they ALL have in common is that the end consumer ends up paying more. Thus every form of government-backed protectionism is a transfer of wealth from the government’s own constituents (consumers) to some favored company or industry.

6. Dan on November 15, 2008 @ 1:43 pm

   Just to comment on the Linkd’s reply, the main problem with antidumping and countervailing duties is not the rationale behind the policy but the way U.S. implements the policy. In theory, what you are saying is correct. Dumping is not a desirable practice neither for the competitors nor the economy overall. No one disputes that. However, when it is used as a barrier to trade or a means to punish a exporter to protect the domestic industry, it becomes problematic. Like I said, since there are countless articles published criticizing the implementation of U.S. antidumping policy. I won’t get into the details but in short, such distorted protective practices cripples the U.S. economy in the long run.

   Also, to comment on Linkd’s final point, I was not neglecting the deadweight loss that consumers have to bear. My examples: Microsoft, Xerox, etc. are well known for their barrier to entry strategies. Whether it be the government protecting foreign entities entering the market or a private companies shutting down their competitors, consumers pay the price. My point was that such practice is not a novel concept and it is not an exclusive practice as shown in the Korean cell phone market.

7. David Barch on November 18, 2008 @ 3:46 am

   Brendon,

   “Dan” is incorrect to equate Korea’s cell phone manufacturers’ required adaptation of the WIPI software platform with the market dominance strategies of Microsoft and Xerox, for the simple reason that the latter represent efforts by individual companies to game market share while the former is a government-endorsed industry-wide effort to keep the Korean mobile market effectively closed to foreign competitors. The two are not the same, and it is misleading to suggest otherwise.

   Korea’s Ministry of Information and Communication made WIPI, developed by the Mobile Platform Special Subcommittee of the Korea Wireless Internet Standardization Forum (KWISF), Korea’s official wireless standard in April 2005. It did so in order to save Korean firms from unnecessary competition and overlapping investments.

   But MIC’s adoption of an only-in-Korea WIPI standard also effectively prevents truly innovative companies like Canada’s Research in Motion and Silicon Valley’s Apple from introducing their Blackberry and iPhone products in Korea. It has also been counterproductive: not only does it block Korean businesses and consumers from being able to use cutting edge products, but it also undermines Korea’s image as an international technology center and an emerging global financial hub.

   The good news is that WIPI may be on the way out. Korea’s handset makers may benefit from the WIPI standard, but many of the country’s mobile service operators would like to abolish WIPI because introduction of advanced foreign phones is likely to increase use of very profitable high data-based services and applications.

   On the other hand, don’t expect Korea’s handset makers to go quietly. KWISF is already developing WIPI 3.0, and it’s expected to be on the market by 2010. So this debate is going to be around for a while.

   Cheers,
   DLB

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