Korea and the Brexit Challenge
As this note is being written, it is quite early in the Brexit process, particularly since the new UK minister in charge of Brexit, Mr. David Davis, has announced no timetable nor made public any negotiating agenda.
Aug. 2, 2016
Nor has the Ms. May the new UK prime minister weighed in on the framework of Brexit discussions set forth a public negotiating position for the ministers who can be expected to be part of the UK’s negotiating team along with Mr. Davis such as Boris Johnson, the new foreign minister and Philip Hammond, the new chancellor of the exchequer. It is certain that the process of negotiation will not be completed in the very near term since Ms May has made it clear that the UK will be proceeding cautiously and carefully as it heads towards Brexit.
Taking advantage of the interest expressed by the Brexit leaders in the UK, the Korean Finance Minister, Mr. Yoo Il Ho, made it known quite soon after the Brexit vote that his country would be prepared to begin talks quickly with the UK on a new Free Trade Agreement with the UK that would essentially replace the current EU FTA between the UK and South Korea. Korean exports to the UK are currently at about US$ 7 billion, or about 1.4% of total Korean exports, while the UK’s exports to Korea are in the $5 billion range, which would amount to something around 1% of the UK’s total annual global exports. Obviously, there is a great deal of room for expansion of trade on both sides and both countries have a strong incentive to come to some type of trade agreement to ensure that when the UK does exit from the EU, there is a trade arrangement in place that replicates generally the terms of the existing EU-Korea Free Trade Agreement. That would mean that Korean auto, electronics and other industrial products continue to be exported to the UK on very beneficial terms and likewise the UK’s exports to Korea of whisky, autos, and highend branded goods continue to have good opportunities in Korea.
Although banks have suggested that the UK may endure a brief recession as a result of the Brexit vote, this is by no means a certainty and the prospects are good for continued strong UK economic growth despite the possible negative effects of the uncertainty surrounding the Brexit process. One example of the resilience of the UK’s economy despite this uncertainty: the recent announcement by the Japanese private equity giant, Softbank, that it will spend about 23 billion pounds to acquire the UK chip and software design company. Other major M&A deals are also being concluded and it is clear that the decline in the pound has acted to spur interest at some foreign companies in looking at opportunities in the UK market since in real terms many assets are now trading at levels that are up to 15% lower than was the case just a few short weeks ago. The new UK government under Prime Minister May has said that there will continue to be a focus on the development of the UK’s commercial relationship not only with its existing EU partner countries but with the rest of the world as well. Australia for one has quickly registered strong interest in opening up trade talks with London to formulate a new post-Brexit trade relationship with the UK.
If we consider the Korean economy today as it begins a long and sometimes painful transition from industrial manufacturing to a growing reliance on domestic exports and services exports, there certainly should be some good opportunities for Korea to benefit from Brexit by taking advantage of the new openness of the UK to non-EU trading relationships and investment. Korea’s National Pension Service has already made impressive returns from some of its investments in recent years in commercial property in the UK, notably its investment in the HSBC Tower which resulted in a gain of 960 billion won for the Pension after only a very few years of holding the property. Other investments have been made in the City of London by KIC and the NPS, and other Korean pensions and investment entities have also shown strong interest in the UK’s commercial property and infrastructure investment markets.
One of the industries that has been designated as a ‘future industry’ by the Korean government is of course the electronics industry and ‘high tech’ in general. In the UK there are a number of major financial software companies with strong track records and given that Korea’s historic strength has been in the hardware side of the electronics sector, it is easy to see that there might be some very good opportunities for Korean hardware and software companies to team up with UK financial software firms to develop ‘fintech’ products for use not only in Korea but that also might have global export opportunities. Fintech is still in its infant stage in the Korean market while many UK firms are global leaders already and there should be good opportunities for Korean banks and other financials along with Korean companies in the electronics/ software sector to enter into cooperative business development and even M&A transactions.
Aside from the lure of the high tech sector, Korea’s retail sector remains of vital importance to the economy as a major source of employment and increasingly, via duty free and rising tourism from China and other countries in the region, a source of foreign exchange income. However, at this stage it is quite clear to most analysts that Korean retail companies remain in general well behind their counterparts in the western world in terms of market efficiencies and brand development. This should ensure that well-established UK brands, some of which are already well known in Korea such as Burberry, Marks & Spencer, Johnnie Walker, The Body Shop, Rolls Royce and Harrods and British Airways. The point is that in addition to these brands there are a great many more highly successful UK brands in the retail sector that have been highly successful in the home market and in some cases in international markets, and there should be opportunities for Korean companies to benefit from this experience in joint ventures or M&A opportunities.
Brexit is an on-going process and it is too early to say how it will develop but it can be said that the UK is very much open and receptive to business and this is something that Korean companies will be able to rely upon and to benefit from, but also there should equally be good business development opportunities available to UK companies in the Korean market and in third markets in cooperative arrangements with Korean companies. Business will work best when the flows are in both directions and perceptive managers in the UK and in Korea know that this is the case.
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