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IT convergence, innovation, FTA will save troubled manufacturing industry
By Park Si-soo
Korea's manufacturing companies are rapidly losing their global market share to Chinese rivals. The "China storm" is growing in power, and weathering it is proving a tall order, analysts say.
In a recent policy seminar, industry experts fueled anxiety by suggesting Korea will fall behind China in all manufacturing sectors except for automobile, semiconductor and general machinery by 2018. Worse, the Korea Economic Association, the Korea Institute for Industrial Economics and Trade (KIIET) and the Korea Economic Research Institute believe Samsung Electronics may even cede its global leadership in the smartphone market to a Chinese maker.
They noted that at the current pace, China will overtake Korea in the textile and clothing industries in three to five years, while the two countries' technological gap in shipbuilding and steelmaking is narrowing quickly.
"China's manufacturing industry expanded from 3.5 times Korea in 2005 to 5.3 times in 2012," said Suh Dong-hyuk, a senior analyst at the KIIET, in a seminar entitled, "China's Pursuit and Challenges faced by the South Korean Manufacturing Industry." "By 2018, China will emerge as Korea's biggest rival in the segments it currently leads."
He said China took up 18.5 percent of the global manufacturing export market last year compared to Korea's 4.3 percent. Suh added that general machinery is the only segment Korea is expected to strengthen competitiveness in over the next five years.
According to the Ministry of Trade, Industry and Energy, Korea earned $39 billion from cross-border trade with China from January to September this year. If this current trend continues, the ministry projects that the total 2014 figure will reach $55.8 billion, down from $62.8 billion in 2013.
Korea continues to record a huge trade deficit with Japan, and its trade balance with the European Union is getting worse. The country's trade deficit with Europe is expected to reach $9.3 billion this year, up from $7.4 billion in 2013, indicating that Korean companies are having a hard time selling their goods in the world's largest economic bloc.
How to overcome?
The leader of German engineering company Siemens, Joe Kaese, recently suggested the crisis in Korea's manufacturing industry could be overcome by "digitalization."
"The industry paradigm to lead economic development traditionally went through three stages ㅡ manpower first, infrastructure second, automation third. But now we are in a fourth stage ㅡ digitalization," he said last week in Seoul. "Digitalization means drawing accurate results by collecting and analyzing data, which will have a tremendous effect on the world."
He noted that the convergence of digital and manufacturing industries will provide a dramatic solution for the troubled manufacturing industry.
"Korea's broadband Internet speed is seven times faster than many other countries. Korea is abundant in manpower with technical skills, and is active in infrastructure investment. It also adopts a business friendly approach," he said. "Korea can become the perfect place for leading the digital era and testing the performance of new technology."
Chang Ha-joon, an economics professor at the University of Cambridge, claimed the "only solution" is making inroads into industries where Korean can still excel and latecomers cannot compete. These industries involve sophisticated technologies like bioengineering and renewable energy, he pointed out in his recent article in a local daily newspaper.
"One problem is that Korean industrial activity revolves around industries that are competitive in a cutthroat way while being generous to latecomers," he said. "Labor costs are an important factor in shipbuilding. Developed economies cannot maintain competitiveness against developing countries where labor costs are cheaper. Production costs can be cut in steel, semiconductors, petrochemicals and mobile devices when backed by large-scale manufacturing investments. Developing countries can challenge us in those industries."
China's technological advances are not negligible, he said. But overall, Korean companies excel in technology.
"If Korean companies jump ahead, they will be way ahead even before China gets in the game," Chang said. "In order for these cutting-edge industries to succeed, they need radical support from the government."
Shin Seung-kwan, director of the analysis and forecast division at the Institute for International Trade, expressed a similar view, saying "Korea's key industries are struggling against a worldwide supply glut, mainly caused by overproduction in China. To emerge as the winner, local exporters should stop making what Chinese and other foreign rivals are, and instead make greater efforts to produce innovative, high-value industrial and consumer products."
He claimed that signing free trade agreements (FTA) with more countries will provide a breakthrough.
"The government, for its part, should sign FTAs with more countries, particularly those in Africa and Central Asia, so that local companies can easily diversify their overseas markets," the director said.
