Uncertainty best describes the future of the economy of Korea and across the globe. Any forecast can at best anticipate some general trends.
Nationalization: Prior to the emergence of COVID-19, the pendulum (both economic and political) had already begun to swing away from decades of globalization. The drive for cheap labor is running its course as sources become increasingly limited. The complex supply chains of global sourcing expose downstream manufacturers to substantial risk of interruptions. Korea, too has experienced significant supply chain challenges of late due to political clashes with our two giant neighbors, China and Japan. Korean firms are already well advanced in efforts to reduce their dependence on Japanese technology diversifying sources and encouraging local vendors.
Diversification: With respect to cheap labor, Korea is probably more dependent than most on China. Even though geographical proximity makes the supply chain issues in China easier to manage than for most industrialized countries, Korean industrials are already heavily diversified into the populous Southeast Asia and the Indian sub-continent. (Four countries, Indonesia, Bangladesh, Pakistan and Vietnam combined offer a workforce that exceeds 50% of China's.)
Rebalancing: 'On-shoring' was coined to describe the wave of factory re-locations as industrial enterprises encourage suppliers to locate close-by. While the global dependence on China is too imbedded to orchestrate any sudden rebalancing, "China plus one" has been in play for over a decade. Disruptions arising from COVID are driving companies to accelerate their diversification away from China and established alternative production bases. Korea is likely to benefit from this realignment of supply lines as local industrial giants like Samsung, Hyundai and LG promote local vendors. Furthermore, industrial firms in the West are likely to find Korea a more reliable supplier than China. The more that China displays a penchant for retaliatory trade policies (to wit imposing tariffs on Australian barley following its demand for greater transparency on the origins of COVID-19), the more attractive Korea becomes as an alternative for high quality, high tech manufactured goods.
Shift to Reliability: Priorities are changing from low cost production to reliability. Unexpected interruptions are costly and often erode the benefits of labor savings. Safety, stability, and consistency will become more important strategic drivers in the future. Korea's sophisticated and successful response to Coronavirus has demonstrated that this country is a dependable and reliable partner. Collective civic mindedness and discipline of Korea's population that were demonstrated during the pandemic contribute significantly to Korea's positive image. There is renewed investor confidence in this country. Western companies seeking alternatives to China are likely to tap Korea's responsive, resilient and flexible workforce.
The future is uncertain but for Korea, there is considerable scope for optimism.
Peter Underwood, Managing Partner
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