Materials, Components Industry
The Korean materials and components industry, which has suffered from a chronic trade deficit, logged US$50.8 billion in trade surplus in the first half of this year, after recording a current account surplus in 1997 for the first time on record. The achievement in the first half brightened the prospect for the era of a US$100 billion trade surplus.
The components industry consists of 8 types of businesses: components for general machines, computers, business equipment, electric machines, electronic products, precision instruments, transport machines, and fabricated metals. The materials industry is composed of 6 kinds of businesses: materials for textile goods, chemicals, rubbers, plastics, nonmetallic minerals, and primary metals. Last year, the materials and components industry accounted for 47 percent of all exports. The industry posted US$97.6 billion in trade surplus, 2.2 times as much as the US$44.1 billion posted by other industries.
Amid unfavorable economic conditions like a decline in the won-dollar rate and a slowdown in Chinese economic growth, the materials and components industry has been logging growth with an increase in trade surplus so far this year, helped by a rise in imports and exports of materials and components.
According to a report on the Import and Export Trends in the first half of this year published by the Ministry of Trade, Industry and Energy, the materials and components industry saw its trade surplus surge to record highs with US$50.8 billion in the first half, a 5.5 percent year-on-year gain. The number surpassed US$20 billion for 13 consecutive quarters. Exports of materials and components grew 3.1 percent to reach US$133.9 billion, while imports increased 1.6 percent to US$83.1 billion. A rise in imports and exports is widely acknowledged to have facilitated the nation’s economic recovery. In particular, exports of materials and components made up 47 percent of the total (US$283.6 billion), which is the highestever half-yearly result. By region, as the country is reducing its heavy reliance on China and Japan in trade, the nation’s trade structure appears to be stabilizing.
With advanced countries’ economic recovery, including the U.S. and Europe, exports of electronic components rose 6.2 percent, transport machine parts 7.2 percent, and general machine parts 7.2 percent. However, outbound shipments of precision instrument parts, electric machine parts, and primary metals decreased due to oversupply and a strong won.
Meanwhile, imports of materials and components grew 1.6 percent year-on-year. In particular, a chronic adverse trade balance with Japan was improved, and the country’s heavy dependence on imports from Japan was lessened, propelled by the improved competitiveness of materials and components and import diversification. In fact, the nation’s trade deficit with Japan in materials and components amounted to US$7.89 billion, a year-on-year decrease of 24.0 percent. The country’s dependence on imports from Japan also reached a record low at 18.0 percent.
Korea continued to maintain a close trade relationship with China, which is the largest exporter of Korea’s materials and components. To be specific, exports of materials and components grew 2.3 percent year-on-year to reach US$45.1 billion, and the country’s trade surplus increased 3.1 percent to reach US$21.4 billion. By industry, outbound shipments of electronic components expanded 8.7 percent, primary metals 5.8 percent, and chemicals and chemical products at 3.7 percent.
Moreover, the country was less reliant on exports to China, as the nation’s exports to developed markets increased, as shown by an 8.6 percent increase in outbound shipments to the U.S. and a 13.5 percent rise in exports to Europe. The nation’s dependence on Japan in exports decreased from 36.3 percent in 2010, to 34.1 percent in 2012, and to 33.7 percent in the first quarter of 2014.
Nevertheless, the materials and components industry still has a long way to go in order to become the basis of the country’s competitiveness. Particularly, the nation’s consistent trade deficit in Japanese materials and components is a great deal of concern. Since 2011, the trade deficit has decreased for three years in a low, but the number reached US$20.5 billion last year.
China is no exception. In 2013, Korea’s materials and components industry recorded US$47 billion in trade surplus with China. But China is nurturing its materials and components industry to reduce imports from Korea. In particular, China is Industry & Company an increasing number of intermediate goods like components or materials. Therefore, it is urgent for Korea to widen the gap with China in the materials and components field and to narrow the gap with Japan at the same time.
On top of that, the polarization of the industry is a serious problem. Last year, companies at the top of 5 percent in sales comprised around 40 percent of the total, and firms at the top of 5 percent in the investment in research and development (R&D) captured as much as 84 percent of the entire investment in the industry. Currently, 67.3 percent of local small and medium-sized manufacturers of materials and components are secondary or tertiary vendors, and their sales constitute merely 1 percent of those of large companies. The growth of those small and medium-sized manufacturers has already reached its limits because of the rise of China and growing competition worldwide. Moreover, investment for facilities and R&D imposes a big burden for them. As a result, the nation’s first priority is to take a step to tackle these issues.
In 2001, the government established a plan to develop the materials and components industry, and it has been pushing forward the policy to foster the industry. The Park Geun-hye administration, which came up with the “creative economy” policy, announced its third plan in Nov. 2013. The government is planning to strengthen its strategy to develop leading technologies and to open the 3.0 era of Industry & Company by creating customized strategies that consider the ecosystem for the materials and components industry, including displays and precision chemicals. An increasing number of voices are voicing their opinions that job creation and restoration of the middle class should be done by fostering venture firms and hidden champions to realize the creative economy via a new high value-added materials and components industry.
The materials and components industry is the basis of the local Industry & Company industry. Aside from the food and beverage and cigarette Industry & Company industries, it represents 68 percent of the total Industry & Company industry, 72 percent of value-added businesses, and 72 percent of total employment. Nonetheless, the materials and components industry’s heavy dependence on foreign countries is an undeniable fact.
An industry analyst said, “The local materials and components industry is still far behind Japan and other advanced countries in competitiveness, and is in a disadvantageous position where they are chased by Chinese firms.” The expert added, “A weakening root industry will deal a serious blow to large businesses. At the end of the day, the entire economy will be shaken.”
Korea has a world-class infrastructure for the Industry & Company industry such as cars, ships, and medical devices. However, when it comes to high value-added and cutting-edge materials and components, the country relies on imports.
There is a lot of research being done in the U.S., China, Russia, and Japan aimed at increasing the added value of related materials, although those countries already have original technologies. Hence, technological advances in the materials and components industry are urgently needed. Experts point out that it is crucial to create a systematic policy by developing materials and components and nurturing materials and components where five senses are combined so as to deliver high added value.
In the meantime, the government decided to operate a specialized fund for materials and components as early as September this year. The fund is being raised by the Small and Medium Business Administration as part of its project to foster the materials and components industry. It is expected to be of a great help to cash-strapped small and mid-sized materials and components manufacturers with excellent technical skills. The size of the fund is 30 billion won (US$28.7 million), 10 billion won more than planned. Previously, the Korea Finance Corporation also started to run part of its specialized fund. Starting in the fourth quarter of 2014, the funds managed by the two institutions are expected to be worth 133 billion won (US$128 million).