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[Materials & Parts] Status and Outlook of Korea’s Machinery Parts Industry

Korea’s parts industry includes general machinery parts, computer and office equipment parts, electric machinery parts, electronic parts (electronics, video, sound and communication device parts), precision equipment parts and transportation machinery parts. The material’s industry includes textile products, compound and chemical products, rubber and plastic products, non-metallic minerals, primary metals and fabricated metal products. The parts industry is growing more competitive as the innovation capacity of electronics and automotive parts becomes stronger. However, the competitiveness of the materials industry, excluding rubber product businesses, is failing to grow due to the lack of corporate investment in R&D. In particular, the steel industry, while experiencing moderate profitability despite China’s oversupply, is seeing its rate of sales against R&D investment fall, and this is an issue that needs to be improved.

Signs of Recovery for the Parts and Materials Industry

Korea’s parts and materials industry maintained an upward trend until 2011, but has since shown signs of fluctuation. Korea’s parts and materials output, after peaking at USD 659 trillion in 2014, went down for two consecutive years. Domestic demand reached KRW 551.4 trillion (USD 513 billion) in 2013, but fell to KRW 523.3 trillion by 2016. During the first nine months of 2017, parts and materials output increased by 0.65 percent from the same period the previous year. By item, non-metallic minerals, fabricated metal products, general machinery parts, computer and office equipment parts and transportation machinery parts saw a decrease in output, while the production of other items increased.

Parts and materials exports, after reaching USD 275.9 billion in 2014, fell for two consecutive years, and recorded USD 251.9 billion in 2016, while imports also declined for two years in a row to USD 152.6 billion in 2016, after recording USD 168.2 billion in 2014. From January to September 2017, parts and materials exports amounted to USD 208.9 billion, a 12.5 percent increase from the same period in 2016, while imports grew by 11.1 percent year-on-year to USD 125.4 billion. As such, the trade surplus reached USD 83.5 billion, a 107.6 percent rise from the same period the previous year. Parts and materials imports during the first nine months of 2017 accounted for about 48.6 percent of the total export volume of USD 430.2 billion, while the trade surplus for parts and materials equaled 110.9 percent of the country’s total trade surplus of USD 75.3 billion. In particular, in the third quarter of 2017, exports reached USD 74.7 billion as the trade surplus amounted to USD 30.6 billion, setting the highest quarterly figures in history for export volume and trade surplus.

By destination, as exports to China and the U.S. decreased, and those to ASEAN and E.U. countries increased, Korea has been lowering its concentration in a small number of countries. Exports to China as a proportion of Korea’s total exports decreased from 35.3 percent in 2015, to 32.8 percent in 2016, and reached 30.4 percent by September 2017. During the same period, exports to the U.S. rose from 10.2 percent to 10.6 percent and then dropped to 10.3 percent. In contrast, the figures for ASEAN countries kept rising from 14.4 percent to 16.5 percent and finally to 18 percent. As a result, the export concentration has continuously declined from 0.387 in 2015 to 0.371 in 2016, and to 0.353 in 2017.

Parts and Materials Trade Trends

(Unit: USD 100 million)

2016 2017
Total Jan. - Sep. Jan. - Sep.
Exports All industries 4,954 3,631 4,302
Parts 1,771 1,302 1,455
Materials 747 554 634
Imports All industries 4,062 2,956 3,549
Parts 985 731 793
Materials 540 398 462
Trade balance All industries 892 675 753
Parts 786 572 662
Materials 206 155 173
Source: Ministry of Trade, Industry and Energy, “Parts and Materials Industry Trends”

Machinery Parts Export Trends

(Unit: USD 100 million)

Transportation machinery Electric machinery General machinery Precision equipment
Jan.-Sep. 2017 199 143 189 48
Jan.-Sep. 2016 208 186 174 41
Growth volume -9.6 -42.9 15.5 6.6
Rate of growth -4.6%9 -23.1% 8.9% 15.8%
Source: Ministry of Trade, Industry and Energy, “Parts and Materials Industry Trends”

The reason parts and materials exports surged in 2017 was the increase in both output and unit prices. Of the 12.5 percent rate of growth for exports during the first three quarters of 2017, unit prices accounted for 10.2 percentage points, while output volume contributed 2.3 percentage points. By item, despite the downturn in exports of several items, such as machinery and electric machinery parts, the majority of items including electronics parts and chemical products did well as actual exports took a favorable turn. For chemical products, the rise in exports was led by export unit prices, which were driven up by rising international oil prices, as well as by the greater output capacity at production facilities newly built and expanded across the country. For electronic parts, exports to all of the major destinations increased due to the rise in demand for semiconductors for servers and mobile devices, and the rise in unit prices for memory chips. However, auto parts exports continued to decline.

