The First Crisis
Stalled Out: Weakening Industrial Competitiveness

The most obvious symptom of the Korean economy’s deteriorating health is the annual economic growth rate,
which now hovers in the 2% range, making the 5% rates posted just after the turn of the millenium seem mythical by comparison.
The Korean economy has, in other words, gotten real old, real fast.
And not just old, but ossified. How do we know this? Twenty years ago,
Korea’s main exports were semiconductors, cars, and chemicals.
Today, Korea’s main exports are...semiconductors, cars, and chemicals.
The economy lacks dynamism; there‘s no new blood circulating through its veins.
Over the past decade, the percentage of new market entrants has fallen to 6% from 9%;
market exits by incumbent firms also fell from 7% to 5% over the same period.
The patient not only has a weak heart, but a poor metabolism as well.


The Second Crisis
Cracks in the Facade: Declining Innovation Capacity

The patient looks weak. And the internals are in even worse shape.
The economy is plagued by numerous marginal enterprises,
or zombie firms, whose profits aren’t enough to pay the interest on their debts,
let alone the principal. Since the COVID pandemic, the number of marginal enterprises has skyrocketed.
The risk of widespread corporate insolvency is real and growing.
Having so much capital tied up in zombie firms hinders innovation.
Korea is considered an AI powerhouse,
but AI adoption rates in the country’s enormously important manufacturing sector sit at just 3.9%.


The Third Crisis
Storms Abroad: Upheaval in the Global Environment

To make matters worse, the playing upon which Korea achieved so much success — the global free trade regime — has been ripped out.
The Inflation Reduction Act (IRA) and the CHIPS and Science Act were the tools through
which the US did the deed. Both laws provide massive subsidies to firms that invest in the US.
This is why Samsung builds new factories in Texas and Hyundai puts up new production lines in Georgia instead of Korea.

And it would be a mistake to think of the current global trade environment has one of mere ’disputes.’ In 2023,
71% of all trade-distorting policies were promulgated by advanced countries that directly compete with Korea.
What we’re seeing is a fundamental transformation of the global industrial environment.
Korea was one of the first fast-followers and one of that model’s greatest success stories.
But it no longer represents a viable survival strategy.

Another issue: The green transition is coming and Korea is not ready for it.
The European Union (EU) Carbon Border Adjustment Mechanism (CBAM) is imminent,
but Korea’s energy mix remains dominated by fossil fuels, with renewables account for just 9.5% of power generation.
This lags far below global leaders like Germany (57.3%) and even China (32.6%).


Four Strategies for Tackling Korea’s Industrial Crisis
Strategy 1: AI and the Green Economy

We propose four strategies for tackling Korea’s multifaceted industrial crisis.
The first: embrace the AI-powered future.
It will not be enough to merely adopt new technology: Korean firms need to address real world-problems using AI solutions.
For example: wearable robotics embedded with AI tech for use in the construction sector and other industries
that are now suffering from a major shortage of skilled workers.

The same goes for green technologies. For POSCO, Hyundai, or any other major steelmaker to spend billions to convert
their pollution-intensive blast furnaces to more eco-friendly solutions (hydrogen-reduction, for example),
the government would have to implement Carbon Contracts for Difference (CCfDs)
or some other mechanism in order to offset risk and get companies moving down the path of decarbonization.


Strategy 2: Policy Reform

Among other things, Korea’s industrial innovation system is in need of a major overhaul,
and this has to start with a change in the industrial R&D ecosystem.
Rather than being misled by the ostensible 90% success rate,
industrial R&D should be assessed on the basis of their real market outcomes.
Industrial innovation is what happens when technologies achieve success in the market.

Korea also needs to completely reconsider its approach to attracting investment.
Successfully attracting investment requires a mix of tax incentives, financial subsidies, and human resources support.
Currently, these functions fall under the purview of different ministries.
This dispersed and opaque system makes attracting large-scale investment from global firms extremely difficult.

The country also needs to shift refocus its investment attraction efforts from firms to projects.
Korea should make every effort to participate in projects led by global leaders;
this will help build out entire industrial ecosystems in Korea, rather than just individual firms.

Another thing to consider: Korean firms make a lot of money overseas,
but currently have little incentive to repatriate this money and reinvest profits in Korea.
The government needs to see capital repatriation as a kind of capital “reshoring,”
and offer benefits commensurate with those extended to foreign firms investing in Korea.

As for the country’s zombie firms, the solution is not to simply let them close their doors forever.
The government needs to let firms capable of growing realize their potential by allowing them to divest unprofitable
or low-value-added lines of business and shift to newer or more promising ones.
Policies that enable this can create new engines of economic growth,
but will require proactive and attentive policy support.

As for the regulatory regime, well — reform requires a top-down approach.
We need to analyze and reform laws and policies that act as constraints on entire industrial sectors.

Regulatory reform should be done on a case-by-case basis.
We should seek to make improvements to individual statutes to maximize regulatory consistency
and predictability and drive tangible change at the country’s businesses.


Strategy 3: Recalibrating Korea’s Foreign Policy

Next up: Korea also needs to rethink its global strategy.
For one, it needs to expand and strengthen cooperation with the US in critical strategic industries like biotech and semiconductors.

And when it comes to China, Korea should pursue a bifurcated strategy.
In areas where we still have the advantage, it is crucial that we maintain a super-gap with the Chinese competition.
In other areas, it is best to take a more pragmatic approach, and determine
where Korean firms can leverage the Chinese market and advanced manufacturing supply chains,
seeking out collaborative opportunities in segments where they are competitive.
For example, Korean suppliers could look to sell advanced electrical components to the Chinese EV sector.


Strategy 4: Upgrading Key Industries and Fostering Future Growth

Finally, Korea must address two other major challenges simultaneously.
The country must help its incumbent industries climb up the value-added ladder
while at the same time fostering an ecosystem that can create the next Samsung or Hyundai.

This is a daunting task. It’s like building a new ship while navigating a storm on the old leaky boat.
But we live in extraordinary times, and seeing Korean industry through the storm will require marshaling every resource available.