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Concerns rising over industrial hollowing-out

June 20, 2018 - 15:15 By Kim Kyung-ho
Concerns are growing over the possible hollowing-out of Korea’s key manufacturing industries as local companies rush to move factories to countries with better conditions to detour anti-business policies at home and global trade friction.

According to industrial sources, 97.1 percent of TV sets made by Korean electronics firms in 2017 were manufactured at overseas plants. The corresponding figures reached 93.2 percent for mobile phones, 86.9 percent for washing machines and 80.3 percent for refrigerators.

Aside from home appliances and telecommunications device makers, Korean firms in other sectors, including cars, car parts and steel, are expanding offshore production.

If this trend goes on, it will be difficult to find “Made in Korea” products among the country’s main export items, industrial officials say.

It is somewhat inevitable for local manufacturers to move factories abroad to reduce costs and meet global demand more effectively. What is concerning is the steep pace with which they are expanding overseas production.

According to government figures, foreign direct investment by Korean companies on the basis of remittances increased 11.8 percent from a year earlier to a record $43.7 billion last year. The amount was more than triple foreign investments actually made here in 2017.

The exodus of Korean manufacturers is expected to accelerate in the years to come as President Moon Jae-in’s administration is sticking to policies that put more restraints on businesses, which have already been struggling to cope with worsening conditions at home and abroad.

“In the worst case, only those companies that cannot afford to move abroad would remain in the country,” said a corporate executive, requesting anonymity.

A set of pro-labor measures taken since Moon took office in May last year have increased burdens on local firms.

“Companies see rising labor costs as the most serious problem, but policies are going in the opposite direction too fast, as shown in the minimum wage increase and working hours reduction,” said Sung Tae-yoon, a professor of economics at Yonsei University.

This year’s steep minimum wage hike is having a riffling effect on salaries received by better-off workers.

According to data from the Ministry of Employment and Labor, wages rose 5.6 percent on average at 741 firms with more than 100 employees that had concluded labor-management negotiations by the end of April. The increase rate had hovered around 3.5 percent in the past three years.

Experts say unionized workers at those companies above the wage floor have used the 16.4 percent rise in the minimum wage as a leverage to press for higher pays.

A recent survey of 372 local companies conducted by the Korea Economic Research Institute showed more than 72 percent expected the planned implementation of the shorter workweek to make it harder to operate their factories.

The Moon administration has also been dragging its feet on lifting regulatory restrictions, which is needed to carry forward innovation-driven growth that it has pledged to push for along with income-led growth.

In a recent meeting with Finance Minister Kim Dong-yeon, who doubles as deputy prime minister for economic affairs, Park Yong-maan, head of the Korea Chamber of Commerce and Industry, lamented most of the body’s requests for deregulation remained unresolved.

The Moon administration’s drive to reduce cost-effective nuclear power generation also runs the risk of pushing local manufacturers to go abroad by disrupting stable energy supply and raising electricity fees in the long run.

“Korean companies now find few reasons to stay at home,” said Lee Sang-ho, a KERI researcher.

The Moon government’s anti-business steps go against global competition to forge better conditions for corporate activities to help create more jobs and spur economic growth.

Bolstered by bold deregulation and tax cuts by President Donald Trump’s administration, corporate investments in the US are estimated to increase 11 percent from a year earlier to reach $1 trillion this year, according to global investment bank Goldman Sachs. The world’s largest economy saw its unemployment rate fall to 3.8 percent in May, which is close to full employment.

Trump’s tough protectionist measures have also pressed Korean manufacturing exporters to increase production in the US to avoid hefty tariffs and other trade barriers.

Critics say the Moon government’s loose and untimely response to trade restrictions by the US and other countries is serving to accelerate the exodus of Korean manufacturers.

“The government needs to be more active in communicating with the business community,” said Lee Bu-hyung, an economist at the Hyundai Research Institute.

He emphasized the need to ease corporate concerns about the government’s restrictive roles, saying the economy will face more difficulties unless policies shift to allowing private companies to take the lead in boosting growth and employment.

The exodus of local manufacturers is set to exacerbate the country’s unemployment problem as the Moon government’s efforts to create jobs by increasing fiscal spending have failed to bring the intended results. Korea’s jobless rate stood at 4 percent last month, the highest for May in nearly two decades.

The widespread anti-business sentiment and pro-labor measures are also expected to deter Korean companies operating abroad from returning home.

According to data from the Ministry of Trade, Industry and Energy, only 47 companies have moved production facilities back to the country since 2013, when a law was enacted to encourage corporate reshoring by offering tax incentives and financial support.

By Kim Kyung-ho