[Exclusive] Moon Administration's 1.4 Trillion Won Investment in 'Smart Factories'... 220 Cases of Fraudulent Claims but Only 21 Recoveries

Smart Factory Project Under Moon Jae-in Government's 'Korean New Deal Policy' Detailed Tasks
Over 25,000 Sites Last Year...Targeting 30,000 Sites This Year
Legal Advisory on Possible Recovery Measures by KIAT
"Recovery Difficult and Lack of Agreement and Management Regulations to Sanction Fraudulent Companies" Opinion
Supply Companies' Capability Issues Highlighted...Only 15% Software Product Certification Rate
Supply Companies Plan 20% R&D Budget Achievement...Only 3.4% This Year, Far Insufficient

[Asia Economy Reporter Kwak Min-jae] The smart factory dissemination project, which the Moon Jae-in administration invested approximately 1.37 trillion KRW in during its term, has been criticized for being hastily implemented due to an excessive focus on achieving quantitative targets. Due to insufficient agreements and management regulations to sanction companies receiving fraudulent subsidies, 220 cases of fraudulent claims occurred, of which only 21 cases have been fully recovered.

According to data submitted by the Ministry of SMEs and Startups and disclosed on the 6th by Han Mu-kyung, a member of the People Power Party (National Assembly Industry, Trade, Energy, Small and Medium Enterprises and Startups Committee), 220 cases of fraudulent claims and poor construction occurred in the smart factory dissemination project, which was a key initiative of the previous government, up to August. Among these, 186 cases are subject to recovery actions, but only 21 cases have been recovered. The remaining 132 cases are under litigation, 6 cases are under police investigation, and 27 cases are undergoing recovery procedures. Most of the litigation cases involve the Small and Medium Business Technology Promotion Information Institute requesting payment orders due to non-compliance with recovery actions by supplying companies, or supplying companies filing lawsuits claiming no breach of agreement.

The smart factory dissemination project was transferred to the Ministry of SMEs and Startups in 2017 and actively promoted with the aim of supporting various types of smart factories in small and medium-sized enterprises (SMEs) and mid-sized companies to enhance manufacturing competitiveness. Under the Moon Jae-in administration, the project was selected as a detailed task of the 2020 “Korean New Deal Policy,” significantly increasing related support. According to data disclosed by Han Mu-kyung’s office, the total government support budget invested in the smart factory dissemination project from 2014 to August of this year amounts to approximately 1.4622 trillion KRW, of which about 1.37 trillion KRW was invested during the Moon administration. As a result, smart factories were disseminated to 25,039 sites by last year, with a goal of reaching 30,000 sites by this year.

However, there are criticisms that the government failed to implement the project meticulously due to focusing solely on quantitative goals. According to data disclosed by Han Mu-kyung’s office regarding inquiries made by the Small and Medium Business Technology Promotion Institute to the Korea Legal Aid Corporation about the possibility of recovery actions for suspected cases of excessive wage payments, the Legal Aid Corporation advised that “it is difficult to recover funds in cases of suspected excessive wage payments or when supplying companies have repaid or reduced the corporate burden of adopting companies through payback methods.” Furthermore, the Legal Aid Corporation stated that “recovery actions are also impossible when individuals employed at other companies participate in the project and embezzle project funds.”

Han Mu-kyung said, “The Legal Aid Corporation’s advice indicates that recovery is (mostly) impossible and that insufficient related regulations and guidelines impose a burden of proof on the government when companies subject to recovery and sanctions file lawsuits.” She added, “Given the lack of agreements and management regulations to sanction companies receiving fraudulent subsidies, it will be difficult for the government to avoid criticism that the project was hastily implemented.”

Legal Aid Corporation advisory content. [Photo by Han Mu-kyung]

Concerns were also raised about the lack of capability of supplying companies that provide smart factory construction technology to mid-sized and small enterprises receiving government support. According to Han’s office, as of 2019, only 11% of smart factory supplying companies had obtained the ‘GS Certification’ (a national certification system for software products), and only about 3% had received the ‘SP Certification’ (software development process quality), indicating that only about 15% of smart manufacturing solution companies had software (SW) product certifications among all suppliers.

The initial plan to prioritize investing 20% of the Ministry of SMEs and Startups’ research and development (R&D) budget in supplying companies’ R&D was also not fulfilled. In 2018, nine ministries including the Ministry of SMEs and Startups and the Ministry of Trade, Industry and Energy held a strategic briefing on smart manufacturing innovation for SMEs and announced related content. Although the proportion of the smart factory R&D budget within the Ministry of SMEs and Startups’ total R&D budget steadily increased from 0.3% in 2019 to 3.4% in 2022, it fell far short of the original plan of 20%.

Han Mu-kyung stated, “The Moon Jae-in administration hastily pushed forward the smart factory dissemination project, focusing on the quantitative achievement of disseminating 30,000 smart factories, even neglecting to establish adequate agreements and management regulations to sanction companies receiving fraudulent subsidies.” She emphasized, “It is now time for a comprehensive review of the smart factory dissemination project, including strengthening supplier capabilities and supplementing agreements and regulations.”