"Deepening Global Supply Chain... Korean Companies Need to Rebuild Production Bases by Industry"

[Asia Economy Reporter Jin-ho Kim] In response to the intensified global supply chain risks following the COVID-19 pandemic, it has been argued that Korean companies need to rebuild optimal production bases by industry. The existing structure, which was concentrated in specific countries, is deemed insufficient for crisis response.

According to the report "The New Normal of Global Supply Chains and Our Response," released on the 7th by the Korea International Trade Association's International Trade and Commerce Research Institute, a clear trend of diversification of production bases across continents is emerging to disperse trade disputes and supply chain risks.

The role of China, previously Asia's production base, is now divided among Taiwan, Malaysia, and Indonesia. Europe’s production base is dispersing from Germany to France and Italy. In North and Central America, although a promising regional base to replace the United States is not yet clearly visible, Mexico is expected to emerge as a new base in the future.

The report conducted an empirical analysis to identify promising new bases that could replace existing ones by region, based on ▲intra-regional trade share ▲greenfield foreign direct investment (FDI) ▲and the value added within the region for final goods production in the base country. An increase in the indices of these three indicators was interpreted as a strengthening of the status as a production base.

In manufacturing, Taiwan, Germany, and Mexico are promising for sectors such as "electrical equipment and basic and processed metals"; Taiwan, France, and the United States for "chemicals"; Indonesia, Germany, and Mexico for "transport equipment"; and Indonesia, Italy, and Mexico for "food and beverages," showing specialization.

Furthermore, with the servitization of manufacturing through digital innovation and active input of services across the value chain, the report analyzed that service industries are also showing specialization by base. For services, "business services" are specialized in Malaysia, France, and the United States; "retail" in Malaysia, Germany, and Mexico; and "inland transportation" in China, Italy, and Mexico, indicating gradual differentiation.

Accordingly, the report advised that Korean companies should also reassess their production networks to strengthen supply chain stability. Kang Nae-young, senior researcher at the Trade Association, emphasized, "Our companies need to adopt strategies selecting optimal production bases considering the characteristics of industry groups specialized by base, while actively participating in the global value chain in high value-added service sectors such as specialized technologies."