China competition pressures South Korea’s manufacturers

South Korea’s exports have been breaking records daily. The surge has been led by semiconductors, which are experiencing a supercycle. Last month, semiconductors accounted for 26.4% of total exports, representing more than a quarter of the country’s export contribution.

A decade ago, at the same time, semiconductors accounted for just 11.5%, highlighting their remarkable growth. While the strong performance of semiconductors is welcome amid difficult economic conditions, the export news is not entirely positive. The weak performance of core manufacturing companies is being overshadowed by record export figures. Overall exports have increased, but shipments of certain items, including automobiles, auto parts, and steel, have fallen 10 to 20% compared with a year earlier.

The manufacturing crisis is not limited to sectors such as petrochemicals and steel, where restructuring intensified in the second half of this year. The auto parts industry, which saw exports drop 18.9% this month compared with a year earlier, is quietly deteriorating. A representative of a domestic auto parts manufacturer said many suppliers are going out of business under pressure from low-cost Chinese imports. Increasingly, companies are using cheaper Chinese parts instead of domestic components to produce vehicles. While cars may carry Korean brands, many contain Chinese-made parts, quietly spreading what some describe as “hollow Made in Korea.” This trend has forced South Korean parts makers to reduce production in the face of low-cost Chinese competition.

It is regrettable that the government and small and medium-sized enterprises did not respond more quickly to the surge in low-cost Chinese imports. Continuous efforts to improve the cost competitiveness of domestic SME products were needed. U.S. tariff measures have exposed the consequences of failing to diversify export markets. Although some analysts say recent declines in exports to the United States have been offset by sales in Southeast Asia and Europe, doubts remain about the sustainability of these gains. Industry insiders caution that companies have only temporarily patched gaps in U.S. exports as a stopgap measure.

The decline of manufacturing companies, which form the backbone of South Korea’s economy, signals a looming employment shortfall. Factories that cannot secure orders against Chinese competition are closing or reducing workdays. The threat is heightened by the rise of artificial intelligence, which has already contributed to jobless growth in the United States, adding further pressure on a manufacturing sector that has traditionally created jobs.

If manufacturing collapses, regional economies are also at risk. In provinces where production bases are concentrated, small and medium-sized enterprises face cash shortages, causing delinquency rates to rise sharply. In the third quarter, the default rate at five major regional banks was more than double that of the four largest commercial banks. Many companies cannot even pay interest on loans, let alone invest in new projects. Reduced cash flow and employment in these regions could accelerate population outflows, worsening local economic conditions in a vicious cycle.

To revive core manufacturing companies, South Korea must develop technological capabilities that go beyond low-cost competitiveness. Many experts emphasize the urgent need for government R&D funding to support SME technology development. The government also needs to review and address disadvantages faced by domestic companies due to U.S. and Chinese protectionist policies. Without these measures, South Korea risks becoming merely an assembly hub for Chinese parts, with little to offer beyond semiconductors. The collapse of the manufacturing ecosystem could even jeopardize the future of the semiconductor industry itself.