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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