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South Korea: Stepping into Make for India 2.0?

Even as its economy copes with the COVID-19 led recession, South Korean companies are eager to expand the scale and scope of their investments in India.

•  With second quarter GDP declining by 3.3% from the previous quarter, the South Korean economy seems to entered a technical recession for the first time since 2003. The second quarter decline follows a 1.3% decline in GDP in the first quarter.

•  South Korean economy’s merchandise trade is following the track of shrinkage as its July’s exports as well as imports plummeted on year on year basis. With respect to June, its trade surged by more than US$ 3 billion in July. This was partially due to escalation in exports of electronics such as computers, servers and automobiles.

• With India, South Korean’s trade for the month of June has increased comparing it with May but is still just half of its normal trade figures which used to exist till six months back. India’s exports to South Korea in June 2020 remained at US$ 308.2 million while imports at US$ 583.9 million

• South Korean firms in sectors like electronics, healthcare and iron and steel, as well as a few startups are showing interest in setting up their manufacturing in India, as they plan exit options from China.

The South Korean economy has been a learning lessons for many developing economies as it transformed itself into a highly developed nation in less than 40 years of time. In the early 1950s, both the Indian and South Korean economies were comparable in most of the macroeconomic indicators including export and import baskets. But due to technological progress and furnishing of value-added services, the latter transformed its economy with alacrity.

A similar reference can also be drawn for its efficient strategy to tackle COVID-19. South Korea was one of the few countries, which focused on contract tracing early and was able to control this pandemic. But its economy is certainly not escaping unscathed.

With second quarter GDP declining by 3.3% from the previous quarter, South Korea seems to have entered a technical recession for the first time since 2003. This follows a 1.3% decline in GDP in the first quarter. GDP mostly declined due to weak exports, which account for around 40% of GDP. They have pulled GDP down by 4.1%. In addition to this, the economy is expected to continue to follow the contraction path in Q3 of 2020 for the first time in over a decade, amid weaker domestic and foreign consumption. Manufacturing PMI (purchasing manager’s index) remained negative and in contractionary mode in June majorly within soft output and new orders.

Additionally, exports plummeted by 20% in the second quarter (April to June 2020) due to lockdowns in major markets. South Korea’s merchandise trade in July also contracted on a Y0Y basis, although it increased by more than US$ 3 billion over the previous month. This was partially due to escalation in exports of electronics such as computers and servers and automobiles.

Source: ITC Trade Map, 2020, figures in US$ billion

According to the graph, there is definitely a sigh of upsurge in the trade figures since last two months but on YoY basis, there is a decline. Compared to May 2020, South Korea’s July trade figures have improved by  US$ 12.2 billion, out of which exports contributing to US$ 8.15 billion.

In line with its trade scenario, South Korea’s industrial output is also signalling a gloomy outlook. Mining, manufacturing, electricity and gas output plummeted by 0.5% YoY in June, after slumping by 9.8% in May (National Statistics Office for South Korea). On a monthly basis, industrial output grew by 7.2% in June, rebounding from May’s 7% fall and marking the best result since February 2009. One of the reasons for this recovery is the placement of new orders from China and East Asian countries.

By and large, indicators like business confidence index, PMI and industrial output are revamping relatively with respect to its last quarter, but in absolute terms, they are still in the negative. Henceforth it is projected that the growth rate of South Korean GDP will remain contracted for Q3 and Q4, 2020.

Not to forget, the travel industry has experienced a decline of roughly 60,000 labours, while the food and hotel industry shed more than 130,000 jobs. The wholesale and retail sectors, too, have lost approximately 55,000 jobs. For a smaller economy in terms of labour force, these numbers seem significant. Despite a recent boost in manufacturing as mentioned, the sector saw the sharpest decline in jobs since 2009. OECD expects the GDP of South Korea to shrink by 2.5% which is somewhat close to US$ 42 billion.

South Korean trade with India has increased in June over the previous month, but is still just half of its normal trade figures, which used to exist till six months back. India’s exports to South Korea in June 2020 remained at US$ 308.2 million while imports were at US$ 583.9 million. India’s imports of electronic products have surged in June. Looking at our export basket, ferro-chromium, oil cake for animal feed, cane molasses and lead experienced a surge for the same month.

Source: ITC Trade Map, 2020, figures in US$ million

For investments in India, South Korean firms are interested to set up their manufacturing plant and are planning an exit from China. For example, South Korean industrialists have expressed interest in investing in Uttar Pradesh as they are exploring the possibility of moving out China due to its trade tension with USA according to recent updates. Meanwhile, Kia Motors, has entered India and set up a production plant in Andhra Pradesh; it is also experiencing a good deal of success with its new launches.

The progress and outlook for South Korean businesses in India has been quite bolstering going by the trend as of now. South Korea’s Deputy Consul General has said that they are receiving queries from Korean firms who are currently operational in China but are interested to relocate in India. Sectors of interest so far are iron and steel and hospitality, apart from some startups.

So far, South Korean companies have been concentrating on automobiles, telecom, FMCG and steel when it comes to India. But, the flourishing health care sector, construction industry and large infrastructure projects with the gamut of building materials, interiors and technology offer big scope in the near future from investment point of view. India also has competitive policies in terms of attracting FDI, especially in Indian states and most of these are gearing up towards an expected migration of industry from China.

Henceforth to reap the capital gains through investments of South Korean companies, there is a need to understand the local ethos, culture and employment. Also, given the imperatives of Make in India, localization of components, parts, etc through tie ups will greatly aid in successful engagement and long-term growth.

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