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Tension In Korea: Manufacturing Becomes A Pawn In a Dangerous Game

Posted By Paul Tate, April 09, 2013 at 5:48 AM, in Category: Global Value Networks

At the end of March it was all going so well. South Korea’s manufacturing sector was showing renewed growth with a Purchasing Managers’ Index (PMI) rising at its fastest rate for a year and new export orders up to the highest level for two years.

Then things got complicated. Very complicated. The missile-ready North Korean regime, under its young new leader Kim Jong-un, began a series of highly provocative announcements threatening the peninsula’s stability. These were, and are still, aimed predominantly at the U.S., South Korea and Japan, but they have put the whole world on edge – from Washington to Moscow, and from the U.N. to Beijing. Global tension continues to rise on an almost daily basis.

South Korean manufacturers are familiar with such occasional northern disruptions, it seems. As one Seoul-based senior manufacturing executive recently confided: “In Korea, whenever the North acts up, most people don’t even bother and it’s business as usual.”

But not everyone is so relaxed. America’s largest car maker General Motors, which has four car manufacturing plants and one transmission factory in the country, warned late last week that it may consider moving its operations out of Korea in the longer term as part of its global contingency plans if the tension with the North continues.

There’s certainly a lot at stake for South Koreans – and potentially for global manufacturing. The country is the world’s seventh largest manufacturing location with an annual value of $276 billion. This accounts for 27% of South Korea’s GDP – a manufacturing contribution that is second only to China amongst the world’s industrial nations.

South Korea is also home to some of the world’s leading manufacturing enterprises, including major electronics groups Samsung and LG; Kia Motors; diversified industrial giant Hyundai; the world’s fourth largest steel maker POSCO: SK Hynix, the world’s second largest memory chip maker; and a host of engineering and electronics parts producers. Korea’s manufacturing exports touch almost every country in the world and are essential to many global manufacturing supply chains.

Any serious disruption to the South Korean manufacturing economy could have significant global implications.

What’s more, a jointly run North/South industrial zone located on the northern side of the fortified Korean border and full of small manufacturers has unexpectedly become a high-profile pawn in this politically unsettling game.

Last week the North’s communist government banned the entry of new workers and supply trucks to the Kaesong Industrial Complex, a shared manufacturing zone that houses 123 manufacturing firms, employs 53,000 low-cost North Korean workers, and generates revenues of around $470 million a year. The consequent lack of materials and parts swiftly halted production at many of the Kaesong-based companies.

Then today, the North Korean government withdrew all its workers and suspended operations at the Complex, saying it is now considering closing the facility entirely. The fate of the 400 South Korean managers still in the zone remains uncertain.

Such moves do not bode well for the future of North/South industrial relations in the shorter term, nor potentially for the future of the South Korean manufacturing community in the longer term.

In a world where leading companies are increasingly risk-aware when planning their global sourcing, partnering and supply chain networks, any continuing political uncertainty in the region will make planners think twice about choosing South Korea as a key location.

However the political situation with North Korea develops over the next days and months, it may take some time before the South Korean manufacturing industry – through no fault of its own – can properly regain international confidence.

What’s your view? Has your company’s assessment of South Korean risk changed as a result of the current political tension?

Written by Paul Tate

Paul Tate is Research Director and Executive Editor with Frost & Sullivan's Manufacturing Leadership Council. He also directs the Manufacturing Leadership Council's Board of Governors, the Council's annual Critical Issues Agenda, and the Manufacturing Leadership Research Panel. Follow us on Twitter: @MfgExecutive

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