Insight: No Uber or Airbnb in S.Korea: Red tape, risk-aversion hobble start-ups

Cafe24

17/12/2018 23:00

* Korea struggling to steer away from chaebol-focused
economy
    * Innovation seen crucial as exports-led growth sputter
    * But startups stymied by red tape, unions, risk aversion
    * Hyundai exits local car-sharing firm amid protests
    * Korea Inc at risk of falling behind, entrepreneurs say

    By Ju-min Park and Hyunjoo Jin
    SEOUL, Dec 18 (Reuters) - When Choi Ba-da pitched his
car-sharing firm Luxi to Hyundai Motor  005380.KS  officials in
2017, he told them there would be no future for South Korea's
top automaker if it failed to embrace emerging technologies.
    His pitch worked: Hyundai agreed to buy a 12 percent stake
in Luxi for $5 million, its first investment in a car-sharing
firm as it joined rivals in the race for new-age transportation.
    But about six months later, Hyundai sold its stake after
thousands of angry taxi drivers, worried about their jobs,
threatened to boycott Hyundai cars, Choi told Reuters. Hyundai
officials say they were also wary of laws limiting car sharing
in South Korea.
    Hyundai's breakup with Luxi illustrates how rigid
regulations, strong labour unions and a risk-averse culture
among South Korea's giant family run conglomerates, or chaebol,
have hindered the growth of start-ups in Asia's fourth-largest
economy.
    President Moon Jae-in's administration says the country's
decades-old growth model, powered by a handful of large
exporters such as Hyundai and Samsung, has reached its limit in
the face of Chinese competition and rising labour costs. 
    To offset slowing growth in sectors such as autos, ships and
chips, it created a new ministry for start-ups last year and has
boosted funding to cultivate new technologies.
    But the government has been too slow to remove cumbersome
regulations for start-ups, wary of upending the country's
economic order or upsetting powerful labour unions, according to
interviews with a dozen entrepreneurs, investors and executives.
    That has left South Korea surprisingly resistant to
disruptive technologies despite its tech-savvy image, they say.
    "After agonising, Hyundai officials told me that they had to
go slow with the service, before eventually pulling out," Choi
told Reuters. "But how on earth can a startup go slow?"
    In a statement to Reuters, Hyundai said it sold its stake in
Luxi as the investment "did not fit a business model the company
pursued", without elaborating.
    Hyundai's chief innovation officer Youngcho Chi also said
South Korean restrictions on ride-sharing to unspecified
"commuting hours" as one reason and said the automaker had
concluded that Luxi was not going to work out.
    Instead, Hyundai pumped $275 million into Singaporean
ride-hailing firm Grab this year.  urn:newsml:reuters.com:*:nL4N1XG1H3
       
    MOST STARTUPS ILLEGAL
    Hyundai and Samsung say they invest in both local and
overseas startups. 
    Close to the company's headquarters, South Korean startups
are easier to communicate with, Hyundai said. Samsung told
Reuters it has been running a startup support programme for five
years to raise local entrepreneurs.
    Still, some say chaebol are moving too slowly.
    "The Korean success has been built on a fast-follower
strategy, but Chinese rivals are catching up very fast," said
Hwang Sungjae, a co-founder of Fluenty, a South Korean
artificial intelligence startup acquired by Samsung Electronics
 005930.KS  last year. "Companies now have no choice but to
innovate and work with start-ups, but they are not investing
quickly enough." 
    "I think Korean companies are at a great risk of falling
behind."
    Regulations are another challenge. 
    South Korean laws would entirely or partially block about 70
percent of the world’s top 100 startups by investment size from
bringing their services to the country, according to joint
research by Google Campus Seoul and the Asan Nanum Foundation.
Those include giants Airbnb, Uber, and China's Ant Financial.
    In February, top South Korean mobile messaging operator
Kakao Corp  035720.KS  bought Luxi for $25 million, but it
remains stymied by carpooling regulations, and has yet to launch
amid fierce protests from taxi drivers.  urn:newsml:reuters.com:*:nL3N1YF2JE
    One protesting taxi driver set himself on fire and died last
week, and unionised drivers say they plan a huge rally this
week.  urn:newsml:reuters.com:*:nL3N1YF2JE
    Kakao said it pushed back the launch schedule of its carpool
service in the wake of the suicide. 
    South Korea's transport ministry declined to comment.
    Regulations also prohibit venture capital funds from
investing in financial, real estate, accommodation and
restaurant sectors in South Korea.
    The government has proposed a new law to lift those
restrictions, but a senior government official acknowledged it
would be neither easy nor quick.
    "The bottom line is that we have to move toward innovation,
but it takes a lot of time and is a difficult process to mediate
existing interests,” the government official at the Ministry of
SMEs and Startups told Reuters.    
    “Realistically, we can’t simply ignore existing interests.
There’s no clear answer."
    He declined to be named due to the sensitivity of the
matter.
      
