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Industry 4.0 technologies, a strategy for the post-pandemic economy
In a broad sense, the machinery industry normally encompasses the subsector of the following industries: metal processing, general purpose machinery manufacturing, precision machining and transport equipment manufacturing, but the term can be narrowly referred to as the business producing general purpose machinery. The machinery industry in this report mainly describes the limited definition of the industry category.
Representing 8.8 percent of the overall domestic value added in gross exports, mechanical products manufactured in Korea have constituted the second largest share of exports following semiconductors for four consecutive years. Although China is securing price and technology competitiveness through rolling, experts still analyze that there is 3-5 year technology gap for each specific industry.
Given the fact that the industry underlies the manufacturing business, being a core part of the key industries that are vital to the success of product quality, added value, output and even employment in an economy, constant efforts to keep the industry ahead of the competition are required.
<Chart 1> Trends of Global Trade in Machinery Industry
<Chart 2> Quarterly Operating Ratio of Key Industries
The latest data shows that the accumulative value of exports until July this year fell 7.8 percent in the same period last year. However, Machinery industry exports are consistently higher than imports (Chart 1)
The operating ratio, which shows the efficiency of a company's management by comparing the total operating expense of a company to net sales (Chart 2), Shipbuilding (↑17.1%) continued to increase from 4Q of 2018. Exports and production declined in the first half of this year due to the strengthened protectionism of advanced countries starting with COVID-19 and the global economic and industrial stagnation, but it is expected that the vitality and competitiveness of the industry will recover along with the improvement of external conditions.
<Chart 3> Manufacturing PMI of Major Economies
<Chart 4> Total Order Value of Mechanical Products (Private Demand)
Under the circumstances where a stagnant global economy with sluggish growth fuels greater uncertainty, the industry facing a looming challenge to its export competitiveness and entrepreneurial vigor, looks fragile. Surely, the industry prospects are disappointing, but there’s reason for optimism. According to an index assessing the state of economic activity and output, such as pricing power or inflationary pressures on a business, called “Purchasing Managers' Index” (PMI), China’s official manufacturing PMI bounced back after reaching its lowest point in February. And the pattern was soon followed months later by the rest of the world’s major economies that have shown a sharp V-shaped bounce back to near pre-COVID-19 levels (PMI above 50) in July, bottoming out an all-time low in April. (Chart 3)
Since a PMI reading above 50 represents an expansion, the world’s three largest economies—China, the U.S. and the EU—are highly likely to get back on the track, seen before the outbreak of COVID-19. Research data which stands for the total value of machinery on order, a leading indicator that tells the prevailing direction of trends in equipment and facility investment across the nation (Chart 4), also showed a rebound off since June this year from a downward move both in April and May in the same period a year earlier. The state of the machinery industry is far from ideal, but seems pretty positive with the aforementioned figures which show signs of recovery.
Still, there are many sources that push the industry into full of uncertainty: COVID-19, Japan’s trade restrictions on Korea, intensifying risks of China-U.S. trade conflicts, etc. But, now is the perfect time to turn today’s crisis into opportunity. Winning the global high-tech race would help the industry successfully overcome the current challenge and go a step further to take the leadership role. In the age of coronavirus where contact-free engagement or risk assessment and mitigation efforts have become the new normal, the machinery industry needs to build its technological prowess, giving more focus on AI-PHM, medical-diagnostic equipment, human-robot interaction technology and smart factory.
Plus, it’s necessary to take a strategic approach to the post COVID-19 economy and remain vigilant against large economies’ protectionist trade policies by forming publicly accessible production platforms, which enable the supply of strategic goods nationwide as early as possible in a state of emergency like an embargo or a breakdown of logistics networks.
By Kim Heetae
Korea Institute of Machinery and Materials (KIMM)
< The opinions expressed in this article are the author’s own and do not reflect the views of KOTRA. >