Toward a new industrial miracle

South Korea’s shipbuilding industry is in a state of crisis. Its biggest company, Hyundai Heavy Industries, carried out unprecedented restructuring that included a layoff of 30 percent of its executives. How times have changed. It was just a decade ago when we crowed about becoming the world’s top shipbuilding powerhouse by triumphing over Japan. Now the industry needs to jettison a whole lot of cargo to even stay afloat. In volume, Korea lost the King of the Hill position to China, but still stayed ahead in valued-added vessels. Korean companies will continue to have to look over their shoulders due to fast advances by Chinese competitors. Japanese rivals are back in the chase thanks to the weakened yen.

Other big industries face similar predicaments. Automakers are still seeing revenue growth, albeit at a slower pace. Manufacturers of mobile phones, displays, televisions, memory chips and petrochemicals are all facing serious competitive challenges.

One problem is that South Korean industrial activity revolves around industries that are competitive in a cut-throat way and generous to latecomers. Labor costs are an important factor in shipbuilding. Developed economies cannot maintain competitiveness against developing countries where labor costs are cheaper. Production costs can be cut in steel, semiconductors, petrochemicals, and mobile devices when backed by large-scale manufacturing investments. Developing countries can challenge us in those industries - but only if they make heavy investments. Korean Inc. turned itself into industrial powerhouse using that exact business model in the 1970s and ’80s.

One may think Korean companies should simply bring down their costs if Chinese competition is their worry. But we can’t compete with China on price when wages there are just 20 percent of what Koreans earn. The idea of shaving our income levels to that of China is out of the question.

There is only one solution. Korea must make inroads into industries where we can still excel and latecomers cannot compete.

Those industries involve sophisticated technologies like bioengineering and renewable energy. China’s technological advances are not negligible. But overall, Korean companies excel in technology. If Korean companies jump ahead, they will be way ahead even before China gets in the game.

In order for these cutting-edge industries to succeed, they need radical support from the government. Companies that must maintain good capital balances to sustain business cannot afford to invest heavily in research and development in new-generation technologies that cannot be commercialized over the short term. Long-term funds that do not require immediate returns must fuel research and development. The areas the U.S. excel in have all advanced with the careful assistance and patronage of the federal government and military.

Second, developing countries still lag behind in machinery, parts, and the materials industry, all of which require precision, stringent quality control and skilled workers. South Korea rakes in surpluses in trading with most countries. But it is in chronic deficit with Japan because Korea’s industrial sector heavily relies on Japanese imports of parts and materials. Machinery, parts, and materials demand specialized craftsmanship of the sort that is best done by smaller enterprises rather than big companies. In order for them to succeed, they need support from public institutions like the Fraunhofer Society for the advancement of applied research in Germany, which shares research developments for industrial applications. The Italian model of joint research centers for small and midsize companies in the same field is also a good idea that Korea could learn from.

Venturing into new-generation technologies is not an easy task. These areas are already dominated by advanced nations like the United States, Europe and Japan. But we must compete in advanced industries in order to join the ranks of advanced economies. There is never an easy way. We must bring ourselves to attempt a new industrial miracle.

Translation by the Korea JoongAng Daily staffJoongAng Ilbo, Oct. 23, Page 35

*The author is a professor of economics at the University of Cambridge.

by Chang Ha-joon