(FORTUNE Magazine) – AS YOU DOUBTLESS have noticed on shopping trips, South Korea has burst into U.S. markets like a hungry tiger. The Koreans are underpricing the Japanese on everything from steel to TVs, VCRs, cars, and computers. A Goldstar VCR goes for as little as $200, about $50 less than the cheapest rival from Japan. The sporty Hyundai Excel, at a base price of $5,195, induces reverse sticker shock. A flood of cheap IBM PC clones has swamped both IBM and Japanese imports. And Korea makes steel for $23 in labor costs per metric ton, compared with $132 in Japan and $164 in the U.S. What's more, the big push has just begun. Korean automakers are gearing up to export more than a million cars within four years, mainly to North America. In consumer electronics the Koreans are out to triple world market share to nearly 7% by the year 2000. (They already have 17% of the American color TV market.) Manufacturers of VCRs and microwave ovens are pushing into semiconductors. IBM, among others, is already buying Korean memory chips. Their success so far has surprised even the cocky Koreans. Exports surged 18% in 1986 to a record $36 billion, giving the country a $3.5-billion trade surplus, its first in modern times. Economic growth, which slipped a bit in 1985, is back on a fast track. Koreans are dreaming of transforming their small country into an advanced industrial power, a mini-West Germany with a standard of living as high as any in Western Europe. It is not an impossible goal. If South Korea, with 41.5 million people, were a European nation, it would rank just behind France in population. At $2,300 a year, per capita income already about equals that of Portugal. But some large clouds are drifting over this sunny landscape. Korea's strategy of high growth driven by exports has already provoked a protectionist backlash in Washington and the European Economic Community. At home demonstrators are fitfully trying to replace an unpopular authoritarian regime with a more representative government. President Chun Doo Hwan, 55, has promised to step down before the 1988 Olympics. But he keeps sending head- cracking police into crowds of protesters who don't like the way he proposes to do it: parliamentary elections rather than a direct presidential vote. Korea has never had a peaceful transfer of power. When Chun, an army general, took over in a coup in 1980, the turmoil clobbered the economy for a year. On top of all that, South Korea still faces an implacably hostile Communist regime to the north. Meanwhile, the economy rolls on. Only three decades ago South Korea was a war-scarred land of mostly poor farmers. By borrowing to the hilt for investment -- Korea's $45-billion foreign debt rivals that of Latin America's champion borrowers -- and by working longer hours than the Japanese, the Koreans created the most dynamic Asian economy after Japan's. Much of the country's competitive edge comes from a potent old culture: Koreans invented movable type before Gutenberg and introduced armored warships in the 16th century. Though restive for political change, the country's people are steeped in Confucian respect for authority, passionate about education, and boundlessly ambitious. Highly motivated workers -- including many macho youths who shun protective goggles while welding -- put in long hours for a fraction of the pay their counterparts get in the U.S. or Japan. Labor costs for auto workers, for example, total about $3 an hour, vs. $18 in Japan and $24 in the U.S. The big conglomerates such as Hyundai and Daewoo, called chaebol, rank among the largest manufacturing companies in the world. An American business executive in Seoul says with only slight hyperbole, ''The whole country, in effect, is one organization and runs on government-controlled credit. To create jobs and service the national debt, companies have got to grow.'' KOREANS SEE the Seoul Olympics as a showcase for their rapid progress. The Tokyo games in 1964 served a similar purpose for a resurging Japan. ''The Olympics will show what kind of country this is,'' says Koo Cha-Hak, 56, chairman of Lucky Goldstar Group. Then he adds, ''And the games will improve the brand image of our products.'' While in the global spotlight next year, Korea intends to launch a national pension plan and a minimum wage system. Within 13 years, according to a detailed development plan, Korea is determined to be among the world's ten largest trading nations, up from 13th now. Much of the economy's recent bounce comes from what Korean leaders call the three blessings -- lower oil prices, lower worldwide interest rates, and a currency that is weak against the Japanese yen. The Korean won is tied roughly to a basket of world currencies, though the finance ministry won't say which ones. Obviously there are a lot of dollars bouncing around in the basket; when the dollar plummeted against the yen, the won went down too. Since September 1985 the won has dropped about 40% against the yen, giving Korea a huge advantage over Japan in the U.S. market. The Koreans made the most of it, pouring 40% of their exports into America. When the U.S. responded with tough protectionist talk, they professed to be surprised -- and hurt. Koreans are emotional about trade issues. They still see themselves as relatively poor dependents of the U.S. and take American protectionism personally -- as one U.S. businessman puts it, ''like betrayal by a big brother.'' The Koreans have a point. Their economy is only 6% of