Country Profile

South Korea

Egypt might not have borrowed South Korea's lessons for modernizing its economy, but it will soon be able to borrow the Asian country's greenbacks. At the end of April, South Korea announced a credit line to Egypt of more than $40 million (LE 186 million), the crucial grease for export deals. On its face, the loan shows how South Korea has a stake in Egypt's economic recovery: In the last five years, Korean manufacturers have spent $40 million to increase production capacity in Egypt for cars, electronics, yarn and steel. They're also profiting: Korean construction firms have undertaken more than $900 million (LE 4.19 billion) in building projects in the same period.

But behind the scenes, the arrangement also reveals a caution that is typical of this moment in South Korea's economic engagement with Egypt. The state-owned Export-Import Bank of Korea, which is providing the credit line to select Egyptian banks for private-sector ventures, considered offering as much as $200 million (LE 930 million) -- but found that the Egyptian banks were "not ready to accept that kind of an offer," according to a South Korean official who spoke on condition of anonymity.

With Egypt's foreign currency reserves in January hitting their lowest level since the mid-1990s, Egyptian officials are nervous about accepting too many scarce US dollars that will have to be repaid in kind, adds Sherif Al Gabaly of the Egypt-South Korea Business Council.

"Who's going to cover your currency exposure? The bank would have to give a guarantee. The bank would not like to fall into this trap," Al Gabaly says. "You have to be very careful, because what's the use of getting $200 million and not being able to pay it back, and then you have another debt over your head?"

Caution also typifies the mood of South Korean investors, even as they gradually increase their commitment to Egypt's industrial base. South Koreans are nervous about operating in Egypt when the slipping exchange rate hurts them on importing components and sending revenues to the home office. A sensitivity to the currency problem is to be expected from South Korea, which just five years ago had to accept a massive international bailout package in order to escape its own currency meltdown.

"When I talk to Korean business representatives, they offer hesitant talk," said Minha Hwang, director of the South Korean embassy's commercial office (KOTRA) in Maadi. "They feel it's dangerous because of the lack of future predictability."

Yet even if South Korean businesses are in a bit of a holding pattern in Egypt, observers from both countries consider it merely a pause in a relationship that has been growing steadily since South Korea emerged from the 1997 Asian currency crisis with a restructured, stronger economy. Locally assembled Hyundai and Daewoo cars now have a commanding share of the Egyptian market, while Korean expertise in televisions, refrigerators and other appliances are increasingly popular, whether sold under the brands of LG Electronics, Samsung, Daewoo or as components inside locally branded products.

But the Korean presence hasn't grown fast enough from the perspective of Egyptian officials, who have been urging Korean investors to take more ownership in Egyptian textiles, oil and manufacturing ever since President Hosni Mubarak's landmark visit to Seoul in April 1999. So Egyptian business boosters are now taking their appeals to the Korean peninsula in person.

In April, Al Gabaly led a delegation of 12 Egyptian businessmen to Seoul for a meeting of the Egypt-South Korea Business Council, formed a year ago. The Egyptians were from the fields of tourism, cotton, marine services, chemicals, light industry, information technology and telecommunications. The delegation left with high hopes for a new infusion of Korean capital into information technology ventures.

Ali El Moselhi, senior adviser to Minister of Communications and IT Ahmed Nazif, briefed a large group of Korean IT business representatives on Egypt's drive to develop its IT sector. Korea's IT minister is expected to lead a business delegation to Egypt in coming months. And two groups of Egyptian investors plan to follow up the April visit by trying to interest Samsung's IT subsidiary in dealing in high-tech medical computer systems here -- and even in opening an IT training center. South Korean Ambassador to Egypt Yoon-Kyung Oh says the meeting should provide "enormous momentum" for new South Korean investor interest.

The visit "was a good opportunity, because the problem is that Korea knows very little about Egypt," says Al Gabaly, who is also chairman of the Mohandiseen fertilizer business Polyserve. "Yes, Hyundai, Daewoo and Samsung are already here. But Samsung, for example, is a huge conglomerate. Maybe it knows Egypt through working in mobile phones or refrigerators or white appliances. But Samsung has a lot of other things which we don't know about, and they don't know about Egypt. Like Samsung Software: They're developing software for all applications in the world. We didn't know that they had it, and they didn't know that Egypt had any interest."

South Korea sends far more products to Egypt than it buys here. According to KOTRA, Korea's exports to Egypt in 2001 totaled $431 million (LE 2 billion), mostly cars, machinery, yarn, electronics and components, steel products and marine equipment. Egyptian exports to Korea totaled $139 million (LE 644 million) in that time, led by raw materials such as naphthalene, cotton and copper, as well as finished cotton yarn. But Egyptian trade officials note that many of the inbound Korean products are used in Korean joint ventures here, providing jobs, while Korean officials say the trade imbalance is offset by tourism.

