Korean companies ‘reshore’ to avoid disruption, lower costs – The Korea JoongAng Daily

by admin on April 27, 2022

An employee stands in front of a machine at Star Group’s production facility in Shangqiu, Henan Province, China. [STAR GROUP]

Manufacturers are moving production back to Korea as they face disruptions and higher costs overseas.

Capacity in the home market is becoming a major asset.

Star Group, a rare earth magnet manufacturer, started building a factory in Dalseong County, Daegu, in November.

“The construction is 70 percent complete and will be wrapped up in July,” Kong Koon-seung, CEO of Star Group, said.

The company started manufacturing in Shangqiu, Henan Province, China, in 1999. China produces 70 percent of the world’s rare earths, and being there reduced costs and simplified sourcing.

Rare earth magnets are key components in electric vehicle motors. Korea imports 90 percent of rare earth magnets it uses from China.

Due to uncertainties in China — as a result of the pandemic and the trade and tech wars between the United States and China — Star Group relocated processing facilities back to Korea.

“To create a stable manufacturing environment, we decided to process raw materials in Korea,” said Kong, adding that the company is buying rare earths from Australia.

When the new production facility is operating at full capacity, Star Group aims to gradually cut ties with China starting with raw material supplies.

“Reshoring” has become more popular due the raw material shortages and shipment delays, higher and unpredictable prices and rising political tensions.

For some companies, the advantages of locating in other countries are now outweighed by the negatives, and promises of gaining footholds in foreign markets often no longer have the draw they once did.

Reshoring is the reverse of offshoring, with businesses bringing overseas operations either partly or entirely home.

A total of 26 companies relocated their production facilities from overseas to Korea last year, according to the Ministry of Trade, Industry and Energy. Though the companies were all small- and mid-sized, it was the highest number since the enactment of the Act on Assistance to Korean Off-shore Enterprises in Repatriation in 2014.

Since 2014, 108 companies have reshored.

In a survey of 105 of the 500 largest local companies conducted by the Federation of Korean Industries (FKI) in February, 27.8 percent said they were considering reshoring. That is nine times more than in 2020, when only 3 percent of companies said they were considering it.

Of those surveyed, 29.2 percent said they may consider reshoring if the domestic market improves.

“Shift in supply chains have made reshoring a more viable option for companies,” said Kim Bong-man, head of the FKI’s international affairs department.

Higher costs, lower sales and strengthened regulations in foreign markets were cited as the reasons for reshoring, according to Korea Trade-Investment Promotion Agency’s report on reshored companies.

Based on an Export-Import Bank of Korea December report, FKI forecast that gross domestic product will grow by 11.4 trillion won ($9 billion) and 86,000 jobs will be added if companies considering reshoring bring their manufacturing back to Korea.

The United States has been encouraging reshoring in the wake of the U.S.-China conflict and auto chip shortages by promoting domestically-produced goods and offering tax incentives.

“Nearshoring” — bringing back production to low-cost countries near the home country — is also on the rise.

Italy’s Benetton plans to move production from Asia to Europe and Africa, reducing production in the Asian region by 50 percent by end of this year. Though costs will rise by about 20 percent, shipping times will be reduced. Germany’s Hugo Boss announced last year plans to ramp up production in European regions.

“Nearshoring became more frequent among companies in advanced economies, as concerns are rising over the supply chain collapse,” said Kang Nae-young, senior researcher at Korea International Trade Association.

“The more advanced a company is in terms of technology, the more jobs it creates in its home country,” said Kang.

Kang called for more active support from the government to encourage reshoring.

“Korea should see this as an opportunity to innovate the manufacturing sector, providing the reshored companies with tax incentives and subsidies, and also supporting the companies in adopting digital technology in the manufacturing process,” said Kang.

BY KIM GYEONG-MI [shin.hanee@joongang.co.kr]

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