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2019.04.03
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[Machinery] Status and Outlook of Korea’s Machinery Industry

The machinery industry includes metal products, precision machinery, electrical machinery, transport machinery and general machinery in a wide sense, but typically refers to the general machinery industry (KSIC: 29, Other machine and equipment manufacturing industry) that manufactures machines or infrastructure. Currently, 418,000 people work for about 48,000 companies, and the industry has been ranked second-only next to the semiconductor industry-in terms of export volume in the past four consecutive years. The machinery industry can be defined in many ways, in a narrow or wide sense, but this report will define the industries as those belonging to MIT standard 71 (basic industrial machinery), 72 (industrial machinery), 75 (machine element tools and mold), 79 (other machines), 732 (semiconductor manufacturing equipment), and 736 (flat-panel display manufacturing equipment).


<Picture 1> Trends of Production, Exports, Imports of Korea’s Machinery Industry and 2019 Forecast


Source: Quotation from KITA (MTI 71, 72, 75, 79, 732, 736), KOSTAT, The production amount was estimated based on businesses with five or more workers


In 2018, the machinery industry’s production was KRW 107.3 trillion, 2.1 percent increase year-on-year, while its exports recorded USD 60.7 billion, an 8.0 percent rise year-on-year. Production dropped in 2016, but has rebounded since, due to the economic recovery of advanced countries and China’s booming construction industry. The machinery industry’s exports in 2018 saw a year-on-year increase in all areas including semiconductor and display equipment during the period until November. Specifically, semiconductor equipment grew at 31.0 percent, display equipment 18.3 percent, other machines 11.1 percent, and industrial machinery 13.5 percent. When it comes to imports, display equipment witnessed the sharpest drop of -76.4 percent, while basic industrial machinery and other machines also experienced a decline, recording USD 52.3 billion, a 0.5 percent decrease from the previous year. .

By country, an increase in both exports to and imports from Germany and China was evident. However, exports rose to but imports declined from the United States, Japan, and Europe (excluding Germany).


<Table 1> Exports and Imports of Machine Industry in 2018 by Region

(unit: USD 1 M)

Exports and Imports of Machine Industry in 2018 by Region
Exports Imports
2017 2018 YoY
Increase(%)
2017 2018 YoY
Increase(%)
2017 2018 2017 2018
China 14,708 19,655 13.9 33.6 6,147 6,775 12.7 10.2
U.S. 8,253 9,522 14.7 15.4 9,910 8,703 168.1 -12.2
Japan 3,502 3,684 10.7 5.2 15,369 13,797 39.3 -10.2
Germany 957 1,118 8.2 16.7 4,395 4,157 18.5 -5.4
Middle East 3,360 2,609 -15.5 -22.4 386 466 52.9 20.4
Europe* 6,967 8,234 12.9 18.2 9,542 10,092 26.6 5.8
Central and South America 2,694 2,672 -3.5 -0.8 160 168 32.4 4.9
ASEAN 32,695 37,512 378.8 14.7 27,893 25,534 1,275.4 -8.5
Total 56,257 63,062 28.1 12.1 52,555 49,357 55.3 -6.1

* Excluding Germany,
* Source: KITA statistics


Regarding domestic demand for the machinery industry in 2018, it was on the upward trend throughout the year for the ICT industry driven by the booming semiconductor industry. However, general machinery, basic metals and automobiles hit the hiatus in the second quarter and declined since then. With regard to the operating ratio index of upstream industries, the shipbuilding industry hit the bottom in the first quarter of 2018 and bounced back, while general machinery, basic metals, and automobiles generally displayed the similar trends with the operating ratio index of the manufacturing industry.

