[2020 Future Business Forum] Donggeun Lee "China Production Bases Should U-Turn to Korea, Develop Domestic Parts and Materials"

Lee Dong-geun, President of Hyundai Research Institute, is giving a lecture at the '2020 Asia Future Business Forum' held on the 28th at the Chosun Hotel in Jung-gu, Seoul, under the theme "The Direction of the Korean Economy in the COVID-19 Pandemic Era." Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Kim Hyewon] Lee Dong-geun, President of Hyundai Research Institute, emphasized, "We must reduce dependence on China, achieve domestic development of parts and materials or diversify supply sources, and simultaneously induce the relocation of production bases from China and Southeast Asia back to Korea."

On the 28th, Lee attended the 2020 Asia Future Business Forum hosted by Asia Economy and delivered a lecture titled "COVID-19, Changes and Responses in the Global Value Chain (GVC)," stating, "We need to disperse the global supply chain and establish our own manufacturing production system."

As of 2018, Korea's manufacturing value-added ratio to Gross Domestic Product (GDP) was about 27%, ranking second among manufacturing powerhouses. Lee viewed that the trade surplus structure in capital goods and intermediate goods suggests a relatively high correlation with the GVC of overseas-produced products.

He said, "As China has grown into a key country and the relationships with existing core GVC countries such as Germany, Japan, the United States, and emerging countries have become closer, the GVC structure is diversifying and regionalizing. Especially, even before COVID-19, with the evolution of Fourth Industrial Revolution technologies, production costs were decreasing and the GVC was weakening."

The traditional GVC, where research and development (R&D) was handled domestically and production was carried out in emerging countries, is increasingly likely to integrate both production and manufacturing processes domestically due to advancements in automation system technologies. With the commercialization of robot technology, autonomous vehicles, and smart factories, the labor cost ratio is decreasing and the GVC was weakening, but COVID-19 has led to the collapse and potential disintegration of this system. Additionally, it is expected that existing production bases will shift to consumption bases due to automation and other factors.

Lee Dong-geun, President of Hyundai Research Institute, is giving a lecture at the '2020 Asia Future Business Forum' held on the 28th at the Chosun Hotel in Jung-gu, Seoul, under the theme "The Direction of the Korean Economy in the COVID-19 Pandemic Era." Photo by Kang Jin-hyung aymsdream@

Lee also mentioned the intensifying competition to build country-centric supply chains. He pointed out, "In major ASEAN countries such as Malaysia and Indonesia, annual wages are only about 30-70% compared to China, increasing the possibility of de-Chinaization of production bases," and emphasized, "The United States and Europe are promoting reshoring policies to strengthen manufacturing competitiveness by encouraging the return of production to their home countries."

He argued that to keep up with changes in global GVC trends, efforts to smarten manufacturing processes, strengthen existing industrial competitiveness, and create new businesses must accompany each other. Lee stated, "It is necessary to reduce production costs, build new supply chains through digital transformation, and focus capabilities on high value-added areas such as product planning, engineering, and logistics," adding, "Corporate production methods need to shift from minimizing inventory to securing inventory as a contingency measure." Furthermore, he pointed out, "Investment in R&D for core technologies should be expanded, and regulations should be fully converted to post-regulation and negative regulation."

Finally, Lee said that responding to digital transformation and leading open innovation are roles of companies, while the government should support by creating industrial ecosystems, reforming regulations to establish a foundation for new business entry, flexibilizing labor, and mitigating external economic risks. The public also has a role in fostering a social consensus based on dialogue and consultation and spreading a pro-business sentiment.