[COVID-19 Transformation] Prioritizing Stability Over Efficiency: Redrawing the GVC Map

Post-COVID, an Era of Great Transformation...⑥ Global Supply Chains at a Crossroads
Advanced Technologies and Key Materials Drive Reshoring...Two-Track Strategy Expands Overseas Production in High-Demand Industries

[Asia Economy Reporter Kim Hyewon] When a leading domestic conglomerate's chairman convened a management meeting with the CEOs of its affiliates last year amid the outbreak of Japan's export restrictions issue, he strongly instructed a complete reassessment of the global supply chain. At the time, they thought their response was already slower compared to competitors, but after facing the COVID-19 pandemic, they sighed in relief, realizing their response had actually been swift. Within just a few months, the company worked to reduce its sourcing concentration in China and Japan and secured sales channels in Southeast Asia.

South Korea's business community, severely hit by the direct impact of COVID-19 and experiencing extreme management difficulties, has found itself at the center of the challenging task of "restructuring the Global Value Chain (GVC)." The unprecedented manufacturing paralysis caused by the worldwide chain of factory shutdowns due to the COVID-19 outbreak brought the structural limitations of the previously submerged GVC system sharply to the surface. Domestic companies, which had already suffered the first blow to their supply chains due to the US-China trade dispute followed by Japan's export restrictions against Korea, have all begun to reestablish their GVC strategies amid the added unexpected variable of COVID-19. This context is reflected in LG Group Chairman Koo Kwang-mo's remarks during his meeting with President Moon Jae-in in February, stating, "We are currently reassessing production strategies to establish a stable parts procurement supply chain in light of the COVID-19 situation," and emphasizing the need for localization and diversification to reduce dependence on specific countries for core materials and parts.

The Korea International Trade Association's Trade Support Center pointed out in its report "Changes in the Trade Environment in the Post-COVID-19 Era," published on the 14th, that the outbreak of COVID-19 revealed the vulnerabilities of globalization and brought deglobalization to the forefront. It emphasized that it is time to establish a diversification posture that can stably secure inventories of essential materials in preparation for unforeseen circumstances rather than focusing solely on efficiency, and to switch import-export routes when necessary. Unlike the 2008 global financial crisis during a period of global economic prosperity, this COVID-19 crisis coincides with the spread of protectionism, including US nationalism, intensified US-China trade disputes, and the weakening of the World Trade Organization (WTO), creating an environment where international cooperation is difficult. In fact, the US, European Union (EU), and Japan have all introduced reshoring policies to bring back core industries and companies highly dependent on specific countries such as China, citing political and economic reasons triggered by COVID-19. For example, Japan's Cabinet Office has introduced an unprecedented incentive plan under the name of "Supply Chain Reform," subsidizing half of the costs for large companies and two-thirds for small and medium-sized enterprises to return parts and materials production companies. The Trump administration in the US has played the semiconductor self-sufficiency card, signaling disruption to the upstream and downstream ecosystems.

Among Korean companies, the automotive industry, which was the first to enter the COVID-19 impact zone and reduce supply chain risks, is accelerating GVC restructuring. Hyundai Motor Group's Global Management Institute recently issued an internal report titled "Trend Changes in the Post-COVID-19 Era," urging diversification of the China-centered supply chain to countries like Vietnam and Cambodia. In fact, domestic automakers had to shut down all factories early in the COVID-19 outbreak due to supply disruptions of the labor-intensive part called "wiring harness," which costs less than 1 million KRW, and experienced the somewhat absurd situation of securing inventory at high prices outside China. As the pandemic emerged as a new threat and barriers between countries increased, voices have arisen calling for domestic automakers, including Hyundai and Kia, to shift their strategic focus from efficiency-centered strategies to securing supply chain stability through diversification of procurement sources.

Experts advise that it is urgent to find alternative production bases and consumer markets among emerging countries to reduce excessive dependence on China. A representative example is Samsung and LG Group gradually relocating their smartphone and display manufacturing bases from China to emerging countries such as Vietnam and India.

Furthermore, it is diagnosed that next-generation advanced technologies and core parts and materials industries should induce reshoring to proactively secure future competitiveness, while industries with large-scale production demand should boldly expand production shares at overseas consumer bases, adopting a two-track supply chain diversification to segment risk hedging. This is why secondary battery manufacturers like SK Innovation and LG Chem have made large-scale investments in North America and Europe, building factories and increasing local production and sales shares.

Professor Choi Won-mok of Ewha Womans University newly defines this as the concepts of "desourcing" and "deshoring," meaning producing overseas to meet local demand, stating, "Advanced technology and core industrial sectors should continue innovation based on a stable domestic foundation through reshoring, while facilities and personnel for mass production or sales of these innovations should establish bases overseas and produce and sell locally." This means that in all industrial sectors, the brain part should remain domestic, while the limbs and other parts should be boldly located overseas.

It is true that COVID-19 has become an important momentum accelerating GVC restructuring for companies already contemplating value chain strategies amid the US-China trade dispute and Japan's export restrictions. The problem is that while companies agree on the necessity of GVC restructuring from a profit-seeking management perspective, there is skepticism about how feasible concrete implementation will be. A representative from a major conglomerate said, "If 100 represents the GVC system, I think only about 5 will be modified," adding, "In an era where cost equals product competitiveness, it is difficult to prioritize stability over efficiency overnight." Professor Heo Jeong of Sogang University's Department of Economics pointed out, "The same applies to Samsung and Hyundai Motor. In the future, to adapt to and survive GVC changes, companies must focus on innovation using software and brand power that can create added value rather than manufacturing costs such as labor and price."

This content was produced with the assistance of AI translation services.