    'ARE YOU DREAMING?'
    Many Korean ventures are focused on applications that would
only apply locally, making them a hard sell for global
companies, a Samsung Electronics executive told Reuters, asking
not to be named as he was not authorised to speak to media.
    Since 2016, Samsung Electronics has acquired minority stakes
in nine startups, only one based in South Korea, according to
corporate research firm CEO Score.
    Hyundai Motor has invested a total 85 billion won  ($75.11
million) worth of minority stakes in 15 foreign startups over
the last three years, compared to 28 billion won spent on five
local ventures over the same period, CEO Score said.
    San Francisco-based venture fund 500 Startups, one of the
early investors in Grab, said it had looked at Korean
ride-sharing firms for a possible investment, but decided
against it because of legal restrictions.
    "The regulatory environment hasn't been favourable to the
investors like us," Jeffrey Lim, who heads 500 Startups's Korea
office, told Reuters.
    There were, however, Korean industries offering interesting
opportunities, such as pop music, online games, and cosmetics,
Lim said.
    500 Startups has invested 6.5 billion won in 30 South Korean
firms since 2015, including radio app Spoon which is now
available in Southeast Asia and Japan.
    Other established foreign rivals have also backed South
Korean start-ups despite the challenges.
    Japan's Softbank has invested in more than 20 tech companies
in South Korea since 2012, according to venture capital data
provider CB Insights, including a $2 billion stake in online
retailer Coupang in November.  urn:newsml:reuters.com:*:nL4N1XV4EP
    South Korean startup Viva Republica, which operates money
transfer app Toss, last week raised $80 million from U.S.
investors including Kleiner Perkins and Ribbit Fund, valuing it
at $1.2 billion.  urn:newsml:reuters.com:*:nL3N1YH1ZU
    Korean conglomerates' tendency to avoid risk and shun
outside partnerships makes them slower than foreign rivals to
adapt to fast changing technologies, said Rhee Moo-weon, a
management professor at Seoul-based Yonsei University, who
advises Samsung, Hyundai and the South Korean government. 
    In 2003, Samsung missed the opportunity to acquire the then
small maker of the Android smartphone operating system, just two
weeks before Google bought it for $50 million plus incentives,
according to a 2013 book by Fred Vogelstein "Dogfight: How Apple
and Google Went to War and Started a Revolution".
    When Android creator Andy Rubin pitched his firm to Samsung,
a Samsung executive told him, "Are you dreaming? You and what
army are going to go and create this? You have six people. Are
you high?," according to the book.
    Samsung said it could not confirm the content of the book.
    
    THINK OUTSIDE KOREA
    As cash-rich conglomerates remain reluctant buyers, only 3
percent of South Korean startups were able to recoup their
investments through trade sales in 2017, according to the Korean
Venture Capital Association.
    That leaves IPOs as one of a few exit options, but it takes
about 12 years for South Korean startups to go pubic - "an
eternity" compared to Silicon Valley where it typically takes
six to seven years, according to consulting firm McKinsey & Co. 
    Only last year, South Korea introduced the so-called "Tesla
listing rule" which allows loss-making startups to list on its
junior, tech heavy Kosdaq market. It's named after the U.S.
electric carmaker that remains loss-making eight years after
going public in 2010, but is worth $63 billion.
    So far, only e-commerce platform Cafe24 Corp  042000.KQ  has
used the Tesla rule to go public. Since its February listing,
its shares have risen 25 percent.
    South Korean entrepreneurs say there is a long way to go.
    “Government officials are trying to meet every stakeholder's
demands in a way that doesn’t lead to a solution," said Seo
Seung-woo, a professor and entrepreneur who moved his
self-driving start-up to Silicon Valley last year. 
    “I say, don’t think about doing a startup in South Korea.
Think outside Korea."
($1 = 1,131.6700 won)

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No Uber, No Airbnb: S.Korea strangles startups png    https://tmsnrt.rs/2PugxKh
No Uber, No Airbnb: S.Korea strangles startups interactive    https://tmsnrt.rs/2PwwoYL
South Korea falls behind in product innovation png    https://tmsnrt.rs/2S5yvoG
South Korea falls behind in product innovation interactive    https://tmsnrt.rs/2Sb6EUd
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 (Reporting by Ju-min Park and Hyunjoo Jin; Additional reporting
by Heekyong Yang; Editing by Soyoung Kim and Lincoln Feast.)
 ((ju-min.park@thomsonreuters.com; +82 2 3704 5650; Reuters
Messaging: ju-min.park.thomsonreuters.com@reuters.net))