ADRN

As China speeds up industrial upgrading, Korea will face more competition in all sectors

 

The world’s most populous country, China has set expanding domestic demand as a core engine for mid- to long-term economic growth. To facilitate higher consumption, the government is seeking to improve the distribution of wealth. Major initiatives include urbanization, higher worker wages and social welfare improvements.

 

Urbanization and national land development planning are the main factors in the development of consumption. Sixteen million people ― more than Seoul’s total population ― are expected to move from rural areas to cities each year up to 2020. There will be 220 large cities with more than 1 million people by then. Rapid urbanization and expanding social welfare systems will drive Chinese consumption in this decade. Spending behavior will shift from “essential” to “discretionary.”

 

Consequently, the structure of Korea’s exports to China will inevitably change, from intermediate parts and materials for assembly and export to intermediate and finished goods for end consumers in China.

 

From “Made in China” to “Made by China”

 

Continuous technology innovation, research and development as well as mergers and acquisitions will sharply upgrade China’s manufacturing over the next 10 years. In traditional industries, production of components and high-tech goods will increase, and the global status of new strategic industries like biotechnology and new materials ― where government investment is currently concentrated ― will rise.

 

Consequently, Chinese and foreign companies will compete on a more level playing field. Instead of being mainly a processing base for multinationals, Chinese companies will coexist with their foreign counterparts and in some areas have a bigger presence. In short, the structural relationship between Chinese and foreign companies will no longer be vertical. It will become a horizontal and competition-oriented one, leading to a sharp increase in “Made by China” products.

 

By industry, the electronics and automobile sectors will see coexistence of multinational companies and Chinese companies, while in shipbuilding, petrochemicals and steel, Chinese companies are expected to grasp a stronger position over foreign companies.

 

As China speeds up industrial upgrading, Korea will face intensifying competition in all sectors. Chinese companies are already pressuring their Korean counterparts in home electronics, telecommunication devices and petrochemicals. This will intensify further. In addition, Korea’s components makers will collide with Chinese peers, who are being aggressively groomed. Already, parts exports to China have declined 5 percent in 2011 from 2010. In emerging industries as well, competition will become more intense.

 

Strengthened position as a financial hub

 

By 2020, the Chinese yuan is increasingly likely to be the world’s third major currency after the U.S. dollar and the euro, thanks to continuous promotion by the Chinese government. Trade with China will be transacted in yuan, and as international trust in the yuan rises, the share of the yuan in various nation’s foreign currency reserves is likely to expand.

 

Along with the internationalization of the yuan, China is seriously pursuing financial reforms, and plans to open up its capital markets by 2020. If its capital market becomes more accessible, Shanghai will become the main financial center in Asia within 10 years, rubbing shoulders with New York and London.

 

The internationalization of the yuan is likely to have positive effects on Korea, including less foreign exchange risks, lower trade costs and improved price competitiveness for Korea’s exports. In addition, there will be greater opportunity for a two-way flow of capital, though sudden in and outflow of yuan-denominated capital could increase volatility in Korean financial markets.

 

A rule setter in international society

 

In 10 years, China’s soft power stature will grow further, as will its position as a rule setter in the international society.

 

China will decisively surpass the U.S. not only in the size of its economy, but in international reputation in about 10 years. As for the size of its economy, while various forecasts exist as to when China will surpass the U.S., all have gradually shortened their time frames. The International Monetary Fund predicts it will happen as soon as 2016. JPMorgan Chase believes it will occur between 2020 and 2025 while Goldman Sachs predicts 2027. Also, a joint study by the BBC News and the East Asia Institute claims that the two countries’ rankings in international reputation have already been reversed this year.

 

Consequently, China will further strengthen its position as a rule setter in international society based on its standing as the No. 2 economy in the world and its international stature. China’s increased influence is clearly evident in the U.N., G20, IMF and World Bank. In 2010, China’s voting rights in the IMF increased from 2.77 percent to 4.42 percent, and in the World Bank from 4 percent to 6.4 percent, coming in third after the U.S. and Japan. Furthermore, China is aware that the G20 constitutes the global governance of the future needed to restructure economic power, which is currently concentrated in Western countries. In line with this, China is increasing its role in reform of international financial systems, introduction of new key currency systems and the resolution of imbalances between advanced and developing countries, to expand its influence in the G20.

 

China’s international rise will likely intensify competition with the U.S. For example, in establishing economic cooperation organizations in Asia, the U.S. increasingly prefers Pacific Rim arrangements like the Trans-Pacific Partnership and APEC, rather than regional groupings that focus only on East Asia. On the other hand, China needs economic communities in Asia like the EU or NAFTA.

 

Accordingly, Korea, which has a close relationship politically and economically with both countries, must establish an adroit foreign policy. The core issue for Korea’s foreign policy in the future will consist of maintaining reasonable balance between the U.S. and China.

 

Implications and responses

 

China’s challenge to advanced economies, despite the significant difficulties involved, will likely provide significant results in 10 years. As China undergoes massive changes in its market, industry and finances, Korea will face both new opportunities and risks. Accordingly, Korea needs to prepare a preemptive response strategy to reduce risks and maximize opportunities.

 

First, it is important that Korea prepares a response strategy for the development of China’s consumer market. Moves by rival countries, including Taiwan and Japan, to gain first-mover advantage in the Chinese market have accelerated. Taiwan is realizing its plans to enter the Chinese market through its “golden triangle strategy,” which combines Japan’s technology and China’s capital. Japanese businesses are diversifying their Chinese market strategies, including joint ventures with Taiwan and cooperation with Chinese enterprises. Korean businesses thus need to focus more on building “complete in China” systems and strengthening partnerships with China’s government and businesses.

 

Second, Korea needs to develop China-specialized products that keep pace with China’s rapid market and social changes, and establish new market pioneering strategies. The rapid growth of China’s consumer market will be a golden sales opportunity for Korean businesses. To realize this goal, Korea will need to make use of customized strategies that consider the regional and demographic characteristics of China’s huge market.

 

In particular, there are already many cases of joint ventures between Chinese and global companies that are pioneering China’s domestic market. Club Med, a global vacation resort company, successfully opened its first resort near the northeast city of Harbin in cooperation with domestic firm Fosun International. Korean firms, which are accustomed to working independently, need to pay attention to these joint ventures.

 

Third, Korea needs to upgrade economic cooperation with China. Recently, a high-level figure in China’s electronics industry visited Taiwan to suggest joint establishment of technical standards for smart TVs and sharing of patents. Korea must pay attention to what transpires under the China-Taiwan Economic Cooperation Agreement signed in 2010.

 

Furthermore, various channels, including a Korea-China free trade agreement, can be used to strengthen bilateral economic cooperation. In the financial sector, Japan is already conducting direct yuan-yen transactions with China, thus increasing the price competitiveness of Japanese exports to China. Accordingly, Korea also needs to strengthen financial cooperation with China, including direct won-yen transactions. In the manufacturing sector as well, Korea needs to pursue close cooperation in intermediary goods (including electronics parts), and in new businesses. In the latter, both countries could collaborate in establishing industry standards and discuss joint entry into the global market, rather than engage in cutthroat competition.

 

Over the past 20 years, Korea and China have built a successful cooperative relationship. In the future, both countries can combine China’s abundant human resources and capital and Korea’s technology and experience, to promote mutual prosperity.