By Park Si-soo
A growing number of Korean companies are moving out of factories in China and other emerging markets amid a decline in their attractiveness as viable manufacturing bases and heading home.
More than 10 companies have decided to shift to local plants from those in China and the number is expected to grow in years to come, according to experts.
The government plans to accelerate the trend by offering subsidies, tax cuts and other incentives to firms who return to Korea. It has allocated more than 335.5 billion won ($297 million) for the campaign next year, up 52 percent from this year.
Leading Korean tire maker Nexen Tire is the first big company headquartered here that will establish a new factory on Korean soil. Its main plant is currently in Qingdao, China.
Although China is still believed to supply cheap labor, the company has invested 500 billion won to construct a backup facility in Changnyeong, South Gyeongsang Province. Built on some 500,000 square meters in the rural town, it will begin operations next week, creating 2,000 new jobs.
“Having a plant in China is no longer a must in the manufacturing industry,” Nexen CEO Kang Byung-joong told local media. “Cheap labor was a major reason for local companies to select China as a base for their manufacturing facilities. But that incentive is gradually losing luster, as the Korean government is eager to introduce various incentives for returning firms.”
Though labor costs will increase, Kang said, the new factory won’t hurt the firm’s profitability thanks largely to Korea’s free trade agreements (FTA) with the United States, the European Union and other countries with high demand for Nexen products. FTA negotiations with China and Japan are underway.
Senior economist Kang Joong-gu at LG Economic Research Institute echoed the view, saying Korea’s aggressive expansion of tariff-free trade networks is tempting more Korean firms overseas to make a u-turn and leave developing nations for home soil.
“FTAs have triggered huge changes to Korea’s investment environment, encouraging domestic firms to relocate from overseas factories to Korea,” Kang said.
Many small- and mid-sized companies are swiftly joining the trend. In August, 14 jewelry companies jointly said they will relocate their factories to Iksan, North Jeolla Province, from China’s industrial city of Qingdao.
The Ministry of Knowledge Economy will cover up to 40 percent of what they spend on building infrastructure and 10 percent of their costs for new manufacturing equipment. The ministry said 36 more jewelry firms in China will return to the domestic market by 2015.
The ministry recently filed a bill with the National Assembly that, if endorsed, will give returning companies full exemption from corporate tax for the first five years and a 50 percent cut for the next two years.
The bill also aims at covering 40 percent of money firms relocating factories having gone overseas spend on land purchases and 15 percent of the cost for installing new manufacturing facilities.