[2022 Industrial Sector Review] Companies Anxiously Facing a Flood of Adverse Factors

Global Supply Chain Disruptions
US-China Confrontation and IRA Variables
Semiconductor Slowdown and Raw Material Price Surge
Ongoing Policy and Geopolitical Risks

[Asia Economy Reporters Hyunseok Yoo, Donghoon Jung, Chaeseok Moon] Expectations were high at the start, but it did not take long for them to turn into concerns. This likely reflects the sentiment felt by South Korea's industrial sector throughout the year. The economic recovery hopes that emerged around the end of last year due to the endemic phase of COVID-19 quickly faded after various challenges. The geopolitical risks highlighted by Russia's invasion reminded us once again that the global supply chain we rely on is more fragile than expected, following the COVID-19 pandemic. As countries worldwide tightened financial flows in response to inflation concerns, corporate difficulties intensified. Given these tough conditions, the domestic industrial sector appears to be focusing more on defense than offense, preparing cautiously for the coming year.

◇ Persistent Supply Chain Disruptions... US-China Rivalry Continues = For global manufacturing to operate smoothly, all economic actors worldwide must share the premise of "mutually beneficial free trade." This premise, taken for granted in the 20th century, has been shaken. While COVID-19 was an unintended variable, Russia's invasion and the US Inflation Reduction Act (IRA) were deliberate factors. Additionally, the resurgence of COVID-19 and China's zero-COVID policy by its health authorities have made supply chain disruptions a constant event throughout the year.

First, energy and raw material prices soared. Companies that had concentrated their facility investments in China were thrown into chaos and loudly called for "de-Chinaization." This trend began during former US President Donald Trump's administration when the US and China raised tariffs and started weaponizing resources like rare earth elements, and it intensified in rhetoric and severity under the Biden administration. The US led the formation of the Chip4 alliance (South Korea, US, Japan, Taiwan) to strengthen semiconductor dominance, which is fundamental to manufacturing.

Despite receiving calls from various quarters, the status of South Korean semiconductors somewhat faltered. Due to decreased consumption, the prices of memory semiconductors, the main products of Samsung Electronics and SK Hynix, dropped, worsening profitability and causing inventory buildup. SK Hynix lost its position as the second-largest NAND flash producer to a Japanese company, and Samsung's foundry business fell further behind the top player TSMC. Moreover, with growing recession concerns and clear signs of consumption slowdown, memory semiconductor prices plummeted. The operating profits of the "semiconductor top two," Samsung Electronics and SK Hynix, fell by 31% and 60%, respectively, compared to the previous year as of Q3 this year.

The sharp rise in raw material prices also continuously troubled the industrial sector. Crude oil prices rose to about $140 per barrel, and prices of basic raw materials such as iron ore, copper, lithium, and grains surged. Naturally, production costs and consumer burdens increased. In this complex crisis of high inflation, high interest rates, and high exchange rates, companies had no choice but to withdraw or reconsider new investments and hunker down.

Two strikes of strikes by the Cargo Solidarity Union also left significant scars on the industrial sector. The strikes, demanding the abolition of the sunset clause on the Safe Freight Rate System, caused damages amounting to 3.5 trillion won in five major industries including steel. The losses during the strike in June this year were in the 2 trillion won range. The Serious Accident Punishment Act, implemented at the beginning of the year, has been criticized even after nearly a year for focusing more on punishment than actual prevention. In the ten months since its enforcement until the end of last month, 533 serious accidents occurred, resulting in 542 deaths.

◇ Policy and Geopolitical Risks Persist... Cautious Business Community = The Inflation Reduction Act, initially set for full implementation in January next year, has been postponed to March for now. Its impact on key domestic industries such as automobiles and secondary batteries is inevitable. While the South Korean government hopes for benefits through exemptions or grace periods for companies, political opinions locally remain divided, making the situation challenging. The Critical Raw Materials Act (CRMA), considered the European counterpart to the IRA, is also set to be implemented next year. Even within the liberal camp centered on the West, conflicts over leadership in the supply chain restructuring of core industries like semiconductors and batteries are becoming increasingly complex rather than resolved.

Furthermore, geopolitical risks such as the conflicts between Russia and Europe and the intensifying tensions between China and Taiwan cast a dark shadow over the global economy. From the second half of the year, emergency management led by major companies is likely to spread throughout the business community. With management uncertainties higher than ever, large corporations are expected to tighten belts and declare emergency management, taking comprehensive countermeasures.

Due to the ongoing US-China technological hegemony competition, South Korea faces the risk of being forced into a binary choice. Earlier in May, the US launched the Indo-Pacific Economic Framework (IPEF) with 12 countries including South Korea, Japan, Australia, and India, and in October announced export controls on advanced semiconductors to China. The US's China containment, which had been verbal until now, is becoming a practical system, placing Korean companies in a difficult position.

By industry, competition over semiconductor technology is expected to accelerate, while eco-friendly businesses using advanced technologies in various fields to reduce carbon emissions are anticipated to gain attention. The legal and institutional improvements made last year allowing large corporations to enter the used car business are also expected to have a significant impact on consumer welfare. Additionally, various forecasts are emerging regarding the effects of labor reforms driven by the Yoon Seok-yeol administration on labor-management relations and the overall industrial sector.

With the full-scale onset of the endemic phase, visits abroad by business leaders are also expected to increase. Industry insiders foresee that global events such as CES 2023, the world's largest electronics and IT exhibition held early next year, and the World Economic Forum in Davos, as well as on-site management at business locations worldwide, will be more active than this year.

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