Why did you invest in Korea?

Korea was the first place for us to invest in Asia. We have since built plants in China and Indonesia, but our first factories were here. The original reason now sounds wrongly conceived. In the early 1980s labor costs were really low compared to Europe's. Components were imported from Europe, the finished lamps were made here and re-exported back to Europe. Domestic sales accounted for 20 percent but 80 percent was re-exported. Now there's a high degree of automation, but then a lot of production involved small quantities needing simple work spaces, so they were brought here. We started with a joint-venture partner, but that wasn't successful. So a decision was taken in 1989/90 to either close the operation down or have a normal Osram factory with automated production lines and the main target being the domestic market. Production lines for fluorescent lamps, halogen lamps and compact fluorescent lamps were brought in. An additional line was added 18 months ago to make energy-saving lamps with integrated ballasts.

What was the nature of Osram's additional 20 billion won investment last year?

We built an extension in the neighborhood of our existing factory in Ansan, and will bring in a new production line this year to make a high-tech lamp for use in semiconductor production. It's not a mass-production item, but the industry requested us to localize the production of this lamp in Korea to be independent of foreign exchange rate shifts and other risks. Also, we will install a state-of-the-art mass-production line for our T8 fluorescent lamp in 1999. A typical Korean production line produces 1,200 lamps per hour; this will produce 6,400 per hour.

What is your involvement in the domestic market?

We have 18 to 20 percent of the domestic market selling 800 products in Korea out of 5,000 made by Osram worldwide. Of those 800, we make 100 here. The remainder we import from our factories in the U.S.A., Europe and Brazil. As a global player we are not only in the domestic market, but the reason we are here is there is a big market for fluorescent lamps, and in this region you need a big production facility. You can't have a production line like this in China; you must have the right experience. We've built up good experience here and we are confident we can manage these lines. Our position in Korea is good.

What do you mean when say your position in Korea is still good?

As you can read hourly there is a difficult situation here. It started as a financial crisis; it will impact on our company but we are well-prepared. They only thing is, our high-risk customers will go bankrupt. In response we've adopted the following approach. We're not selling in an aggressive way and we're starting to demand payment in cash rather than promissory notes. We're reducing sales because we don't want to have high sales in December and then find we're lagging in March because our customers have died. We're also insuring ourselves against the credit risk of high-risk customers. We have a global contract through a German insurance company. This is something all Siemens companies have to do.

Also, because of the huge fall of the Korean won against the deutsche mark and the U.S. dollar, and because imports form 40 percent of our turnover, 80 percent of which are deutsche mark-based, we have fixed our exchange rate in advance. So until mid-1998 we won't face major cost increases. Finally, we're shifting production to exports, because the domestic market is decreasing. Exports formed ten to 15 percent of output last year; now they'll rise to 20 to 40 percent. According to our 46 factories worldwide, they're organizing their capacity to help us through. We're producing more for the U.S.A., Germany and Taiwan, when normally product would come from the U.S.

How will you respond after mid-year when you may likely face vastly higher foreign exchange costs and higher-priced imports?

There will be a time when we have to follow the exchange rate, and it's only a protection period we have, but we don't have an emergency situation where we have to raise prices 60 to 70 percent or lay off people.

Do you have confidence in Korea?

I can't believe in my lifetime there will be nobody in Korea buying a light. It's not unusual for a country to have economic problems; Korea's economic growth was incredibly fast and strong, so its economic problems have hit equally fast and strong. The problems I see are those associated with the restructuring of the country, the layoffs this will entail and the social and political problems it will cause. There are 50 to 80 companies in our field in Korea where there are normally 10 in countries where we operate, so there's a necessity to restructure. Maybe when stability returns there will be growth. Not double-digit growth, but growth similar to other industrial countries.

Do you foresee Osram restructuring?

I see no reason to do it. We started from zero and because of our production facilities, all from Germany, a very high-cost country, we never had many people actually engaged in production. So we'll be growing in a normal way and keeping staff, but growing.

How do you see the reduced exchange rate impacting on the value of Osram's assets here?

We are really looking long-term. That means 50 years from now. We plan on getting our return on investment in a new production line in 20 years. This is in marked difference to the Korean approach; here, an investment in semiconductors is expected to give a return in one year, otherwise they won't invest. We are a conservative company, and for us the strategy has worked. We are not that short-term oriented. More important are our expectations for the future and our board in Munich is convinced our involvement here is worthwhile.

by Charles Duerden