South Korea struggles to lure factories home from China

South Korea is struggling to lure companies with operations overseas back to the country despite expanded incentives aimed at helping local factories compete with China and south-east Asia.

Park Young-sun, minister for small to medium-sized enterprises and start-ups, said the government was redoubling efforts to encourage companies to return home, as the country grapples with rising unemployment and slower growth stemming from coronavirus.

“It remains to be seen if the reshoring trend will accelerate but I think our incentives will influence the decisions of high value-added manufacturers,” Ms Park told the Financial Times.

However, most Korean-owned companies remain reluctant to relocate their operations, given the wide wage gap, access to big export markets and labour market protections in South Korea, according to analysts and companies.

A recent survey showed that only 8 per cent of 200 South Korean SMEs with operations in China and Vietnam said they were willing to return home, according to local industry association K-Biz.

“Despite the changed environment amid the pandemic, it is hard to expect substantial progress with reshoring, unless there are stronger incentives for relocation to offset the sunk cost from offshoring,” said Park Seok-gil, an economist at JPMorgan.

Seoul was boosting tax breaks, subsidies and financial support for research and development for companies that moved operations back to the country, Ms Park said.

The funding is directed at accelerating automation in factories — particularly through the use of more robotics and artificial intelligence — to offset higher labour costs in South Korea.

Seoul’s challenge in persuading companies to bring manufacturing home raises questions over similar policies touted by many other markets, including the US, the EU and Japan, to reduce their reliance on China as a manufacturing base and an export market.

This push has gathered pace during US president Donald Trump’s tenure as US-China trade tensions have exacerbated geopolitical risks surrounding Beijing’s aggressive foreign policy.

According to a Bank of America report in February, “companies in two-thirds of global sectors in North America have either implemented or announced plans to pull at least a portion of their supply chains out of China”.

South Korea’s latest efforts have taken on renewed importance as they are a pillar of President Moon Jae-in’s economic recovery plan aimed at combating the fastest rate of job losses since the Asian financial crisis.

Data, however, show that despite earlier government efforts at reshoring, South Korean companies have been increasing their offshore investments in recent years.

Since 2014, 80 companies — mostly auto and electronic parts makers — have moved operations back to South Korea while more than 21,000 companies have set up foreign subsidiaries and branches, according to the Export-Import Bank of Korea. Over the past three years, the number of Korean companies that ventured abroad rose more than 10 per cent.

According to official data, overseas investments by South Korean companies reached a record high of $61.9bn last year — nearly five times higher than foreign direct investments into the country.

Oh Suk-tae, an economist at Société Générale, said many South Korean manufacturers were still attracted to China’s manufacturing base, despite US-led efforts to decouple technology supply chains from China.

“We’re now settled in China with stable business — it is a big market with cheaper wages. We can’t give it up just because the government is offering small tax incentives,” said a Korean businessman who set up a Chinese plant 15 years ago.

Pushan Dutt, a professor of economics at Insead, cautioned that reshoring still looked to be an expensive strategy for many South Korean manufacturers. 

“South Korea’s core competencies are how its companies are embedded in complex global value chains and their knowledge capital in effectively managing their complexity,” he said. 

“Therefore, these policies [of encouraging reshoring] run counter to leveraging South Korean companies’ core competitive advantage and may be counterproductive.”

Additional reporting by Edward White

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