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A Hyundai Motor factory in Ulsan has suspended operations due to a shortage of Chinese-made parts resulting from the coronavirus scare.

The spread of the novel coronavirus is forcing South Korean automakers such as Hyundai Motor Company, Kia Motors, and Ssangyong Motor Company to cut back on production or suspend it altogether. Their parts supply has been disrupted as numerous South Korean auto parts manufacturers in China suspend their operations. Since these automakers are unlikely to find a substitute for their Chinese-made parts anytime soon, a prolonged outbreak could cause catastrophic damage to the industry. Electronics firms such as Samsung and LG that produce semiconductors and displays in China have also entered crisis mode as their local factories suspend operations.

The coronavirus outbreak is a good opportunity to consider the serious danger resulting from our overdependence on the Chinese market. The export controls that Japan imposed last year disclosed the fatal danger of the South Korean semiconductor and display sector’s overdependence on Japanese-made materials, parts, and equipment.

Under the guise of globalization, South Korean companies have rushed to set up shop in China, justifying their actions by the low wages there and by access to China’s massive domestic market. Hyundai and Kia set up a local production system in China and asked their parts suppliers to join them there.

China accounts for 25% of South Korea’s total exports and 21% of its imports. In a considerable number of product categories, over half of exports go to China. The dangers of this dependence on the Chinese market has already been made clear by China’s retaliation for the deployment of the THAAD anti-missile system in South Korea and by the US-China trade dispute. People are even joking that when China coughs, South Korea catches a cold.

Given China’s status in the global economy, increasing exports to China and building a local production system are to some extent inevitable. Even so, South Korean companies need to be more cautious about setting up factories in China just because wages are cheaper there or because their conglomerate buyers want them closer at hand.

Moving too many factories to China has the negative effect of reducing jobs and investment in South Korea. Last year, the South Korean automobile industry alone cut 19,000 jobs. That’s thought to be a major factor behind the troubling phenomenon of fewer jobs for factory workers in their 40s.

“Aside from the 5,000 jobs that were lost when GM closed its Gunsan factory, most of the other losses result from job cuts at auto part suppliers. This is closely related to the relocation of South Korean parts factories to China,” said Lee Hang-gu, a senior analyst at the Korea Institute for Industrial Economics and Trade.

Japan’s export controls have prompted the South Korean government to pursue a policy of supporting the materials, parts, and equipment industry, which includes localizing production of key parts. It looks like the government, even at this late hour, will need to quickly devise a plan for reducing overdependence on the Chinese market.

One idea is a more aggressive “U-turn” policy that will encourage South Korean firms with factories overseas to bring their operations home. In November 2019, the National Assembly enacted a revision to a related law, which expanded the industries eligible for aid. But the question of whether that revision is adequate needs further review. Countries including the US and Japan provide various incentives to “U-turn firms,” with the goal of reducing dependence on other countries, invigorating domestic industries, and creating more jobs.

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