[Reviving the Industrial Heart / Roundtable] Current Status and Future Path of Korean Manufacturing Industry

[Inaugural Planning, Paper Roundtable] Asking the Future of K-Manufacturing
Urgent Need to Ease Regulations and Invest in Essential Infrastructure
Corporate Tax Rates Must Remain Lower Than Competitors
Expansion of R&D Tax Credits for Large Corporations Is Urgent
Reconsideration of Corporate Regulation Laws and Serious Accident Act Needed, Labor Market Flexibility and Stability Must Be Reviewed

[Asia Economy Reporters Kim Hyewon, Choi Daeyeol, Woo Suyeon] It is difficult to readily answer "Have we recovered from COVID-19?" However, clear signs of escaping the social stagnation caused by the pandemic are evident. In this process, the manufacturing industry, regarded as the growth engine of our economy, has played a significant role and most agree it will continue to do so. It is too early to be complacent just because the light is shining. The trade dispute between the U.S. and China centered on manufacturing can always pose a threat to our economy, and the structural changes across industries triggered by COVID-19 show that failure to respond timely can lead to falling behind. We asked experts about the current status of our manufacturing industry and the path forward.

▲Eunjeong Lee, Head of Industrial Department at Asia Economy (Moderator)= According to last year's World Manufacturing Competitiveness Index released by the United Nations Industrial Development Organization (UNIDO), South Korea ranked third after Germany and China. What is the future growth engine of our manufacturing industry?

△Junhyung Ko, Director of POSCO Research Institute= Attention should be paid to the declining ranking of Japan (5th). In the past, the source of manufacturing growth was a ‘follower’ strategy of producing cost-effective products to catch up with Japan, but after COVID-19, environmental friendliness, decarbonization, and digitalization are not options but necessities for future manufacturing competitiveness.

△Cheonil Park, Director of Korea International Trade Association’s Institute for International Trade and Commerce= The criterion for judging growth engines in the post-COVID era will be whether companies can block competitors’ entry through disruptive innovative technologies and advanced facilities, secure comparative advantages, or build platforms that are difficult to replace to dominate the market. Semiconductors, next-generation mobility, biohealth, batteries, and hydrogen industries are expected to reshape the global industrial landscape.

▲Moderator= Our manufacturing industry also faces many challenges.

△Yongjin Kim, Professor of Business Administration at Sogang University= Competitiveness in core materials, parts, and equipment (so-called ‘SoBuJang’) sectors is weak, and there is a lack of capability to independently create and conceptualize innovative products or services. To ride the wave of digital transformation, a large-scale industrial structural innovation is necessary to also enhance cost competitiveness.

▲Moderator= There are internal problems, but also external obstacles such as regulations and the environment.

△Junhyung Ko= That is correct. Deregulation and infrastructure investment for industries are urgent. In response to the massive transition toward environmental friendliness and digitalization, we need to reflect on whether our laws, systems, and essential infrastructure investments are being properly implemented. For example, to lay hydrogen supply pipelines or install hydrogen charging stations, one must pass through 23 permits and regulations including the Development Restriction Zone Act, Road Act, Park and Green Space Act, and National Land Planning Act.

△Nakhoe Kim, Former Commissioner of Korea Customs Service= Continuous investment is necessary for companies to secure competitiveness and sustain economic growth. One important factor companies consider when making investment decisions is the corporate tax burden, i.e., the corporate tax rate. The corporate tax rate should be maintained stably with minimal changes and kept lower than competing countries as much as possible.

▲Moderator= Let’s discuss more about regulatory and tax issues.

△Nakhoe Kim= The business environment in South Korea is not particularly favorable compared to competing countries. It is desirable to maintain relatively low tax rates to secure competitive advantages, at least in the tax domain. Looking at this year’s corporate tax rates (including local taxes) of major countries: UK (19.0%), USA (25.8%), Canada (26.5%), South Korea (27.5%), Italy (27.8%), Japan (29.7%), Germany (29.9%), France (32.0%). Compared to these countries, Korea is mid-level, but it is relatively high compared to Taiwan (20%) and Singapore (17%).