Growth Rate of Major Parts and Materials Sectors

Sales Amount Total Assets Tangible Assets
2014 2015 2016 2014 2015 2016 2014 2015 2016
Textiles -0.55 0.18 0.28 5.83 6.03 4.94 -2.59 5.51 14.98
Synthetic rubbers and plastic substances -2.17 -11.14 -0.27 4.19 6.32 9.78 5.36 4.79 1.41
Rubber products -4.06 -4.55 -1.60 7.06 6.87 2.65 7.39 4.80 1.66
Plastic products 4.26 -2.34 5.26 9.02 2.18 8.26 9.31 3.52 7.70
Non-metallic mineral products -3.13 6.19 5.47 -4.29 7.52 6.58 0.53 6.09 2.70
Primary steel -3.95 -12.79 -3.74 -2.33 -3.69 0.74 -3.48 0.04 -0.82
Primary non-ferrous metals -2.37 -4.24 2.10 6.18 -1.71 4.16 8.43 4.23 -1.41
Semiconductors and electronic parts -6.33 0.97 -2.44 6.71 3.33 6.48 1.51 2.04 5.72
Vehicle bodies, trailers and parts 4.47 5.01 4.18 8.48 8.50 7.61 9.87 13.94 6.81
Source: Bank of Korea, 2017 Corporate Management Analysis

Rise in Sales and Rate of Return

According to an analysis of the major parts and materials industries by the Bank of Korea, textiles, plastic products, non-metallic minerals, primary non-ferrous metals, vehicle bodies, trailers and parts industries saw an increase in sales, but in contrast, the sales of synthetic rubbers and plastic substances, rubber products, primary steel, and semiconductors and electronic parts decreased. While these industries all saw their total assets go up, the tangible assets of primary steel and primary non-ferrous metals industries declined. Meanwhile, the Korea Auto Industries Coop. Association (KAICA) found that auto parts sales rose by 3.7 percent in 2015 and by 0.8 percent in 2016.

In 2016, parts and materials industries experienced a rise in profitability, except for semiconductors and electronic parts, and vehicle bodies, trailers and parts industries. Cost saving efforts also continued in the parts and materials industries.

FDI Slows Down

The total reported amount of Korea’s inbound foreign direct investment (FDI) reached a record high of USD 22.94 billion in 2017. The reported number of FDI in the parts and materials industry as a share of all inbound FDI declined from 76.1 percent in 2010 to 66.0 percent in 2015, but rebounded to 67.8 percent in the first half of 2017. By sector, electric and electronics had the highest aggregate number of foreign-invested companies, followed by machinery/equipment, chemical engineering, transportation machinery and metals. The total reported amount of FDI in the parts and materials industry as a share of all inbound FDI went down from 79.4 percent in 2010 to 48.4 percent in the first half of 2017.

In 2016, the chemical engineering sector topped the list of reported inbound FDI, followed by electric vehicles, transportation machinery and machinery/equipment sectors. By the first half of 2017, this order changed, with chemical engineering still at the top, but followed by transportation machinery, electric vehicles and machinery/equipment sectors, in that order. This is in contrast to the breakdown of green field investments in global parts and materials industries in 2016, where the list is topped by automotive and transportation equipment, chemical substances and chemical products, textiles, metals and metal products, rubber and plastic products and machinery/equipment.

No. of Inbound FDI Cases in the Parts and Materials Industry

(Unit: no. of cases)

Source: Ministry of Trade, Industry and Energy, “Foreign Investment Statistics”

Total Value of Inbound FDI in the Parts and Materials Industry

(Unit: USD million)

Source: Ministry of Trade, Industry and Energy, “Foreign Investment Statistics”

The Need to Strengthen Innovation Capacity

In Korea, the parts and materials industry’s investment in R&D as a percentage of sales is lower than that of advanced countries. Moreover, the R&D intensity of most parts industry sectors is declining, and in need of improvement. Such anemic investment caused the number of Korean companies listed as the top 2,500 global companies investing in R&D to go down from 80 in 2014 to 70 in 2016. Considering how Chinese parts and materials companies are expanding their investments in R&D and moving up in global ranking, Korean parts and material companies also need to expand in investment in R&D.

In particular, with the demand for parts and materials expected to be led by ICT and auto parts sectors, there needs to be greater efforts to reinforce the innovation capacity of these two fields, as they are the two pillars of the Korean manufacturing industry. If not, it is highly likely that Korea’s parts and materials industry will be stuck between advanced countries and China like a nut in a nutcracker.

HangKoo Lee
Korea Institute for Industrial Economics and Trade Senior Research Fellow / hklee@kiet.re.kr

The above article does not necessarily reflect the views or position of KOTRA.

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