US initiatives prompt fears of hollowing out of S. Korean manufacturing

Posted on : 2022-09-16 16:57 KST Modified on : 2022-09-16 16:57 KST
Korean firms are moving up and expanding plans for investment in the US after recent incentives announced by Biden
US President Joe Biden (left) President Yoon Suk-yeol (center), and Samsung Electronics Vice Chairman Lee Jae-yong (right) tour a Samsung semiconductor plant in Pyeongtaek on May 20, 2022. (presidential office pool photo)
US President Joe Biden (left) President Yoon Suk-yeol (center), and Samsung Electronics Vice Chairman Lee Jae-yong (right) tour a Samsung semiconductor plant in Pyeongtaek on May 20, 2022. (presidential office pool photo)

More and more South Korean companies are announcing plans to invest in the US in step with the US government’s policy of providing incentives to major industries and favoring US-made products, designed to expand production facilities within the country.

Large and mid-sized South Korean corporations are scrambling to move up their existing investment schedules or promise additional investments, while their subcontractors are taking steps to join in on the movement to establish production facilities in the US. This is raising concerns of the collapse of the manufacturing industry in South Korea, which accounted for 27.0% of the country’s gross domestic product in 2021, and the weakening of growth for new industries.

According to the White House website on Thursday, the US government will be promoting its biotechnology and biomanufacturing industry in the next five years by investing a total of US$2 billion, including incentives for the establishment of biomanufacturing facilities worth US$1 billion, as part of the National Biotechnology and Biomanufacturing Initiative, which US President Joe Biden signed on Monday.

The US government followed up its announcement of plans to strengthen its foundation for the manufacture of semiconductors, electric vehicles, and batteries with a plan to establish a solid foundation for its pharmaceutical and biomanufacturing industries.

“After announcing its intention to strengthen its domestic production capacity for 10 key items last year, the US is releasing a series of follow-up measures,” Daegu University economics professor Kim Yang-hee commented. “The US means to establish a domestic industrial ecosystem like China.”

Subsequently, South Korean companies are speeding up plans to invest in the US. An official at a biotechnology company said, “We had been considering establishing production facilities in the US at the behest of our US clients, but now that the US government is offering incentives, we are more proactively looking into the option.”

One battery company made the decision to invest in the US after years of deliberation, only for its proposal to be rejected by the South Korean government. L&F’s plan to build a facility for cathode material production for secondary batteries in the US was blocked by the Ministry of Trade, Industry and Energy, which cited the company’s inadequate safeguarding measures concerning its core technology. L&F stated it would request another round of deliberation after strengthening its safeguarding measures.

Earlier, LG Energy Solution postponed its plan to spend 1.7 trillion won to build new factories in the US due to the economic recession, only to reverse its decision. The company will be announcing its investment schedule soon.

Hyundai Motor moved up its completion date for its US electric vehicle factory from the first half of 2025 to the second half of 2024. An official at an auto parts company said, “Hyundai Motors is likely to enter into the US market with an existing subcontractor it pinpointed.”

Samsung Electronics and SK Hynix each also recently announced plans to newly build or expand chip factories in the US.

This trend is likely to dampen investment in the domestic manufacturing industry, which had been rebounding recently. Equipment investment in high-tech manufacturing sectors such as the semiconductor, display, automobile and pharmaceutical sectors declined from 64.8 trillion won to 54.4 trillion won from 2017 to 2019, picking back up to 69.5 trillion won in 2021.

Between 2010 and 2021, the semiconductor industry saw the most amount of equipment investment (353 trillion won), followed by the display (105 trillion won) and automobile (95 trillion won) sectors. The share of investments made towards research and development for new technology relative to the GDP increased from 1.94% in 2008 to 3.34% in 2020.

A finance insider said, “Investment sources are limited. The expansion of investments in the US equals reduced domestic investment.”

A researcher at the Korea Development Institute also commented, “If big domestic corporations increase investments in the US, their subcontractors will inevitably move into the US market as well, which may lead to the hollowing out of the domestic manufacturing industry. The situation is very concerning.”

The South Korean government has responded with a flurry of countermeasures that seem uncoordinated in the big picture.

On the one hand, it proposed to focus on workforce development as part of its effort to foster the semiconductor sector. On the other hand, in response to predictions that Hyundai Motor will not be offered incentives as part of the Inflation Reduction Act, multiple government officials announced trips to the US.

Regarding the US’ biomanufacturing initiative, the government plans to “discuss the matter through official channels between South Korea and the US.” Some are pointing out that the South Korean government’s response “is in stark contrast to the US government’s move to improve its various systems with security, carbon neutrality, and energy transition as pretexts as if it were a ‘military operation.’”

Kim said, “The steps the US has taken sends us a positive message that China can be held in check while also raising concerns that the foundation of the domestic manufacturing industry may falter.”

She added that the Korean government should “look at the big picture and maintain and strengthen our technological competitiveness so that the manufacturing industry doesn’t collapse from the foundation.”

By Lee Jeong-hun, staff reporter; Ahn Tae-ho, staff reporter

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