△Manki Jeong, Chairman of Korea Industrial Federation Forum= It is important to identify Galapagos regulations unique to Korea and align them with global standards. Entry regulations imposed by interest groups such as the Small and Medium Enterprise Suitable Industry Regulation and shared vehicle regulations under the Passenger Transport Service Act need rationalization. Additionally, expanding tax credits for research and development (R&D) especially in advanced fields like semiconductors, pharmaceuticals, future automobiles, robotics, and artificial intelligence (AI) is urgent. For example, last year Hyundai Motor Group ranked 4th in sales among 13 global automobile giants but was around 10th in R&D expenditure. While other factors like excessive labor costs exist, this is not unrelated to the significant reduction in government tax support for large corporations’ R&D investments.

△Yongjin Kim= I have a slightly different view. If large corporations do not accept and respond to environmental or social regulations, business is impossible even at the private level. However, since small and medium enterprises face difficulties responding to various regulations due to limited resources and capabilities, government support such as establishing environmental hazardous substance tracking systems should be more actively provided.

▲Moderator= Since last year, numerous corporate regulation-related bills have easily passed the National Assembly, leading to complaints toward the legislature. There are calls for re-amendment as well.

△Junhyung Ko= The so-called ‘three corporate regulation laws’ and the Serious Accidents Punishment Act require productive discussions on re-amendment to align with global standards. Corporate regulations have positive functions such as establishing fair competition rules and enhancing management transparency, but regulations should be carefully designed to accurately diagnose problems, preserve legislative intent, and minimize adverse effects on companies.

△Manki Jeong= The Serious Accidents Punishment Act, which holds management criminally liable in case of fatal accidents, the Commercial Act which separates the appointment of audit committee members and limits individual major shareholders’ voting rights to 3%, and the Passenger Transport Service Act which regulates shared vehicles and platform operators are problematic.

▲Moderator= It feels like we are quickly recovering from the COVID-19 shock. If you rate the resilience of manufacturing compared to pre-COVID-19 on a scale of 1 to 10, what would it be?

△Manki Jeong= Manufacturing played a decisive role in our economic recovery and I think it has recovered to about ‘9’.

△Yongjin Kim= Semiconductors, automobiles, home appliances, and chemicals have reached or surpassed pre-COVID-19 levels. If I quantify manufacturing resilience, it would be around ‘8’.

▲Moderator= The intensifying U.S.-China hegemonic rivalry seems to be another variable intertwined with the global supply chain restructuring.

△Junhyung Ko= The direction of global supply chain restructuring can be summarized as ‘3S (Safe, Short, Smart)’. Global supply chains will focus on stability by reducing concentration on specific countries and companies (Safe), simplify around consumer markets considering market accessibility and skilled labor supply (Short), and become more efficient and flexible through digital technology application in supply chain management (Smart).

△Cheonil Park= The overall increase in uncertainty and binary choice pressure due to U.S.-China conflicts may burden our economy. However, the decoupling and attempts to restructure supply chains centered on domestic markets by the U.S. and China shake existing market orders and create new markets, which could be an opportunity for our manufacturing industry. The government should enhance our manufacturing industry's responsiveness through strengthening trade issue cooperation with allies, diversifying export markets, and boosting corporate vitality. It is important to remember that strategic benefits can only be enjoyed if we hold competitiveness in key areas needed by both the U.S. and China.

△Yongjin Kim= We need to advance our current production technologies and strengthen capabilities as production and service bases to maintain a neutral position. Building strong cooperative relationships with Southeast Asia, Central Asia, and Middle Eastern countries to create a third zone is also an important issue.

▲Moderator= Lastly, we cannot avoid discussing the Fourth Industrial Revolution era, manufacturing jobs, and labor flexibility.

△Manki Jeong= At the beginning of the Second Industrial Revolution, Marx and Engels predicted that machines replacing human labor would cause massive unemployment and create a proletariat class, but in reality, new industries and jobs emerged, leading to strong growth in the Western world. Similarly, in a data-driven economy based on AI, it is currently difficult to predict how many jobs, including in manufacturing, will disappear or how many new industries and jobs will be created thanks to AI and robots. However, qualitative changes in job levels are inevitable.

△Junhyung Ko= Social agreements such as the Netherlands’ New Course Agreement (1993) and Flexicurity Agreement (1995) can serve as good examples. It is meaningful to reconsider the once hot topic of ‘flexicurity’. From a company’s perspective, labor can be flexibly allocated, and from a worker’s perspective, employment security is ensured through stable lifetime employment and income, with expanded unemployment benefits and vocational training as safety nets.

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