Media  Global Economy  2022.01.27

China hit in turn by offshoring

Le Monde on December 10th, 2021

This article was initially published in French in Le Monde newspaper on 10. December 2021, as part of a series of monthly columns on Asian economies. The original article can be found here:

Sébastien Lechevalier reports, in his column for Le Monde, on the results of a study on the various strategies for relocating to Korea production previously carried out in China by Korean companies

With the pandemic, the relocation of production (reshoring) has taken on a new dimension in South Korea. This trend, which mainly affects the electronics, automobile and textile sectors, concerns mostly the production of factories previously located in China, and is expected to accelerate in the future ("Changing GVC in Post-Pandemic Asia: Korea, China, and Southeast Asia", Keun Lee and Taeyoung Park, Working Paper of the Economic Research Institute of Seoul National University, October 2021).

For more than two decades, the offshoring of production has been the most visible manifestation, in OECD countries, of the formation of globalized value chains (GVCs). This deepening of the international division of labor has led to the development of production networks around the world, but also to the concentration of production capacities in certain countries, mainly China. While the benefits of this process are no longer in question, the structural risks are real.

The relocation of production for a country like Korea, whose multinationals play a major role in global value chains, is a real turning point, resulting from a combination of three factors. First, the digitalization of production since the early 2010s is changing the comparative advantages of offshoring in favor of home countries. Secondly, trade disputes between the United States and China have prompted some multinationals to move their production from China to other Asian countries. Finally, the pandemic crisis has highlighted the vulnerability of these value chains in the event of an external shock.

Digitalization and robotization

Based on detailed case studies, the authors distinguish three reshoring strategies of Korean multinationals. The first is the relocation of labor-intensive production, given the rise in wages in China. It is a minority strategy because the wage differential with Korea remains significant. The second is to eliminate an intermediate stage carried out in a foreign country in order to "shorten" the value chain; a typical strategy of SMEs that acquire the capacity to produce a given component, previously subcontracted. The third concerns companies that have chosen to invest massively in building "4.0" factories in Korea, leading to a profound transformation of the production process through digitalization and robotization.

The main lesson to be drawn from this study in terms of public policies is that if subsidies can in the short term facilitate relocations linked to the first strategy, they are not at all sufficient in the next two cases. Rather, the key would be to provide technical assistance and financial support for research and development to modernize the production process, whether from the government, large partner companies or smaller players specializing in a given technology.

The authors also point to a process of nearshoring, which benefits South East Asian countries, notably Vietnam, which have profited greatly from the exodus of production capacities from China. In a context where wage differentials are less important in location choices, the massive relocation of production to OECD countries will ultimately depend on their ability to invest in “Industry 4.0”. However, this will not guarantee massive job creation, as "smart" factories are also frugal in terms of human resources...

Column by Sébastien Lechevalier, Professor at Ecole des Hautes Etudes en Sciences Sociales (EHESS, Paris), Senior Researcher at Maison franco-japonaise (UMIFRE 19, Tokyo) and at the Canon Institute for Global Studies (CIGS, Tokyo).