Low-wage-based Overseas Production Era Over Soon

Fewer companies are moving their production bases overseas.

Companies used to flock to China or Southeast Asian countries such as Vietnam to secure price competitiveness, but they have run out of countries to move to. It has been analyzed that the low-wage-based overseas production era has practically come to an end.

According to Korea Customs Service’s data on May 6, companies that moved their production facilities or factories overseas in the form of reporting overseas investment to their main transaction banks have drastically shrank from 1,149 in 2002 to 125 in 2013, showing a sharp drop to 10% over the decade.

The trend previously was increasing. During the 1998 financial crisis, 666 companies moved production overseas, and by 2000 850 companies followed them. By 2002, 1,149 had fled for the Tropics.

However, with the turning point of 2002, the number fell to 878 in 2004, 371 in 2008, and 125 in 2013, showing a sharp decline.

The figures have been compiled by Korea Customs Service based on “overseas investment exports” that invests spot goods such as facilities after reporting Foreign Direct Investment (FDI) and “industrial facilities” that export upon getting an approval from The Ministry of Trade Industry and Energy in accordance with overseas trade law.

The government’s statistics show that FDI has ballooned in size on the back of large corporations such as Samsung Electronics and Hyundai Motor Company building overseas factories for localization, while the companies that pursue low-wage-based overseas expansion are dwindling in numbers.

Experts foresee that the trend will continue in the offing because the merits of overseas production have virtually vanished.

So far, countries such as China and Southeast Asian countries such as Vietnam and Cambodia seemed like a life saver for companies, since they provided cheap labor that could replace expensive local labor.

Cheap labor was a factor that could more than offset local uncertainties about related laws, regulations, and political instability. However, now the appeal has been lost, once these countries saw rapid economic growth accompanied by soaring labor costs and strengthened in labor and environment regulations.

Korea Small Business Institute (KOSBI)’s Senior Researcher Lee Jun-ho says, “The biggest factor is that the overall expenditures such as labor and land have shot up in nations such as China. Best alternatives could be Indonesia, Malaysia, and Vietnam, but the costs have risen significantly even in these countries making them almost equally unattractive for overseas production.”