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The Peninsula

Samsung’s Troubles Demonstrates How Different North and South Korea Really Are

Published October 31, 2016

By Troy Stangarone

North Korea and South Korea are different, but sometimes it takes a crisis in each country to draw those differences out. In many ways, the flooding in North Korea in September and the recent crisis at Samsung help to illustrate how different the two countries have become since they were divided after the Second World War.

For a North Korean living in the flood ravaged north of the country, life was already perilous before floods damaged or destroyed 35,500 homes. Now, with the onset of winter approaching, life has become even more perilous. In contrast, the crisis around Samsung, South Korea’s star economic performer, will not place the lives of South Koreans in anywhere near as perilous a fate. Instead, Samsung faces a reputational crisis as a result of a flaw in the Galaxy Note 7 that has led some phones to catch on fire.

For many countries, while challenging, the domestic resources would be available to deal with a calamity similar to the floods in North Korea. For those nations lacking in the resources, international aid would be available to help deal with the needs of those short of food and housing.  North Koreans are not as fortunate. The state does not have the capacity to deal with the challenge, and while international organizations such as the World Food Program, UNICEF, and Save the Children have made appeals for aid totaling $28 million to help some 600,000 in need of assistance. Years of food shortages from a state that is more interested in developing nuclear weapons than ensuring that its citizens are cared for have made international donors less willing to help. To date only a quarter of the $28 million has been raised.

In contrast, South Korea’s Samsung Electronics is also facing its own onset of difficulties. After turning around two years of declining profits in the first half of the year, the troubles of the Galaxy Note 7 have shaken Samsung. After an initial recall, replacement phones have also reportedly caught on fire. In an effort to prevent the damage from spreading and protect Samsung’s reputation, the decision was made to permanently discontinue the Note 7. Initially Samsung revised its quarterly operating profit down by $2.3 billion, but in its recent quarterly statement the figure had grown to a $4 billion net decline in the 3rd quarter profit.  Some analyst expect the recall to cost Samsung anywhere from $6.2 billion to $17 billion.

What makes these two crises so interesting is not just that Samsung’s loss, and, by extension actual profits, will significantly exceed the sum of international aid requested for North Korea, but that the losses of one South Korean company represent such a significant portion of the estimated GDP of North Korea itself. The CIA estimates that North Korea’s GDP is approximately $40 billion, on a purchasing power parity basis. That makes Samsung’s initial revision of its quarterly profit a little less than 6 percent of North Korea’s GDP. Its actual decline in reported 3rd quarter profit, $4 billion, represents 10 percent of North Korea’s estimated GDP. If the ultimate loss rises to the $17 billion estimate it would represent 42.5 percent of North Korea’s GDP.

In essence, South Korea’s economy is now so much larger than North Korea’s that the failure of a single product at one company is much greater than the resources Pyongyang needs to address the recent flooding and a significant portion the productive output of the North Korean economy itself. In a sense, the Note 7’s failure represents a stark contrast to the real catastrophe in terms of lives and wellbeing that North Korea’s economic and political choices have had for its people.

Troy Stangarone is the Senior Director for Congressional Affairs and Trade at the Korea Economic Institute of America. The views expressed here are the author’s alone.

Photo from the European Commission DG ECHO’s photostream on flickr Creative Commons.

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