Perspectives from Around the World 062

A Reflection on the Future of Industry in East Asia

DoHoon KIM
President, Korea Institute for Industrial Economics and Trade

East Asia, which is represented here mainly by three countries, namely, Japan, China, and South Korea, is well known for its industrial strength. When we look at the major manufacturing industries, we can easily find East Asia's dominance in the world market. The dominant industry list is long enough: shipbuilding, steel, and automobiles among the conventional manufacturing industries, and also semiconductors, liquid crystal display (LCD) panels, computers, and mobile phones among IT related industries.

East Asia's industrial dominance in the world market has been persistent for several decades, even though the positions of individual countries in each industry have been evolving. Japan led the industrial prowess of this region in the world market up until the 1990s. South Korea then followed Japan's path and took over the leading position in a few industries during the 2000s. Finally, China has taken the leading position in many of these industries except for a few areas such as automobiles and semiconductors (by shares in the world market even though China's production level has already reached the top). This dominant position of East Asia has caused envy from other parts of the world, which has resulted in the three countries often receiving commercial pressures, most notably from advanced economies such as the United States and the European Union. Many developing countries also have expressed their concerns occasionally about East Asia's dominance in industries while trying to benchmark the history of industrial development of the three countries.

However, industries in East Asia seem to be faced with strong new headwinds these days. The harshest one came from the sluggish world economic recovery. The three countries have been seeing their industrial exports plummeting since 2015. Declining exports are largely due to the sluggish world economy, especially declining demand from the major advanced countries. In addition, many new emerging markets which started to face damage from the brutal price plunge of oil and other primary products also had to reduce their own demand for industrial products of East Asia. As most of the above-listed industries in this region heavily depend upon external demand from the world market for growing scale and efficiency, worldwide collapsing demand is putting the sustainable development of these industries in this region into a serious quandary. Of course, inherent overcapacity in many industries, which is partly due to past competitive expansionary strategies among the three countries, has played another aggravating role in this evolution. This has forced major industries in East Asia to embark on an unprecedented structural adjustment process.

Japan once again took the leading role in this. During the previous decade in which many industries in Japan suffered from a declining competitive edge against their counterparts in South Korea and China, the Japanese government applied an active industrial adjustment policy under the name of industry revitalization, and Japanese firms started to change their business structure from manufacturing activities toward new businesses linked with services and other soft activities. On this aspect, it appears that South Korea and China are forced to embark on structural adjustment at a similar time, although a bit belatedly. The Xi Jinping government put forward a new concept, "xinchangtai (new normal)," in order to persuade companies to embark on strong streamlining or restructuring. The Korean government, benchmarking Japan's policy, has recently introduced a law to facilitate the industrial restructuring efforts of private enterprises under the name of corporate revitalization.

With pressures for industrial restructuring at the domestic level, industries seem to have two options: the first option is going abroad to continue to preserve their industrial dominance by keeping the control at least at the management level and/or at the technological level. In previous decades, China was regarded as an ideal destination country for overseas investment by many Japanese and South Korean industries. These days, many Chinese companies are also forced to go abroad to other developing countries. This movement seems to intensify the rising industrial power of newly industrializing giants in neighboring regions such as India, Indonesia, and Vietnam, as they are receiving more industrial activities from the three East Asian countries as well as Western advanced countries. Moreover, another unexpected result appears to have been induced, namely, the risk of shortening technological catch-up of these new giants.

Thus, the second option is being seriously considered. So-called new industrial innovation, a similar type of German Industrie 4.0, is being opted for in many manufacturing industries under the concept of "manufacturing innovation 3.0" in South Korea and "new manufacturing development program 2025" in China. Industrial enterprises have been strongly advised to introduce new IT-related technologies such as Internet of Things (IoT), big data, and 3D printing and robotics in their domestic production facilities. And by doing so, they hope to raise their competitiveness up to the maximum level. However, not only for Japanese companies, but also their counterparts in South Korea and China, there seems to be a struggle as it is a difficult task for most small and medium-sized enterprises (SMEs) to adopt those technologies because of a lack of financial and personnel resources, putting aside large companies which have already adopted this kind of efficiency-improving innovative technologies to a certain extent. Moreover, it is not easy either to find the right assisting partners when trying to apply this new industrial innovation.

