Even the Backbone Manufacturing Industry for COVID... Facing a Crisis of Exhaustion

President Moon: "True Colors Revealed Amid Crisis"
Exports Led to Renewed Focus on Manufacturing

Growth and Profitability Worsen
Urgent Need to Promote Low-Carbon Manufacturing

[Asia Economy Reporters Eunbyeol Kim, Chaeseok Moon] The manufacturing industry has been gaining renewed attention since the outbreak of the novel coronavirus disease (COVID-19). Once called a "chimney industry," manufacturing was pushed to the sidelines with the advent of the IT and distribution-centered era, but the recent atmosphere has changed. As the third quarter gross domestic product (GDP) in South Korea rebounded sharply thanks to exports, President Moon Jae-in recently remarked, "There is a saying that true character is discovered in times of crisis," and evaluated that "(COVID-19) is becoming an opportunity to rediscover our manufacturing industry." The manufacturing sector contributed 1.8 percentage points to the 1.9% growth rate in the third quarter.

However, the fundamental strength of our manufacturing industry is steadily declining. Although the president praised it highly, manufacturing indicators have consistently worsened under the current administration. The response to the government's "Manufacturing Renaissance" policy announced last year has also been lukewarm.

According to the Bank of Korea's corporate management analysis on the 10th, the growth and profitability of manufacturing have deteriorated simultaneously under this administration. The manufacturing sales growth rate, which was around 9.0% in 2017, dropped to 4.0% in 2018 and further to -1.7% last year. The operating profit margin on sales, an indicator of manufacturing profitability, also declined from 7.6% in 2017 to 7.3% in 2018 and 4.4% in 2019. It is expected that manufacturing-related indicators worsened further this year due to the COVID-19 shock. South Korea's manufacturing operating profit margin on sales has consistently maintained around 5% since 2009. Even when the sales growth rate was negative between 2014 and 2016, the operating profit margin held steady. This means that even with declining sales, companies were able to maintain profitability by reducing costs. However, recent analyses suggest that companies' self-help measures alone are insufficient to cope with the sharp decline in sales.

The share of manufacturing in GDP has also been steadily decreasing. According to the Bank of Korea, the manufacturing share of GDP, which was about 28.2% in 2011, fell to 25.3% last year. Although the downturn in the semiconductor market has had some impact, this also implies that the concentration in our manufacturing industry has increased, making it excessively vulnerable to economic fluctuations.

In June last year, the government announced the "Manufacturing Renaissance" policy, setting the goal of becoming one of the world's top four manufacturing powers and achieving a per capita income of $40,000 by 2030. However, the industry says that without addressing employment burdens and labor rigidity issues caused by the income-led growth policy, solutions are difficult. Professor Taegi Kim of Dankook University's Department of Economics stated, "Labor is the essence and core of manufacturing difficulties, and unless that part is addressed, the effectiveness of policies will inevitably be low," diagnosing that "deregulation is the biggest and most urgent measure."

There is also advice that the government should induce the "decarbonization" of manufacturing. A Bank of Korea official said, "In the future, manufacturing will face difficulties in exports and profitability if it does not comply with low-carbon regulations," adding, "The government should consider this aspect carefully when setting regulations."

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