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South Korea is the fifth largest manufacturing1 economy in the world. If one looks back a decade or so, its growth in manufacturing was on a major upwards trajectory. It weathered the 2009 downturn particularly well, enjoying a small amount of growth while most regions contracted significantly; and during the period 2007 to 2012 it expanded by nearly one half. However, since 2012 – when its manufacturing output peaked – growth has stalled, and the region’s output today is no bigger than it was in 2012 (See Figure 1).
The South Korean manufacturing economy enjoyed a particularly strong year in 2017, which was a period during which most manufacturing economies performed well. While official annualized figures for 2018 have not yet been published, monthly figures point towards a weakening trend. Since February 2018, output in the region has contracted every month (on a year-over-year basis), including during the first quarter of 2019, with one exception – during October 2018 output was measured flat. We estimate output contracted by 1% in 2018, and we expect a further deepening in 2019.
Our view is that South Korea’s manufacturing output growth will remain slow for the next five years. There are a couple of factors that weigh upon this thinking. First, the period 2012-2017 saw little (or no) growth for the region, while for global manufacturing this was a period of continued growth. So as a percentage of overall manufacturing output value, Korea lost share during this period versus the rest of the world (See Figure 2). For example, South Korea’s share of flat panel TV production dropped considerably in recent times as it lost out to Chinese manufacturers.
Second, our outlook for 2019 to 2023, (reinforced by the view of ITR Economics), is that during this period we will see two periods of economic slowdown. The first is occurring right now, with most economies around the world (the US seemingly bucking the trend) seeing slower or even recessionary type conditions. South Korea is feeling the effects of this, as illustrated by the aforementioned monthly growth numbers. The next expected downturn period is 2022-2023, when a more pronounced down economy is forecast. Both factors will create headwinds for Korea’s manufacturing over the next five years, and sufficiently so that we expect overall growth to be relatively flat.
Industry Concentrations Should Help, Not Hinder, Growth
Digging a little deeper, to try to understand what is impacting manufacturing within the region, we wondered whether the mix of industry strength was a contributing factor. When one looks at South Korea’s output mix, there are five main sectors that account for over 70% of the region’s total output value. These are automotive, chemicals & pharmaceuticals, electrical & electronic equipment, metals production and semiconductors & electronic components (See Figure 3).
At a global level, these five sectors grew at a CAGR of 4.5%, slightly above the global manufacturing rate of 4.4% between 2012-2017. So, one can surmise that South Korea’s industry concentrations were not disadvantaging the region as globally these five sectors were performing above the total manufacturing average.
Weakness in Flat Panel TVs Outweighed by Strength in Semiconductors?
In four out of five of South Korea’s largest industries (automotive, chemicals & pharmaceuticals, electrical & electronic equipment, and metals production), it underperformed versus the global market. Electronic components – which includes flat panel TV production – peaked at $86.8bn in 2013 but has dropped steadily since, as the country’s manufacturers lost out to Chinese brands. Chemicals & pharmaceuticals production (it’s largest single sector) was also a problem area; it peaked in 2012 at a value of $246.7bn, and in 2017 recorded $200.8bn, a negative 4.0% CAGR over this period.
The one bright spot during this timeframe was the semiconductors & electronic components sector, which enjoyed growth of 4.5% for the period 2012-2017, although this is still lower than the global average of 5.4%. Performance of this sector was exceptionally good in 2017 when it expanded by more than 25%. It is understood that South Korea outperformed the global semiconductor industry in that year, partly due to supply constraints in China. The outlook for this sector is particularly cloudy, however. China is massively ramping production capacity, stimulated by strong government support, and it is quite possible that South Korea’s gains will be reversed.
Are Currency Rates and Import/Export Markets a Factor?
Versus the US Dollar, the Korean Won has depreciated over the period 2007-2018, equivalent to about 21 cents on a single dollar. This weaker currency value over time has stimulated exports, while lowering imports, thus improving manufacturing output. Government data confirmed that imports levels for 2012 and 2018 were roughly the same at around $525bn, while exports grew from around $550bn to $580bn.
Aside from exchange rates, other factors are potentially at work. For example, The Bank of Korea recently published an analysis of labor productivity, showing a notable weakening in productivity in the region during the periods that closely align with the numbers we have presented here.
Expect additional insight on this topic as we further explore this issue in the months ahead.
¹Our definition of “manufacturing” does not include the value of output from mining, utilities and petrochemical production.
Data for this analysis is sourced from the Korean Statistical Information Service (KOSIS) and Interact Analysis.
All of our growth rates are calculated on a fixed (average) currency basis to eliminate impact of forex changes.
Adrian Lloyd is the CEO and Research Director for Interact Analysis. He leads a team preparing the most in-depth analysis of the manufacturing economy available. The data is available through our Manufacturing Industry Output Tracker.