Treading water?

Outwardly, South Korean business operations in Egypt are upbeat. For example, the decline of the Egyptian pound has actually helped Dong-Il/DIB Egypt to increase exports to Europe from its cotton spinning plant in Kaliobia. Meanwhile, after making television components for various brands in Ismailia for a decade, LG Electronics began complete assembly of televisions in Egypt last August at a partner's factory. LG plans to add more models in coming months and expects to open its own TV factory in 2003 or 2004, probably in Sixth of October City. The company has raised its profile by lending its sponsorship to football and musical events.

Daewoo Electronics Co., which imports stereos and other consumer products through its liaison office in Maadi, is optimistic about being able to dominate the regional market in coming decades.

At present, Japan dominates with expensive but well-regarded products. Korean electronics cost about half as much. On the low end, Chinese-made products cost as little as a quarter of their Korean rivals' prices. But Daewoo's Fadi Fayez says Korean quality is winning customer loyalty.

"Chinese prices are kind of a miracle, practically less than the manufacturing cost. But nowadays even the buyers are starting to change their mentality. Before, they treated Korean products like second- or third-class products, but this has totally changed," says Fayez, assistant general manager. "When the consumer discovers that he paid less but didn't really get what he wanted, he will change back to Korean products. We believe that the next 20 years will belong to the Far East companies."

But there are also patches of concern. Although sister company Daewoo Motors is highly successful in Egypt, with the country's largest car factory and a 40% market share, the financial troubles of its parent company have cast questions on its future.

While General Motors agreed at the end of April to take over many of the bankrupt parent company' assets, GM took a pass on certain properties -- including the Egypt plant. The Dow Jones news service reported ominously that if Daewoo's creditors cannot find a new buyer for the Egypt factory, they would consider "merging" it with Daewoo plants in other countries.

Local Daewoo officials express optimism that they will continue to operate in Egypt.

And currency troubles have squeezed South Korean firms that import components for assembly of electronics and appliances here, says Hwang of the embassy's commercial office. "How can you expect good news in this bad situation? If the market is contracting, then you cannot buy hard currency. You sell in pounds, you have to change it to US dollars," Hwang says. "Korean firms in Egypt have not reduced their production yet. They maintain their current level. But I think they might consider reducing the size of their workforce if this kind of situation continues."

An official in the Egyptian Ministry of Foreign Trade expressed confidence that the Ebeid government has the foreign exchange situation under control. "Talking about the currency problem, Egypt is in a better situation than a lot of countries," says Mohamed Elaref Soliman, director of the Asian Department in the ministry's Commercial Representation Sector.

"If you compare Egypt with what happened last year in Turkey and Argentina, thank God, what we have witnessed here wasn't the same size or nature. And the government and the central bank took the necessary steps and measures. Now things are settling down," he notes.

Getting to know you

At the official level, Egypt's relationship with South Korea is still new. After the end of the Second World War, when the Korean peninsula split into a communist regime in the North and a republic in the South, Egypt for many decades sided with the North. It was only in April 1995 that Egypt established full diplomatic relations with South Korea. The countries signed agreements in 1996 to encourage trade and investment.

In April 1999, Hosni Mubarak became the first Egyptian president to make an official visit to Seoul. That began the official appeal to South Korea to bring its high-tech, low-cost manufacturing expertise to Egypt by taking deeper ownership in Egyptian business. The call was renewed during the August 2001 visit to Cairo of South Korean Minister of Foreign Affairs and Trade Han Seung-soo. Prime Minister Atef Ebeid asked the minister to encourage his countrymen to invest in Egyptian oil and factory modernization.

The officials signed a cooperative agreement on information technology that could produce results during the Korean IT minister's forthcoming visit. They also inked an agreement to cooperate on nuclear energy that has produced no apparent results as of yet. And they formed the Egypt-South Korea Business Council, which made its first visit to Seoul in April.

Observers from both countries agree that they need to move beyond talk and toward solid business deals. "People can say in meetings or speeches or whatever that they want the Koreans. But it's not that simple, because [Koreans] don't know enough about Egypt," says Al Gabaly of the joint business council. "You have to do a lot of work in Korea. Show them what you have. They will not come if you don't show them what you have." Al Gabaly adds that Egypt's ambassador to South Korea, Amr Helmy, has been active in seeking investor interest.

Soliman, who oversees the Foreign Trade Ministry's export and investment promotion in Asia, says the government is committed to helping Egyptian exporters visit South Korea by providing logistical support, although there is no funding for travel subsidies.

