[China Report] China May Overtake Korea in 3-10 Years
By Ryu Jin
Staff Reporter
``The rapidly industrializing China might overtake Korea in the next three to 10 years.'' This is the message from Deputy Prime Minister Jin Nyum, warning South Korean industry that they should not disregard their Chinese neighbor.
Jin, who acts as both deputy prime minister and minister of finance and economy, said last week in a meeting with business representatives hosted by the National Strategy Institute, that China already poses a threat to South Korean manufacturing firms. He predicted that China's rapid growth would have a profound impact on South Korean economics.
Since it initiated economic reform two decades ago, China has begun to change the economic topography of the world. From textiles, footwear and home appliances to petrochemicals and the high-tech IT industry, China has made dazzling economic development over the past two decades.
China has been enjoying a high economic growth rate of an annual average of 7-8 percent even in the toughest of times, even after the financial crisis of 1997-98. It has emerged as the seventh largest economy in the world, with gross domestic product (GDP) topping $1 trillion last year. The speed of China's economic growth is expected to increase, timed with its entry into the World Trade Organization (WTO) and its hosting of the Summer Olympic Games in 2008.
At this juncture, many economists believe that the world's economic order is changing in accordance with Chinese economic developments, and the South Korean economy is not immune from happenings across the Yellow Sea.
``From the simple manufacturing sector to the high-tech industry, chances are higher than we expect China to outpace South Korea in the near future,'' said Prof. Chon Jin-whan of the Yonsei University. ``Therefore, unless we take appropriate action and sharpen our technology, South Korean companies and their economy will never survive global competition.''
To get a sense of how Korean businesses feel about future prospects for the Chinese economy, The Korea Times and the Maeil Business Daily have joined hands with the Choong-ang Research & Consulting Co. (CRC). They polled 1,000 South Korean companies on a variety of issues regarding the Chinese economy.
About 54.5 percent answered that they think South Korean companies currently hold the dominant position, while only 7.5 percent said that Korean firms fall behind Chinese enterprises in overall competitiveness.
However, Korean textiles, footwear, steel and computer-related industries could see an unfavorable turn for the worst over the next three years, a majority of those polled answered.
China, which started development with the traditional smokestack industries, solidified its status as a production base for multinationals.
It then began to equip itself with international IT competitiveness.
Renowned multinational enterprises have been quickly moving production bases into the world's most populous nation, not to be left behind in grabbing a share of the vast market.
As for Japan, electronics companies such as Mitsubishi, Matsushita and Toshiba have already reset their production strongholds in the Chinese mainland. South Korean chaebol, particularly Samsung and LG groups, regard China as becoming their main production base in the near future.
As a result, more than half of the motorbikes, air conditioners and photocopiers with Korean names are currently produced in factories on Chinese territory.
In the home appliances market, including televisions, washing machines and refrigerators, China holds the top post in terms of world market share.
A run of visits by the CEOs and presidents of South Korean chaebol to China shows how tremendous their interest is in the Chinese market. Not only in the manufacturing sector but also in IT production, China is entering the top ranks as one of the strongest economic powers.
Following the United State, with $88.5 billion, and Japan, with $45.5 billion, China ranked third in IT production last year, reaching $25.5 billion.
The International Monetary Fund (IMF) also predicted that China, if it continues to grow at current rates, would outrun the U.S. before the year 2010, accounting for 20 percent of global production.
These changes indicate that economic order in Asia is shifting. That is, the new economic order, led by China, is taking the place of the traditional system of international division of labor, according to the Korea Economic Research Institute (KERI).
In the past, KERI claimed, Japan, South Korea and China drove forward economic development, each based respectively on cutting-edge technology, traditional infrastructure investment and labor-intensive manufacturing.
However, collaboration between the three neighbors is getting meaningless now that China has risen from traditional industries to high-tech IT industries.
The Samsung Economic Research Institute (SERI) said in a report on the relations between South Korean and Chinese industries, that, ``China has already overtaken, or is overtaking, South Korea in terms of exports and technological level in some traditional manufacturing industries, including shoes, textiles and home appliances. In less than 10 years, the chaebol might only be able to maintain their dominance over China in semiconductors, if they're lucky.''
SERI noted how quite a few Korean-made products are being driven out of the U.S. and Japanese markets-the nation's two largest export markets- giving up their seats to more economical Chinese-made goods. At this pace, SERI noted, China will likely catch up with South Korea within the next five years in industries such as digital home appliances, telecommunications, steel and synthetic fiber, industries where South Korean companies still have a competitive edge.
A change has already started in the world's semiconductor industry. South Korea, the U.S., Europe, Japan and Taiwan previously dominated the market.
But SERI described that now we see the emergence of a powerful challenger, China.
The Federation of Korean Industries (FKI), whose executives recently toured some industrial sites in the mainland, has emphasized that prospects for the South Korean economy in the 21st century are very cloudy, unless it learns from China and strengthens cooperation with its neighbor.
KERI researcher Park Sung-rok said, ``Faced with the rapid growth of the country, Korean companies need to develop value-added products so as not to be relegated to the periphery of the global market.''
Sandwiched Economy
However, many analysts say that such concerns are already becoming reality. Kwon Young-uk of the Korea Foreign Trade Association in Tokyo said, ``Jostled by Japan in terms of quality and shoved by China in the aspect of price, Korean companies are getting engulfed in a serious dilemma, the so-called sandwiched economy.''
In the U.S., Japan and many other countries, Korean goods are losing their competitive edge.
Confronted with the dreadful Chinese dash, most economists claim that a new economic strategy for industrial development should be worked out immediately. Commonly pointed out by economists is that South Korea must adopt a national strategy of choosing one or two particular areas on which to concentrate efforts. This is a shift from the expansion-oriented growth of the 1980 and 1990s. Large-scale production of facilities and mass production will not work nowadays.
If it adopts a ``selection and concentration strategy,'' said the Korea Development Institute (KDI), South Korea should concentrate its domestic industries on prospective businesses, such as IT and biotechnology.
The KDI also stressed that companies must expand investment in research and development (R&D). R&D spending for South Korean listed companies was reported to be 1.4 percent of sales, far lower than the 10 percent level at leaders such as Ericsson, Sony and Nokia.
The KDI pointed out that Seoul needs to build and reinforce a cooperative system of interchange with Beijing to cope with changes in the new economic era.
``What is important is how we can take advantage of the fast growing Chinese economy,'' said Ji Man-soo from the LG Economic Research Institute.
``For this, Korea should bolster its cooperative relations with China.''
Deputy Prime Minister Jin also insisted that Seoul should forge a partnership with Beijing and take advantage of its rapid industrialization in a bid to maximize Korea's economic potential. He added that the country's future growth would rely on how it sharpens its competitive edge in the Northeast Asian market.
Lee Dong-uk of the Korea Center for International Finance, said that South Korea must train and educate people so that they are well versed in China and in things Chinese. ``There are only about 140 sinologists in South Korea, most of whom are specializing in the humanities.''
``This means that skilled people with a deep understanding of Chinese society and Chinese economics are too few to forge strategic plans concerning that vast market,'' Lee said.
Some day, China will certainly emerge as one of Korea's fiercest competitors, all research institutes agree. The challenge is not a crisis, though, since China will certainly be Korea's largest export market. That is why many economists say that the future of this country relies on how it copes with China surfacing as an economic power.
jinryu@koreatimes.co.kr
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