Manufacturing industry losing luster
Korea’s manufacturing industry has been losing luster as its global competitiveness is likely to continue declining due to structural problems as low productivity and high labor costs such as well as external factors including China’s rise.
The unfavorable trend is particularly worrisome when major economies like the U.S. and Germany have regained their reputations as traditional manufacturing powerhouses by bolstering manufacturing bases through various efforts, including “reshoring” of their firms’ overseas operations.
According to Deloitte, a U.S. accounting and consulting services provider, Korea will see its global manufacturing competitiveness ranking fall to sixth, down from third in 2010.
During the same period, the comparable rankings for the U.S. and Germany are expected to rise to first and third, respectively, from fourth and eighth.
Experts warn that this is posing a serious concern for Korea, the fifth-largest manufacturing economy.
The growth of Korea’s economy has centered on the manufacturing industry, as it is the core businesses of the country’s top conglomerates. Manufacturing still accounts for about 30 percent of GDP.
The latest figures show deteriorating conditions for the industry.
In a November report, IHS Markit stated Korea’s manufacturing sector “remained under pressure” at the start of the fourth quarter, due to weak demand conditions across domestic and external markets, based on trade tensions and slower global growth harming exports.
The country’s manufacturing purchasing manager’s index (PMI) posted 48.4 in October from 48 in September. While the index increased, “it remained subdued by historical comparisons and extended the currency sequence of deterioration to six months,” the report said.
The sluggishness of exports was cited as a key draw back. Data from the trade ministry shows exports stood at $46.78 billion in October, a 14.7 percent year-on-year drop. This is the largest margin fall this year, amid falling outbound shipments for the 11th consecutive month.
Exports of chips fell 32.1 percent, petrochemical products by 22.6 percent, and automobiles by 2.3 percent.
“The slump in exports remains the true Achilles heel, with headwinds coming from all directions. As well as U.S.-China trade frictions, tensions with Japan and a stagnating European economy have significantly dented order book volumes at South Korean manufacturers,” IHS Markit economist Joe Hayes stated in the report.
“Firms are trying to bolster sales by reducing prices, although so far this has been to little benefit.”
A report from Hana Institute of Finance said a factor coming from China is the weakening of the global manufacturing value chain, as Chinese companies seek to become increasingly self-sufficient.
“The percentage key industries such as IT and auto account for in economic growth is decreasing,” said Kim Kyoung-you, a research fellow at the Korea Institute for Industrial Economics and Trade.
“Competitiveness in such sectors as semiconductors and displays has weakened, as China has strengthened its capabilities in the sector.”
He noted the fall in Korea’s manufacturing competitiveness was partially due to rising labor costs, especially in the auto industry with strong labor unions.
The same report from the Hana institute noted Korea’s failure to restructure key industries swiftly resulted in continued surplus production capacity, which has led to low productivity and the rise of businesses that fail to grow.
Data shows the number of such businesses has continued to grow in recent years, from 2,204 in 2011 to 2,526 in 2013, 2,754 in 2015 and 2,730 in 2017.
The circumstances are set to turn worse for small- and medium-sized enterprises (SMEs) due to continued sluggish exports as well as consumption.
Park Chong-hoon, head of economic research at Standard Chartered (SC) Bank Korea, said Korea needs to strengthen the competitiveness of SMEs in manufacturing.
“The government needs to devise policies that can invigorate SMEs so that they can boost their productivity,” he said.