As the future of its once mighty manufacturing sectors is under serious threat, East Asia might have to look for other sources of new industrial growth engines. In fact, under different callings and for several decades now, the three countries have been trying to develop new promising industries: next-generation growth engines, future technologies, future promising sectors, new strategic emerging industries, etc.

When looking over the list of selected future promising sectors and/or industries in these countries, we can find that they are rather closely linked with their existing major manufacturing industries and/or with technology development. It does not seem strange that the three countries have been focusing on these supply side aspects. In fact, led by Japanese companies which have applied the incremental innovation approach under the concept of kaizen, companies and governments in East Asia have been putting tremendous effort, especially in terms of research and development (R&D) expenditure, in order to improve the quality of products and services in their existing industries and to upgrade their production processes. Through these efforts, companies have successfully attained unmatched competitiveness and maximum market shares in the world market in most of the major industries. Being confident with their previous success, the three countries seem to continue to pursue similar strategies for new industries.

However, the daily news put forward different sets of newly emerging industries, especially in Silicon Valley and Bio-Clusters in the United States. Even though they are also rooted principally in IT technologies and bio-technologies, they seem to be rather focused on demand side aspects, and therefore emphasizing the convergence between manufacturing industries and services and/or socio-cultural elements. As such, starting from portal search engines, social network services (SNS) networks, and mobile smart phones, newly emerging industries seem to be enlarging their boundary toward the fin-tech businesses, shared economy, wearable devices, and new health care businesses. These new businesses very often tend to disrupt the existing industrial order which major industries have developed and provide a huge impact on competitiveness of existing industries. The problem is that these disruptive new businesses seem to prefer Silicon Valley and Bio-Clusters as their birthplace over East Asia.

These disruptive new businesses are said to be demanding a so-called first mover spirit (creative spirit) rather than the fast follower strategy. Accordingly, they very often require new ideas and new talents outside of established successful companies in which managing talents are more necessary than creative talents. Of course, for these new creative ideas to realize the necessary R&D and reach commercialization, the experiences of existing companies are absolutely required in addition to financial and technical assistance provided by angels, venture capitals, and accelerators. It seems that these assisting groups are plenty and very active in Silicon Valley, which is different from that in the three East Asian countries. On top of that, successful Silicon Valley companies such as Apple Inc., Google Inc., and Facebook, Inc. seem to be more open to collaborate with new start-ups and are keener to purchase newly emerging businesses than established successful East Asian large companies. A more serious consequence of this situation is that, being attracted to the business environment of Silicon Valley which is more favorable to newly emerging businesses, promising start-ups around the world including even those in East Asia seem to prefer to go directly to Silicon Valley when they want to grow their businesses.

Curiously enough, China, which has been the slowest among the three countries in developing major manufacturing industries, seems to be advanced compared to Japan and South Korea in establishing industrial ecosystems similar to Silicon Valley as seen in Zhongguancun in Beijing and Huaqiangbei in Shenzhen, even though no real disruptive businesses at the worldwide level have appeared aside from the notable Alibaba.

Having reflected upon the future of industries in East Asia, I have two major concerns.

The first is about job creation in industries. As existing industries are under pressure to shed domestic jobs, either by going abroad or applying new industrial innovation which is fundamentally based upon further job saving technologies, will East Asia suffer from an unemployment problem similar to the situation in Europe?

The other is about industrial strategy for developing newly emerging industries. Can East Asia provide an industrial ecosystem similar to that of Silicon Valley or apply the fast follower strategy again to catch up to Silicon Valley in new industries once they become fully established as what was done for conventional manufacturing industries?

February 22, 2016

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