International Law

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

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!

Full post as published by Korea Law Blog on November 09, 2008 (boomark / email).