Korean firms’ competitiveness hinges on innovation
Published : 2014-01-13 19:41
Updated : 2014-01-13 19:41
Steep wage increases in Southeast Asian countries have put an increasingly unbearable burden on Korean manufacturers operating in the region to maintain price competitiveness. More than 8,200 Korean companies have run production facilities in a number of Southeast Asian nations to take advantage of their low labor costs.
According to industry sources here, the monthly minimum wage for Cambodian workers has more than doubled over the past months, with pay increases reaching 14.9 percent and 22 percent for laborers in major Vietnamese and Indonesian cities, respectively.
The labor costs faced by Korean companies in the region, which usually give employees at least twice the minimum wage in actual pay, are expected to grow further as calls for wage hikes are intensifying in most Southeast Asian countries.
A recent survey by a Japanese trade organization showed that Japanese companies expect wages to rise this year by double digits in Indonesia, Vietnam and Myanmar, and by about 7 percent in Cambodia and Laos. Korean enterprises may have to brace for similar increases.
Though to different extents, Southeast Asian countries have been losing their advantages as production bases outside of China. In Malaysia and Thailand, Korean companies are expected to spend between $7,000 and $7,800 per worker in average annual pay, near the current level of $8,000 in China.
This steep rise in labor costs has worsened the profitability of Korean manufacturers operating in Southeast Asia, with their price competitiveness ― particularly against their Japanese competitors ― having already been weakened by the won’s appreciation against the U.S. dollar.
Under these conditions, it may be inevitable for many Korean companies to move their factories to other countries with cheaper labor forces and fewer regulations, including Laos, Sri Lanka or even some African states.
Some companies may consider making a U-turn to Korea. In preparation for this possibility, the government needs to increase support and incentives for manufacturers returning home in a welcome move that would help create more jobs here. Over the long term, it may be necessary to build more inter-Korean industrial complexes like the one in Gaeseong north of the Demilitarized Zone to use the North Korean workforce.
It should be reminded, however, that the eventual and fundamental way of maintaining and enhancing corporate competitiveness is ceaseless technological innovation that would result in reducing costs and improving product quality. It is clearly impossible to ceaselessly move to countries with lower wage demands.
In a matter of time, Southeast Asian workers’ wages will get closer to or even catch up with those for Chinese laborers, in keeping with economic growth and price hikes in their countries. This phenomenon must be anticipated by Korean manufacturers, which have transferred their factories to Southeast Asia to avoid rising labor costs and increasing regulations in China. Now, they should recognize that there is no alternative to persistent and strenuous technological innovation in securing their sustainability and growth.