Pandemic prompts companies to weigh reshoring

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Pandemic prompts companies to weigh reshoring

Korean manufacturers are taking an interest in efforts to bring overseas factory production back to their home country after the coronavirus outbreak wreaked havoc on international supply chains.
 
The practice, known as reshoring, forgoes the benefits of cheaper labor and lease expenses in other countries, instead focusing on reducing the risk of instability in the international system.
 
“The world is showing signs of reshoring as manufacturers’ risk managements on their supply chains have been highlighted with the outbreak of Covid-19,” said Choo Moon-kap, who heads the economic policy team at the Korea Federation of SMEs. “It is time for Korea to start focusing on policies that would encourage Korean companies [overseas] to return.”  
 
A recent study by Bank of America has found that 80 percent of global companies operating in China were considering reshoring.  
 
A study by the Korea Economic Research Institute estimated that 130,000 jobs would be created in Korea if 5.6 percent of Korean companies’ whose operation is currently based overseas relocate back home.
 
But reality isn’t that easy.  
 
According to the Ministry of Trade, Industry and Energy, an average of 10.4 companies returned every year between 2014 and 2018.
 
Worldwide, an average of 482.2 companies returned each year during that period. The government in 2013 made changes to legislation that would give more support to reshoring companies. But market experts say the changes weren’t enough to encourage Korean companies to consider moving back.
 
The United States has lowered its maximum corporate tax to 21 percent. The Obama administration lowered the corporate tax from 38 percent to 28 percent under the banner of “remaking America.” 
 
The U.S. government provided additional support covering 20 percent of the expenses needed for reshoring. More recently, the corporate tax rate was further lowered to 21 percent under the Trump administration.  
 
The Japanese government has also increased its support of Japanese companies returning production facilities to Japan.  
 
Japan's Shinzo Abe government lowered the corporate tax rates from 30 percent to 23 percent in 2012.  
 
As a result, leading Japanese companies including Toyota, Honda, Nissan and Canon have moved plants back from China to Japan.
 
The coronavirus outbreak has further fueled the Japanese government to increase its supports for reshoring.  
 
Abe’s government on April 5 announced that it will create a $2.2 billion fund that would finance Japanese manufacturers reshoring from China. The Japanese government will cover two-thirds of the relocation expenses.  
 
Japan’s reliance on Chinese parts is estimated at around 21.1 percent — quadruple the size of France’s 5.1 percent and Britain's 5.9 percent.  
 
The Korean government on the other hand has raised the corporate tax rate, including those levied by the local governments, to maximum 27.5 percent.  
 
Korea’s reliance on Chinese parts stands at 30.5 percent.
 
Korean companies are reluctant from moving back due to high costs for domestic production, including logistic expenses and land leases as well as rigid labor regulations.  
 
Under the current Moon Jae-in government labor costs have risen significantly.  
 
Starting with a 16.4 percent hike in 2018, the minimum wage in the last three years has risen 32.8 percent.    
 
Under its reshoring measure, the government will only allow companies that operated overseas for more than two years to receive the benefits when it relocates back to Korea. Businesses that operated less than two years are excluded.  
 
“The newly reformed bill [on reshoring] was enacted in March, but it doesn’t seem like the support measures are practical,“ said Cheong In-kyo, an international trade professor at Inha University. 
 
“The reshoring policies would only work when it includes [additional] government regulation easing, reconsideration of next year’s minimum wage hike and additional [flexibility] measures for the 52-hour workweek.”
 
Many of those companies have suspended businesses or closed up shop entirely.
 
Since 2014, 68 companies have returned their production back to Korea. Of that total, only 38 are still in business.
 
According to lawmaker Kwak Dae-hoon’s office, companies that returned back to Korea have spent 879 billion won ($720.7 million) in moving back to the country.  
 
The government’s support including partial coverage for relocation and tax benefits amounts to 24.6 billion won.  
 
Ryu Byung-hyun is the CEO of Dong Gu, a company specializing in metallic mold. The company recently decided to fold its operations in China and move back to Korea.  
 
“In China there’s a lot of Korean [small businesses] that are hoping to return to Korea,” Ryu said. “[However,] there’s a desperate need for the government’s help, including tax benefits as well as guarantees of work commissioned by Korean conglomerates [in order to move back].”  
 
Ryu said that it’s not easy for small- and medium-sized Korean businesses to return back to Korea because many have moved abroad to follow large Korean companies when opening up plants abroad. Those conglomerates and other companies are their primary clients, making it difficult for them to return independently.
 
One of the leading Korean companies that relocated back to Korea was Hyundai Motor’s main parts supplier and affiliate Hyundai Mobis.  
 
Hyundai Mobis closed two plants in China and moved back to Ulsan in August. Since building a new plant, five of its smaller Korean partners returned back to Korea as well.  
 
The Korean government has started to take steps to increase its support for reshoring companies.  
On April 28 the government created a joint team with the Korea Chamber of Commerce and Industry that will be dedicated to reshoring companies.  
 
But some experts note that new job openings could be much less than what many would hope for, as companies returning back to Korea would likely increase automation to ease the burden on higher labor costs.  
 
“The government has to expand its support for reshoring to include cooperation between companies, academia and research institutes,” said Non Min-young, a researcher for the Korea Small Business Institute.  
 
BY LEE CHANG-GYUN   [lee.hojeong@joongang.co.kr]  

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