[Reshoring Exposed] "No Workers Available and Support Is Minimal, They Ask Us to Come Back..."

Tax Incentives Like Corporate Tax Cuts Exist
But Support Less Attractive Compared to Costs and Risks
Young Skilled Workforce Hard to Secure
Subsidiaries of Large Corporations Cannot Decide Independently
Short-Term Effects Hard to See, Companies Avoid

[Asia Economy Reporter Lee Junhyung] Companies review at least dozens of factors when expanding overseas, including labor costs, production workforce, labor regulations, the location of the primary contractor's factory, and even the status of Free Trade Agreements (FTA). The reasons for companies' overseas expansion are complex. The background for expansion varies slightly by industry. For this reason, businesspeople with factories abroad unanimously say that they cannot easily decide to return to the domestic market with only fragmented support. Since the reasons for overseas expansion are complex, there are not just one or two factors to consider for 'reshoring.'

"Support must be enough to elicit an explosive response"

Businesspeople point out that support for the U-turn policy is insufficient compared to the burdens caused by reshoring. The government supports 6-24% of facility investment costs and 9-50% of site investment costs based on sale prices and land prices. If a company is selected as a priority support target within three years of returning to the domestic market, an employment subsidy of 600,000 KRW per person per month is also paid for two years. In addition, there are benefits such as corporate tax reductions, but according to the businesspeople contacted by this paper, the support is not very attractive compared to the costs and risks that must be borne by reshoring.

In fact, the amount of support provided was not large. According to the Ministry of Trade, Industry and Energy, the amount of support provided to 64 companies returning to the domestic market over five years from 2015, including investment and employment subsidies, was about 21.8 billion KRW. This contrasts with Japan, which allocated a budget of 2.7 trillion KRW last year alone to strengthen its domestic production supply chain. The CEO of electronics parts company A, which entered Vietnam 10 years ago, said, "(Government support) does not make us want to dispose of overseas factories," adding, "Support must be enough to elicit an explosive response from businesspeople for them to make bold decisions."

There were also policies that did not consider the realities of small and medium-sized enterprises (SMEs), such as support for smart factories. The government supports the smart factory transformation of returning companies by providing up to 500 million KRW for robot distribution projects. The CEO of electronics equipment company B, with 15 years of experience, said, "Building a smart factory costs hundreds of billions to trillions of KRW at a minimum," adding, "This is an option only feasible for large companies, not SMEs." The CEO of semiconductor company C, which has overseas subsidiaries in Brazil and elsewhere, added, "To automate factories, all existing equipment must be replaced. Considering the investment cost, it does not make sense to replace equipment that is not yet outdated."

Supply of young production workforce also a problem

There are many obstacles beyond costs, such as the supply of production workforce. CEO C explained, "Korea's new hiring market is mainly composed of college graduates, making it difficult to secure young production workers," adding, "Especially in small and medium manufacturing sites, aging has already progressed significantly." According to the Ministry of Employment and Labor, the average age of manufacturing workers in 2019 was 42.1 years, and 41% were aged 40 or older.

Turnover and resignation rates are also issues. Even within the same manufacturing sector, the turnover rate for production workers was more than twice that of other job groups. According to the Korea Institute for Industrial Economics and Trade, the turnover rate for office management and sales/marketing positions in manufacturing was in the 7-9% range, while production workers exceeded 17%. This figure is even higher in small and medium-sized manufacturing companies. CEO C said, "In the equipment industry, factories operate in three shifts, and new workers often find the work difficult," adding, "As a result, many leave the company quickly, making it difficult to train skilled workers."

Large company suppliers find independent decisions difficult

Suppliers to large companies find it practically impossible to decide independently to return domestically. Many mid-sized manufacturing companies rely on cooperation contracts with large companies for most of their annual sales. They have no choice but to follow the overseas factories of large companies for efficiency in parts supply. For example, Dreamtech, a smartphone parts manufacturer, built its first factory in Vietnam in 2011 after its main client Samsung Electronics entered Vietnam in 2009, and completed its third factory last year.

The CEO of Hyundai Motor's first-tier supplier D said, "Industries that require local logistics procurement and after-sales service (AS) must have overseas factories," adding, "If the client's factory is in Korea, we might consider returning domestically." CEO C added, "There is also the problem that factories in Korea cannot meet the prices demanded by large companies," adding, "The key is whether we can maintain price competitiveness in the global market."

Experts also pointed out the ineffectiveness of policies. Researcher Song Youngcheol of the Korea Small Business Institute said, "Returning production bases domestically is a strategically significant decision with high risks," adding, "Due to COVID-19, the business environment has become uncertain, making it difficult for companies to see short-term effects from reshoring, so it inevitably falls lower on the priority list." Researcher Song added, "In Korea, reshoring seems to attract more government interest than that of companies."