How to beat economies of scale

Only technological innovation and industrial structural reform can beat the “economy of scale.”

HAN WOO-DUKThe author is a senior reporter of the China Lab. Gao is CEO of a logistics company in Weihai, China. He sends Chinese products ordered by Korean consumers to Incheon. He also runs his own online store. When asked how his business was doing these days, he responded, “The Korean market is so easy.”

What does he mean by the Korean market being easy? He explained that it was an “empty market.” There is no line of Korean products that can compete with China’s cost-effective products. I checked online shopping sites to verify, and he was right. The goalpost was unguarded.

Take, for example, the electric shaver. Most popular products in Korea are foreign brands such as Braun, Phillips and Panasonic. Their prices on Coupang are over 60,000 won ($45). High-end models range from 400,000 won to 500,000 won. There are no mid- to low-priced Korean brands. That’s not the case on AliExpress, a Chinese online shopping mall. Search “electric shaver,” and there are countless Chinese products. A fancy Xiaomi model costs around 30,000 won. Good quality at a ridiculously low price. This is the empty market that Gao was talking about.

The Korean market is practically bombarded. Koreans bought about 2.2 trillion won worth of Chinese goods directly from overseas between January and September this year. That’s more than double the figure from the same period last year. The country from which Koreans buy directly the most now is China, not the United States. People buy more from AliExpress than Amazon. Korean consumers rave over China’s Singles’ Day shopping festival on Nov. 11.

Structurally, Korea cannot win because the production cost is not competitive. Chinese companies can sell more thanks to the gigantic market and the ability to cut their production costs. It is economies of scale. Korean companies cannot meet the cost and have to give up the market. That’s why Chinese businesses say, “Korea is an easy market.”

There are many voices worrying about dependency on China. Korea relies on China for key materials and intermediate goods exports. Now, not only production but also consumption may have to rely on China. This is a phenomenon that occurs as the Korean consumer market is incorporated into China’s “economy of scale.”

The only way to overcome this is innovation. Only technological innovation and industrial structural reform can beat the “economy of scale.” Lately, Chinese companies are more innovative than Korean counterparts. Someday, Koreans may order cost-efficient BYD electric vehicles from AliExpress. If the goalpost is unattended, the goal is bound to be scored.