Japan's. Skyscrapers in Seoul resemble those in Tokyo, but the Korean capital is still laced with narrow lanes and humble cottages like a village. In the countryside some 20% of homes lack running water. Moreover, Korea has a heavy defense burden (6% of its GNP vs. about 1% in Japan) as well as that big foreign debt. And Korea has stumbled before. In the 1970s the government subsidized heavy industry, creating some costly white elephants. The treasury is still quietly supporting a $5-billion bailout of ailing shipping and overseas construction firms. As one technocrat admits, ''The government has not been good at picking winning industries.'' Koreans are also quick to point out that their $7.1-billion trade surplus with the U.S. is just 4% of the total American trade deficit. Japan accounts for 35%. Says Nam Duck Woo, 62, chairman of the Korean Traders Association: ''In the U.S. we're competing with Japanese, not American, products.'' Privately senior executives of big Korean corporations complain with Confucian indignation that U.S. protectionism punishes them for Americans' slack work habits and drug abuse and for the union rules they say have sapped U.S. competitiveness. Along with protectionist proposals, Washington is prodding Korea to raise the value of the won against the dollar to take away some of Korea's price edge. It is a touchy issue in Seoul. Finance Minister Chung In Yong points to South Korea's chronic trade deficit with Japan. ''Most of what we earn from the U.S. goes out of our pockets to Japan,'' he says. In terms of value, about 40% of the components in Korean electronic products are Japanese -- along with much of the capital equipment in Korean factories. Still, Seoul did allow the won to appreciate against the dollar by about 3% last year and probably will continue to let it slowly strengthen. A more sweeping revaluation, Chung claims, would make it tougher to convince Koreans of the need to open their home market. Getting imports into South Korea has been maddeningly difficult. Says Kim Mahn Je, 52, deputy prime minister and minister of economic planning: ''For a long time Korea has lived in an era of foreign exchange shortage. We need a new mentality. We're trying to educate people that trade is a two-way street, but that may take some years.'' Bureaucratic resistance at times resembles Japan at its worst. Korea still quarantines American citrus fruit, for instance, to counter the long-vanished Med fly. American oranges are put in cold storage for a month before they go on sale. ''You wouldn't want to eat one,'' says Russell L. Hanlin, president of Sunkist Growers Inc. Some barriers are coming down, if haltingly. The outright ban on auto imports will end this summer, though 330% tariffs and taxes will make even the cheapest U.S. cars luxury items. Other consumer goods have fared better. Tariffs and duties remain high, but the government has sharply reduced the bureaucratic procedures that kept many products out. ''We're becoming a consumer society much faster than Japan did, and most American products have had good advertising through the U.S. military's PXs here.'' So says Y. O. Park, a graduate of New York University and deputy chairman of the Doosan Group, a conglomerate that distributes Kodak film and Seagram whiskey, among other U.S. products, and operates a dozen Kentucky Fried Chicken outlets. American cigarettes, however, remain a big exception. Though the government bowed to U.S. pressure recently and let in U.S. brands, they have not sold well. For one thing, the government has not gone out of its way to publicize the fact that buying American cigarettes is no longer illegal. Also, many Koreans still associate U.S. brands with the Korean war, when GIs used them as black market currency and to pay prostitutes. UNTIL RECENTLY the fiercely independent Koreans rebuffed foreign investment. The total comes to $2.7 billion, which isn't much when compared with, say, tiny Singapore, with $6.6 billion. Korea's eagerness for technology has made it more receptive to investment. General Motors, for instance, has put nearly $400 million into joint ventures with Daewoo for producing autos and components. Automakers have made the most striking progress of all Korean exporters. London-based broker W.I. Carr thinks that Koreans could have nearly 4% of the U.S. market by the end of 1987, up from zero two years ago. Essentially Korea is filling a gap created by the Japanese. Clobbered by the strong yen and blocked by voluntary quotas on their imports, Japanese automakers have moved upscale to more profitable larger cars. At Hyundai Motors' huge plant in Ulsan in southeastern Korea, a huge banner proclaims: ''Hyundai's Will -- to Make the Country Prosperous Through Exports.'' Chung Se Yung, 58, chairman of the parent Hyundai Group, talks of increasing output 50% this year to 600,000 cars -- mostly for export. Though a few Japanese welding robots are scattered around, most assembly is done with assiduous attention to detail by 21,000 workers divided into two ten-hour shifts. Says H. B. Suh, 50, a tough retired Korean air force colonel in charge of indoctrinating workers on the importance of quality: ''They must understand that if we fail to make good products for overseas, we have no future.'' The Hyundai Group has long been known in Korea for its independent attitude. After trying for a decade to go it alone in cars, Hyundai turned to Japan's Mitsubishi Motors for technical help. About 10% of the Excel's parts, including