The current status of machinery industries can be summarized into: machine tools=stable; plants=recession; construction machinery=boom; semiconductor equipment=boom; and display equipment=stable. In the case of machine tools, the amount of orders received (KRW 2.5 trillion) up to October rose 4.2 percent on-year as domestic demand decreased (-17.7%), but exports sharply increased (30.7 %). Meanwhile, plants saw a 7.7 percent decrease on-year, discontinuing the growth trends during 2017 (50.3%). Construction machinery witnessed a huge increase of exports until the third quarter, a 15.4 percent jump from the previous year, continuing the export-led growth momentum. The exports of semiconductor equipment to China reached KRW 1.3 trillion, recording the highest since 2013, on the back of the semiconductor exports boom. Exports of display equipment turned into the red, due to reduction in investment to control LCD supplies. In particular, its reliance on China (84%) has deepened since 2018, after seeing a brief detour to Vietnam (35 percent, China: 52%). The equipment investment index has been on the downward trend since the second quarter of 2017, even seeing a negative growth rate year-on-year in the second and third quarter of 2018.

Since an increase in shipments outpaced an increase in inventory in March 2018, it has fluctuated between slowdown/decline and recovery/growth trends. After pulling out of recovery/growth trends in July 2017, it has been repeating slight slowdown and recovery. The amount of machinery orders received hit the highest level in March 2018, and has been on a gradual declining trend.

The machinery industry in 2019 is expected to experience a growth momentum in the first half of the year due to solid exports led by upstream industries, largely attributable to booming advanced economies, but then enter into the stagnation phase in the second half of the year. With increasing trade uncertainties due to NAFTA renegotiations, U.S.-China trade disputes, and expansion of U.S. trade protectionism, a fall in exports to China is expected. As a result, the production of the machinery industry is projected to record about a 1 percent growth rate at around KRW 108 trillion. An important variable will be whether the machinery orders, on a gradual decline, will recover.

The 2019 forecast for machinery industries can be summarized into: machine tool=stable; plant=stable; construction machinery=stable/boom; semiconductor equipment=stable; and display equipment=recession.

In case of machine tools, it is expected to continue growth trend driven by booming economy of major countries, but the growth momentum is likely to become weaker due to the unstable economies of emerging countries. The performance of plants is forecast to improve to some extent driven by the recovery trend of onshore plants and determination of orders carried over from the previous year, but a prolonged drop in oil prices still pose a threat. The construction machinery is expected to grow, led by exports originating from the U.S.’s infrastructure replacement and increasing infrastructure investment by China and India. However, construction orders received domestically is projected to decline 6.2 percent year-on-year. Meanwhile, semiconductor equipment is going to see only a slight increase in demand for backend process equipment, due to reduction in investment by semiconductor companies, but its market will eventually expand from 2020. Display equipment is expected to have a growth period (QD-OLED, foldable) in the first half of the year, but total investment in equipment is forecast to drop constantly until 2021.


Conclusion


In 2018, production in the machinery industry recorded KRW 107.3 trillion, a 2.1 percent increase, while exports recorded USD 60.7 billion, an 8.0 percent increase, and imports recorded USD 52.3 billion, a 0.5 percent drop. In terms of production and exports, the growth margin fell short of that of the previous year (production 6.5 percent, exports 14.6%). However, the growth momentum was maintained throughout the year, with exports hitting the record. In 2019, the machinery industry is expected to experience slowing growth due to a slowdown of the global economy, the U.S.’s tighter economic sanctions on Iran, expanding geopolitical risks, and prolonging trade disputes between the U.S. and China. China’s improving competitiveness in general machinery and the resulting intensification of competition in the Chinese market are projected to have a negative impact on exports to China. Also, it is necessary to actively pursue emerging markets such as India and Vietnam, while responding to competitors who eye the domestic and export orders based on their price competitiveness. Automobiles, shipbuilding and other industries based on domestic demand are expected to stagnate in the first half of the year. A sluggish construction market is also a major factor contributing to underperforming domestic demand. As there is concern over stagnation of the domestic market in the general machinery industry overall, including construction machinery and machine tools, the key this year will be whether exports can play a role in overcoming such stagnation.


By Kim, Hee-tae, Ph.D
Senior Researcher
Department of R&D Strategy
Korea Institute of Machinery and Materials (KIMM)
htya91@kimm.re.kr


< *The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA >
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