"We are organizing missions for the exporters to go to Seoul and participate in the trade fairs," Soliman explains. "Foreign Trade Minister Youssef Boutros-Ghali is really putting an emphasis on Egyptian trade organizations and entities like us working hand-in-hand with the private-sector organizations to go abroad. It's an aggressive policy. We have to go outside, to see the people, to be able to know what they need, their opinion about our products, what we should do to modify our products to suit the requirements of the foreign markets."

Follow the leaders

But South Korean business promoters say visiting is just the first thing that Egyptians need to do. Hwang of the KOTRA trade office in Maadi suggests that Egypt look at the example of markets that have risen to prosperity on foreign investment, including South Korea, Ireland and even states in the southern US.

Their secret in attracting investors: customer service. Not only do officials there offer financial inducements such as long-term tax exemptions and discounted utilities, they free investors from the burden of bureaucracy, often by doing the paperwork for them. The Korean Investment Service Center operates an ombudsman's office just for foreign investors, where specialists in courtroom, immigration and customs procedures provide help on questions from buying land to dealing with municipal governments -- even helping foreign workers find schools for their children.

Koreans echo other countries' complaints about Egypt's protectionist tariff policies. "The way the Egyptians can move forward is to find the comparative advantages in their industries," Hwang says. "They might have selected the textile industry as the industry to be protected with tariffs to make that competitive. But the way to make those industries competitive is not by protecting them with tariffs. They have to compete. Without competition, you cannot develop." Hwang suggests the Egyptian government should instead help the textile industry upgrade equipment and quality assurance while providing training in skills such as design and dyeing.

For Egypt, advice to reform its economy and stabilize the currency is a little easier to accept from South Korea than from industrialized Western countries. After all, South Korea has been there. Korean society was one of the world's poorest agrarian cultures in the 1950s, with a lower gross national product than Egypt's. Starting in the 1960s, a concerted drive to increase exports was bolstered by prudent savings policies and openness to foreign investment, while aid from America, its Cold War ally, was channeled into the education system and manufacturing capacity. South Korea's gross national income rose from $2.3 billion in 1962 to $474 billion in 1997.

The fall came in the mid-1990s. Real estate speculation and government intervention in banking combined with over-diversification by South Korean conglomerates. The South Korean won collapsed in 1997. Foreign currency reserves, which are crucial to keep exports moving, were almost depleted, and unemployment skyrocketed. Gross national income fell to $317 billion in 1998.

The International Monetary Fund (IMF) came to the rescue with a multi-billion-dollar loan package. In the strict economic reforms that followed, the government tightened its budget and pared down the troubled financial sector. Dozens of failing banks and insurance companies were bailed out, forced to restructure, or closed. New laws required transparency in corporate management, and customs procedures were rapidly deregulated. The IMF declared the crisis resolved at the end of 1999.

Now South Korea is more outward-looking, exploring new markets as its economy becomes more reliant on exports. Today it stands as the world's 11th-largest trading nation, the leading shipbuilder and fifth in production of cars (3.12 million vehicles in 2000, according to the Bank of Korea). The country is savoring the limelight as it co-hosts the 2002 World Cup with Japan this month, having spent more than $2 billion (LE7.1 billion) to construct glittering football stadiums in each of 10 cities.

Egypt is a willing student, says Soliman of the Foreign Trade Ministry.

"Korea is helping to create and build up production capacity for the Egyptian economy, and we need the technical assistance of Korea as well to build up our export capacity. They have the knowledge and the know-how in going abroad. So we're trying to learn something from them," Soliman explains. "They have so many projects going on now, either Korean-owned, joint ventures with Egyptians, or technical assistance cooperation for Egyptian firms. The cooperation is really diverse." bt

Sectors to Watch

Information technology: A promising growth sector if Egypt works it. A recent Egyptian delegation to South Korea is courting Samsung's IT branch to deal medical systems here and possibly open a training center. An anticipated business delegation led by South Korea's IT minister could bring more deals.

Automotive: South Korea's most visible stamp on the Egyptian market is the rapid popularity of Korean brands such as KIA. Daewoo Motors and Hyundai Motors each assemble vehicles locally in joint ventures. Daewoo is reportedly considering expanded production at its Sixth of October City factory -- even as its financially troubled parent company looks to sell it.

Electronics: South Korean parts are inside appliances and consumer electronics sold under the Samsung Electronics and Daewoo Electronics names and local brands. LG Electronics Egypt started full local assembly of televisions in August 2001; LG also exports spare parts to Jordan, Turkey and Tunisia and plans to build a factory in Sixth of October City in 2003 or 2004.

Textiles: The Kaliobia spinning mill operated by Dong-Il (DIB Egypt) is an example of how a South Korean specialization could revivify Egypt's aging textile industry. Port Said officials are trying to interest Korean businesses in starting a textile complex. South Koreans are interested in more ventures in textiles and synthetic fibers, while exhibitors at the Cairo International Fair in March were hawking advanced machinery for knitting, sizing, label-weaving and inspection rolling. But Korean trade officials say Egypt needs to cut its red tape.