emission control kits and automatic transmissions, are Japanese. Hyundai's U.S. debut was a stunning success. In 1986 the Excel was the best-selling new import in history. The Korean company set up its own network of 85 exclusive dealers, few enough, says Chung, ''so that they could make money.'' He admits to being ''quite scared'' about entering the U.S. and initially had reason to worry. Potential brake problems forced a recall of the first 4,400 cars, prompting Hyundai to tighten quality control fast. Even Hyundai engineers say the Excel isn't up to Japanese standards, but it is a good car for the money. Using a different strategy to avoid trade friction, the two other Korean automakers entered the U.S. market with American partners. Daewoo Motors, 50% owned by GM, is turning out a model called the LeMans for Pontiac. It was designed in West Germany by Opel, GM's European subsidiary, and is being built in a new Korean factory equipped with a lot of Japanese machinery. Daewoo will ship 100,000 LeMans cars to North America this year and hopes to nearly double that in 1988. Kia Motors, originally a truckmaker, is building the Ford Festiva, a three-door hatchback subcompact. With help from Ford and Mazda of Japan, Kia erected a factory on the outskirts of Seoul that will eventually turn out 150,000 cars a year. IN ELECTRONICS the Koreans laid typically ambitious plans, but so far the record is mixed. They have done well pumping out TVs, VCRs, and microwave ovens. Buoyed by initial success with these less complex consumer products, they jumped into semiconductors -- only to stumble. Samsung and Hyundai began mass production of computer memory chips just as the world market slumped in 1984. For Hyundai it was a particularly bold -- or foolish -- move since the company had no previous experience in electronics. To get a quick injection of technology, it set up a design center in Santa Clara, California. But Hyundai's autocratic management style apparently turned off American engineers. Last year Hyundai Electronics closed its California operation, a $20-million write-off. Overall, Korean companies invested more than $1 billion in semiconductor efforts, but got clobbered by Japanese price cutting. Now the Koreans hope to recover, partly because the U.S. and Japan have agreed to set a floor price for memory chips. George B. Cobb, president of Samsung Hewlett-Packard, a computer joint venture between the American company and the Samsung Group, says: ''Within a year or two the Koreans will be competitive with the Japanese in cost and quality of high-volume memory chips.'' Hyundai has pulled itself off the floor too -- and back to Korea. The company is putting its memory devices into a new economy-model computer called Blue Chip. Its base price (with one disk drive and no monitor) is $699 in the U.S., where Hyundai hopes to sell over 200,000 this year. Even Korean competitors doubt that Hyundai can turn a profit at that price. Companies that went high tech with American partners did better. Charged with getting Goldstar into memory chips, Min Pyong June, 50, who earned his Ph.D. in computer science at Purdue and spent a decade in the U.S. as a ^ manager at IBM, promptly recruited AT&T for a joint venture. The U.S. company owns 44% of Goldstar Semiconductor. Min, a cigar-puffing extrovert, is part of a growing reverse brain drain. ''I earn about 70% to 80% as much as my U.S. salary,'' he says, ''but I get more recognition and the chance to contribute to Korea.'' Since coming home, he has hired more than a dozen Koreans with advanced U.S. degrees from such companies as Bell Labs and Hewlett-Packard. ''This gave us momentum,'' he says. Min thinks Koreans can exploit what he sees as declining U.S. competitiveness in standardized electronic products. Says he: ''In semiconductors, except for the top 20% that are custom chips, the advantage has left the U.S. The same thing is happening with PCs.'' While Korean chip production is already highly automated, Min insists that the country still has a crucial edge over the West: ''The big labor cost is in white-collar workers for research and development and quality control. In Korea you can pay a qualified engineer about one-fifth what his counterpart in the U.S. gets.'' In consumer products, the Koreans plan to keep on building market share. ''Our goal is to become one of the top five consumer electronics makers in the world,'' says Goldstar's Chairman Koo. The company is about 20th now. The human energy propelling Goldstar can be seen just outside Seoul, where assembly line workers in military-style uniforms earn less than $2 an hour. The company imbues workers with inhwa, a type of Confucianism that stresses human harmony -- and discourages unionism. Last year sales rose 60% to $1.6 billion, while exports leaped 70% to over $1 billion. The company turned out three million VCRs in 1986 -- triple the volume of the previous year -- and claims about 10% of the global market. Though Goldstar built an assembly plant for TV sets and microwave ovens in Huntsville, Alabama, five years ago, it has still been hit with U.S. antidumping charges. The latest involved Korean-made components in its Alabama TV sets. When the European Community imposed restrictions on imports of Korean microwave ovens and VCRs last year, Goldstar began construction of a plant in Worms, West Germany. Samsung is shifting assembly from Korea to plants in Britain and Portugal. Cheap steel is one of Korea's major assets. A World Bank