Further Strengthening the Industrial Cooperation between South Korea and Japan

Visiting Scholar, RIETI

South Korea (hereinafter Korea) and Japan have created a win-win relationship through mutual close cooperation, as the industrial cooperation between the two countries has been developing very rapidly lately. Therefore, it would be wise for the new administrations of both countries to deal with the diplomatic frictions such as territorial and historical issues to avoid future adverse effects on their economies and cultures.

Korean and Japanese companies are building a relationship of co-existence and co-prosperity through their cooperative relationship

Korean and Japanese companies are maintaining a close mutual cooperative relationship while at the same time fiercely competing in the global market.

There has been a strong tendency in the Japanese media recently to report the poor business performance of Japanese manufacturers, such as Sharp Corporation and Panasonic Corporation, in the areas of semiconductors and flat-panel liquid crystal display (LCD) television sets, compared with the strong performance of Korean companies, such as Samsung Electronics. This kind of reporting makes it easy for the Japanese people to focus solely on the fact that companies in these two countries are in an intensely competitive relationship.

However, a considerable part of the success of Samsung Electronics and other Korean companies can be attributed to their cooperation with Japanese companies in the areas of materials, components, machinery, and equipment. When the business performance of Korean companies is strong, their business partners—Japanese companies—also reap large profits.

In other words, when Korean electronics makers manufacture advanced products such as mobile phones and LCDs, they rely largely on the machinery, equipment, materials, and components produced by Japanese companies.

In 2010, Korea recorded a $24.3 billion trade deficit with Japan in components and materials alone (Note 1). While Korea holds a 4.6% global market share in the area of components and materials (2009), Japan has a much larger share at 8.2%. Also, Korea's trade specialization index with Japan was -0.50 (2009) in this area, showing that it specializes in imports. In the case of materials in particular, its trade specialization index was -0.59, much higher than in components at -0.41 (Note 2).

In other words, Korea is still less competitive with Japan in the area of components and materials despite its significant achievements in certain respects (Note 3).

In addition to imports from Japan, Korean companies also obtain a considerable amount of equipment, materials, and components from the local Japanese companies that have entered Korea, although this is not distinctly reflected in trade statistics.

Since the Great East Japan Earthquake, Japanese companies have been actively building or expanding their local production bases in Korea to overcome the so-called sextuple whammy and respond quickly to the needs of large Korean customers. According to Korea's Ministry of Knowledge Economy, Japan's investment in Korea has increased sharply, from $2.29 billion in 2011 to $4.54 billion in 2012 (Note 4).

The Japan External Trade Organization (JETRO) has also indicated that the operating income of the local subsidiaries of the Japanese companies that have entered Korea is much larger than that of those that have moved into other countries and regions (Note 5).

In short, a win-win relationship has been established in which Korean companies have grown markedly through cooperation with Japanese companies, while the latter has also been able to grow by absorbing the dynamism of the former.

Issues in the sustainable expansion and development of cooperation between the two countries

If Korean and Japanese companies, which share the values of a market economy and a liberal democracy, continue to expand their close alliance and take advantage of their mutual core competencies while fiercely competing with each other, they will be able to contribute significantly not only to their two countries, but also to East Asia and, in turn, the global economy.

To that end, an optimal procurement system for components and materials first needs to be established, taking advantage of the lessons learned from the Great East Japan Earthquake. The Japanese government and Japanese companies have been working hard to rebuild their supply chains after the disaster. This is also a very important issue for Korean companies that have a close cooperative relationship with Japanese companies, from the standpoint of being able to continue to procure components, materials, and equipment. For both countries to establish such system by spreading out their risks, a good approach may be to create a foundation for promoting an alliance by cultivating and reinforcing support industries in Korea. Japanese companies should not only increase their investment in Korea as in the past, but also Korean companies need to invest actively in Japanese companies. Given Korea's policy of encouraging overseas investment, the Japanese national and local governments require stronger efforts and support policies to create an environment that increases Korean companies' investments in Japan.

Second, the two countries should actively take steps to promote mutual cooperation while competing with each other, given that they share many areas in common as both are interested in fostering new growth industries. In particular, cooperation in the areas of energy and the environment has great potential.

Third, the unification of standards for components and materials and the sharing of components need to be encouraged. A strategic alliance with Korean companies and the expansion of cooperation in the area of standardization will have a big effect on overcoming the so-called "Galapagos syndrome" for Japan, as well as for Korea.

Fourth, efforts should be made to unify trade and industrial codes between Korea and Japan—or between three countries, including China—as a system for expanding cooperation. If the classification of components and materials is unified as well, this will become a useful tool in the various future negotiations and cooperation.

In conclusion, I would like to reemphasize the importance of creating a sustainable cooperative environment between Korea and Japan by separating politics and economics.

January 15, 2013
  1. ^ On the other hand, Korea recorded a $45.9 billion trade surplus with China.
  2. ^ Calculated based on the formula: (Exports - Imports) / (Exports + Imports).
  3. ^ Please refer to Mok Sakong, Moon-Hyung Lee, Hyun-Soo Shin, and Chul Cho, "The Change of Specialization Structure in Component and Material Industries among Korea, China, and Japan and the Suggestions for Korean Policy Issues," Korea Institute for Economics and Technology (KIET), December 2011 (in Korean) and Mok Sakong, "Competition and Complementarity in Component and Material Industries between Korea, China and Japan," IER vol. 17, no. 2, KIET, March/April 2012, pp. 15-30.
  4. ^ Ministry of Knowledge Economy, "Record of Foreign Direct Investment (FDI) in 2012 Largest Ever," press release, January 4, 2013.
  5. ^ JETRO, "Survey of Japanese-Affiliated Companies in Asia and Oceania (FY 2012 Survey)," December 2012: The percentage of local Japanese firms in Korea that expected a profit in 2012 was 75%, that expecting breakeven was 14.6%, and that expecting a loss was 10.4%. The percentage expecting a profit was the second largest in Korea, after Taiwan, among major industrialized nations.

January 15, 2013

Article(s) by this author