Construction: Many of Egypt's biggest recent industrial projects were joint ventures with Korean firms. Those included, in 1998 and 1999, an Alexandria polyethylene factory by Daelim, Khalda gas processing plant by Samsung Engineering, and the Sadat Special Steel factory by Posco Development. Hyundai Construction worked on the Four Seasons Hotels, Méridien complex, Vodafone building and Port Said east project in 1999 and 2000. On the water, Samsung Construction led the Damietta port extension, and Daewoo Corp. built two major cargo ship containers. On the export side, Egypt wants to ship more marble and ceramic building materials to South Korea.

Tourism: South Korea's Christians fly from Seoul to Cairo to visit the Holy Land; Egypt could work to attract them to vacation on the Red Sea as well.

Q&A with South Korea's Ambassador to Egypt

A Model Nation?

South Korea's ambassador is not certain his country's reform programs
are a model for Egypt, but he's not shy about suggesting reforms.

Ever since South Korea emerged from the 1997 currency crisis with a reformed and strengthened economy, the Asian nation has been seen as a role model for Egypt -- and a potential benefactor. But high hopes for greater Korean investment in Egypt's economy have stalled amid the war on terrorism and Egypt's own currency shortage.

Yoon-Kyung Oh, South Korea's ambassador to Egypt since February 2001, spoke to bt's Dan Bernard in April about the chance of moving from hope to reality in the short term. Oh, an expert in international law and maritime treaties, has served South Korea as an official at the UN and ambassador to New Zealand in addition to postings in Oman, Canada, Japan and India.

bt: After 9/11, some Korean businesses cancelled visits to the Middle East or temporarily closed offices in the region. In Egypt, Daelim and SK prepared emergency evacuation plans. What's the mood now?

Oh: This is one of the reasons I contributed an article to one of the major Korean newspapers in the wake of the 11 September attacks. As you know, many Korean businessmen postponed their visits here. I explained in the article that it's not [valid] -- Egypt is a safe country, and there's no need to worry about the aftermath of 11 September in this area. Some Koreans do not know exactly what is happening in this area. When they watch CNN, they see that this is a very dangerous place. But every time I have an opportunity, I encourage them to come here.

Last week, I paid a courtesy call to the governor of Suez, who asked me to bring some Korean businessmen to see the area. I meet every three months with around 30 representatives of Korean companies in Egypt. I promised to hold the next business meeting in that area at the end of May. The governor offered to brief us about industrial zones and advantages such as inducements to investors from abroad.

bt: Are there signs South Korean investment in Egypt will increase?

Oh: We have good news. A Korean banking delegation made a visit here just a week ago -- the Export-Import Bank of Korea -- to discuss ways to improve our balance of trade. They had fruitful discussions. Egypt is suffering from a kind of liquidity crisis, as we did four years ago. To alleviate this, the bank agreed to extend a credit line of up to $40 million (LE 186 million) initially, gradually increasing. I understand that Egyptian companies in the fields of machinery, electronics, transportation and public utilities will benefit. This will prove especially beneficial to the Egyptian economy by helping alleviate the effects of the liquidity shortage.

I expect the Korean minister of information and technology to come here, along with Korean business people, to promote cooperation in the fields of information technology.

Considering Korea's economic capacity and Egypt's potential, there are many possibilities to explore. We are ready. But are Egyptians ready? I'm not sure. One Korean company complained that [Egyptian firms] borrow money in US dollars, but they want to pay back in Egyptian pounds because of the foreign exchange. They cannot get US dollars in this market unless they go to alternative sources. That would have been too difficult for Egyptian banks.

bt: Your minister of foreign affairs and trade visited Cairo last August to discuss economic cooperation. Any progress?

Oh: If I recall correctly, the prime minister requested three things: more investment in this country -- he mentioned the Gulf of Suez area might be a good place; training of Egyptian traders; and organizing a business forum of business people and government officials, to set up a date to sit down together to discuss all matters, bring forward our difficulties. But when I read the previous meeting's records [from the Korean minister's visit in 1999], it was nearly the same.

[Egyptians] say, "Bring more Korean business people here to listen to me." But if they want to increase Korean investment, they should provide [promotional] materials. They should hold a road show in Korea. They should go to Korea to explain their schemes -- the incentives, the terms the industrial zones can offer, these sorts of things.

bt: What should Egypt learn from South Korea's economic recovery?

Oh: Every country has a different stage, and I don't think Korea's case could be easily applied to this country, but stick to a market economy, transparency and eradicating corruption. Hard work is the best solution to get out of the quagmire. Hard work is the only way.

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