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CHUNG Sang-Eun

China’s Industrial Upgrade Means Higher Risks and Return to Korea

CHUNG Sang-Eun

July 30, 2007

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China’s economy has enjoyed annual growth of over 10% for the past four years (2003-2006), with 11.4% growth in the first quarter of 2007. China’s trade surplus also continues to post record-highs. This has been achieved while only a handful of Chinese companies are globally competitive.

In a borderless world, a nation’s industrial structure will be determined more by where it lies in the value chain no matter how many high tech industries this nation has. In this sense, China’s industrial structure can hardly be said to be “advanced” at least for now. For example, China’s high-tech industries such as semiconductors and liquid-crystal display panels are focused on assembly rather than R&D or parts production.

However, Chinese industries have been fast upgrading recently. In the IT sector, major multinationals like Sony, Intel, and Microsoft are strengthening their R&D in China, suggesting that production in China is headed up the value chain. Sony let its Shanghai Technology Center, opened in 2005, cover the whole process of planning, design, and production of its MP4 players before releasing them on the global market. Intel invested US$2.5 billion to build a semiconductor plant in Dalian, also the location of its R&D center. On the heavy industrial front, China’s shipbuilding industry, that used to have virtually no presence at all ten years ago replaced Korea as No. 1 in new ship orders in the first quarter of 2007. The Chinese shipbuilding industry’s future is also bright. China has 31 shipbuilding companies listed among the world’s top 100, with Dalian Shipbuilding at No. 5 in the amount of backlog orders. This compares quite favorably with Korea’s 15 shipbuilders, and Japan’s 30.

All these events imply that China is experiencing improvements not only in quantitative terms, but also in quality. Of course that does not mean that China is ready to surpass Korea within a year or two, let alone Japan. For example, China’s shipbuilding industry still focuses on low value-added vessels like cargo carriers, bulk carriers and small and medium sized container ships, whereas Korean shipbuilders lead in producing high value-added vessels such as large container ships and liquefied natural gas tankers.

But things will surely be different in three to five years. The Chinese government is stepping up R&D support. Multinational corporations are continuing to expand R&D facilities and are deepening the depth of R&D in China. Assuming those trends will not slow and the Chinese economy maintains robust growth, nobody can be sure that Korea will be able to maintain its current technological edge over China. The recent trend for more Korean students to avoid the natural sciences and engineering in colleges also does not bode well for the mid to long-term future of Korean industry, as does the continuing problem of sluggish corporate investment. If China catches up Korea, it could spell really bad news for Korea’s economic future.

However, there is no need for any undue pessimism regarding China’s industrial upgrade, and in any case, China’s changing industrial structure is an issue that affects many countries other than Korea. Rather, China’s industrial upgrade can serve as a substantial opportunity for Korean companies, depending on how they approach the issue. Effective use of China’s industrial upgrade process can indeed be a very good chance to drastically strengthen a foothold in the Chinese market while simultaneously enhancing global competitiveness. For example, Korean companies could collaborate with their Chinese counterparts in the development of global technology standards, through which they can establish a firm foothold in China’s huge market. If those standards are adopted by other developing countries, Korean companies will naturally be large beneficiaries. There is already a case in hand. For example, Korean mobile giant SK Telecom is assisting China in developing its own third-generation (3G) standard for handsets.

If Korean companies do not utilize such opportunities arising from China’ industrial upgrade, some other companies from fully industrialized countries will do this. If that is the case, China will choose an industrial upgrade path that excludes Korea.

Therefore, the crucial issue here is to form a virtuous cycle wherein China’s growth is complementary to Korea’s. This will be possible only when Korean companies make solider inroads into the Chinese market. Previous business strategies that take China as a simple assembly place or repeat one time investment for a short profit will no longer guarantee success. Only companies that invest deeper (i.e. strengthen R&D) and longer (long term investment for higher value-added production) would reap sweet fruits of their efforts.

The writer is a research fellow at Samsung Economic Research Institute. Inquiries on this article should be addressed to sangeun.chung@samsung.com

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