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Semiconductor illusion masks decline in Korea’s manufacturing base

Published: 03 Nov. 2025, 00:03

Kim Dong-won

The author is a former invited professor of economics at Korea University.

Warning lights are flashing across Korea’s manufacturing sector, long the driving force of economic growth over the past six decades. Externally, competition from China is intensifying and U.S. protectionism has raised tariffs. Domestically, rising polarization has eroded productivity and profitability. Korea’s manufacturing industry reached its peak in 2022 and has entered a phase of structural decline.

Nvidia CEO Jensen Huang, center, takes a photo with Samsung Electronics Executive Chairman Lee Jae-yong, left, and Hyundai Motor Group Executive Chair Euisun Chung during a dinner in a chicken restaurant in southern Seoul on Oct. 30. [JOINT PRESS CORPS]

National income data shows total manufacturing output in 2024 was 5.8 percent higher than in 2022. Yet this growth was driven almost entirely by automobiles and semiconductors. Most other sectors recorded falling output. The manufacturing shipment index in July 2025 was 5.3 percent higher than in 2015. Excluding semiconductors and related parts, however, it was 4.2 percent lower. This illustrates the “semiconductor illusion” distorting Korea’s industrial performance. Outside semiconductors, automobiles and pharmaceuticals, many manufacturing sectors are already in decline.

According to Statistics Korea, the number of manufacturing firms peaked at 586,000 in 2022 and fell to 504,000 in 2024 — a 14 percent drop in two years. Firms with five or more employees slightly increased, while those with fewer than five employees fell by more than 50,000. This suggests Korea has passed its manufacturing peak in terms of business formation.

This file photo, taken March 12, 2025, shows aluminum products at a plant in Hwaseong, about 45 kilometers south of Seoul. U.S. tariffs are increasing pressure on Korean steel and aluminum manufacturers. [YONHAP}

Investment trends paint a similar picture. Total manufacturing capital investment in 2024 was 60.7 percent higher than in 2020. Yet almost half of that increase came from high-tech sectors such as semiconductors. Investment in medium- and low-tech industries barely grew. Research and development spending fell 41 percent, while spending on equipment maintenance surged 380 percent, signalling weakening industrial dynamism.

Employment is declining in parallel. Manufacturing jobs in September 2025 were down 4 percent from 2022, falling for 14 consecutive months. Most of this drop came from firms with fewer than 300 employees. Meanwhile, industrial polarization is widening. Between 2015 and July 2025, production by large firms rose 19 percent, while output at small and medium-sized firms fell 7.3 percent.

Import dependence has also increased. The domestic supply index shows imported goods accounted for 30.2 percent of manufacturing inputs in mid-2025, compared to 25.5 percent in 2020. China’s share of intermediate goods rose from 26.8 to 31.7 percent over the same period. The rising reliance on Chinese inputs reflects both China’s improving technological capabilities and shrinking competitiveness of Korean suppliers.

The United States’ push to decouple from China in cutting-edge technologies has led Beijing to double down on self-reliance, boosting the competitiveness of Chinese parts and materials. Korean manufacturers are increasingly vulnerable as a result.

Semiconductors and automobiles made up 26.6 percent of exports in 2020. By the first nine months of 2025, their share had grown to 33 percent. The combined share of the United States and China in Korea’s exports also rose significantly — to 36 percent from 25.8 percent in the same period. This geographic and sector concentration exposes Korea to greater geopolitical and trade risks.

Korean manufacturers are expanding production overseas to respond to foreign protectionism. The number of overseas manufacturing subsidiaries increased from 587 in 2021 to 813 in 2024. Hyundai Motor announced plans to raise its U.S. production ratio from 43.5 percent of American sales to 80 percent by 2030, and increase local parts sourcing to the same level. Similar trends are expected in semiconductors and other export-heavy industries as the United States and the European Union accelerate onshoring policies.

While global production networks are necessary for corporate growth, they carry national risks. As seen in parts of U.S. manufacturing, offshoring can lead to domestic industrial hollowing, shrinking output and jobs at home. Governments are increasingly competing to attract factories and supply-chain hubs, a trend Korea must closely monitor.

Structural weaknesses are deepening polarization in the manufacturing workforce. As of 2024, 68.5 percent of workers enrolled in employment insurance were employed by firms with fewer than 300 people. Their average wage was only 59 percent of those at larger firms, down from 61 percent in 2020. Income concentration is worsening. The top 0.1 percent of corporations paid 59.3 percent of total corporate taxes in 2024.

Despite the optimism around the semiconductor supercycle, many analysts predict a downturn around 2027. A slump could intensify polarization and hit low-productivity firms the hardest. The number of “zombie companies” — manufacturers unable to cover interest payments with operating profits for more than three years — increased from 491 in 2022 to 575 in 2024. According to the Bank of Korea, the high share of low-productivity firms misallocates labor and capital, undermining long-term growth.

A tile manufacturer in South Gyeongsang Province. The company sparked controversy after halting operations in January 2024 and notifying all 130 employees of dismissal due to capital impairment from worsening business conditions. [YONHAP]

The International Monetary Fund supports Korea’s industrial policy but continues to urge structural reform. The government has been reluctant because restructuring causes political pain. Yet delaying reform will only worsen the pressure on small and mid-sized manufacturers.

Policymakers must pursue industrial policy targeting semiconductors and other growth sectors, while simultaneously facilitating exit or transition for declining industries. The illusion of semiconductor-led success should not obscure the reality that manufacturing accounts for 29 percent of GDP and 44 percent of exports. Its decline is a national risk.

To prevent a broader economic peak-out, the government must act preemptively. Restructuring manufacturing is essential not only for stability, but also to make Korea’s AI and digital transformation effective and sustainable.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.