economist describes the industry as ''arguably the world's most efficient.'' Most of the steel is turned out by government-controlled Pohang Iron & Steel, known as Posco. Says ^ President Ahn Byong Wha, 57: ''In many places cheap labor is a kind of synonym for low productivity, but not here.'' Despite being turned down initially by Western creditors, the Korean mill has expanded over the past decade to become the seventh-largest steel works in the non-Communist world. And though global steel demand remains depressed, the company is still adding capacity. Next year Posco will complete a $2.6-billion integrated mill in Kwangyang on the southern coast that will boost capacity to 14.5 million metric tons. ''If we actually produce that much steel,'' says Ahn, ''we will be No. 2 -- after Nippon Steel and ahead of USX.'' The Kwangyang mill will become a major supplier of USX. Posco and the U.S. steel giant have formed a joint venture. They are investing more than $400 million to modernize USX's rolling mill at Pittsburg, California, and will supply it with semifinished steel from Korea. Says Ahn: ''It is significantly cheaper to ship steel by sea from Kwangyang to California than it is to send it overland from the Midwest.'' All this giddy economic growth might be put on hold for a while if political turmoil increases. Chun has never attained full legitimacy among his own people. As one Western diplomat explains, ''Chun is an extremely unpopular president because he came to power by military coup when there was not real chaos and there seemed the possibility for a blossoming of democracy.'' After the assassination of President Park Chung Hee by his own chief of intelligence in late 1979, General Chun declared martial law and brutally put down protesters. Without allowing debate, he rammed through a new constitution that ensured his election as president. Koreans showed their distaste for the government in elections for the National Assembly two years ago. The government party won only 35% of the popular vote. The system, however, is rigged so that the government still got slightly more than half the seats. AN ORDERLY TRANSITION from an authoritarian regime would be difficult anywhere, but South Korea has no democratic tradition nor a spirit of political compromise. In addition, President Chun has put himself on a tight timetable. He wants to hand power to an elected successor next February, just before the Olympics. As debate over how to pick a new leader spills into street demonstrations that are squelched by thuggish police, conservative Korean business executives have begun to privately express embarrassment at their country's primitive politics. Though the situations are far different, the overthrow of Philippine President Ferdinand Marcos last year with American approval has inspired opposition leaders and sobered the Chun regime. The U.S., which has nearly 40,000 troops in South Korea, has tried to nudge the Koreans toward a more representative government. Kim Dae Jung, 61, a charismatic politician sentenced to death by Chun's regime on trumped-up charges and then released because of U.S. pressure, thinks it might already be too late. ''There's no guarantee that Chun won't face people power like Marcos did,'' he says. ''If there's no democracy, I have no doubt that there will be more chaos and an anti-American movement.'' Seoul's generals have plenty to worry about above the 38th parallel, the cease-fire line with North Korea. If street violence gets severe enough, and so far cracking down on demonstrations has only fueled more, North Korea could be tempted to stir up trouble by infiltrating its own terrorist bands into the south. Zbigniew Brzezinski, the national security adviser under President Jimmy Carter, thinks the Communists could do even more. He warns that North Korea may launch ''a brief but intensive military incursion'' during the Olympic games. The aim, as he sees it, would be to strike a psychological blow and possibly trigger a mass exodus from Seoul, which is less than 25 miles from the demilitarized zone. President Chun's regime also claims that the Communists are building a dam just ten miles from the demilitarized zone in order to flood Seoul. Though the dam threat seems exaggerated, U.S. corporations figure that war is an inherent political risk in Korea. North Korea's penchant for trouble-making has often been stifled by its two big Communist patrons, the Soviet Union and the People's Republic of China. Neither seems in the mood for a replay of the Korean war. Still, even limited adventures by North Korea -- the kind Russia and China might wink at -- could be dangerous along a front where the U.S. has recently strengthened its nuclear artillery. South Korea needs social and political progress to become an Asian version of West Germany. As Seoul's own long-term economic plan acknowledges, Korea must develop democratic institutions. Korea can also afford to allow its well- educated people other choices now denied them -- such as electing mayors, reading a free press, and buying shares of conglomerates that remain closely held by their founding families. Already Korea has learned expensive lessons in trying to substitute bureaucratic judgment for market forces in the economy. As a Korean executive rightly says, ''Business has a great deal of independence and initiative, which is probably why our economic performance is better than our politics.'' Once Korean generals get that message, the country will grow up.