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 #KIET #ISTANS 

Hello,

I’m Sung Keun PARK, Research Fellow and head of the Economic Outlook and Analysis Division at KIET.

I’d like to discuss the current economic situation and macroeconomic outlook for 2024.

In 2023, the domestic real economy has been experiencing some sluggishness in domestic consumption amid a high-interest rate environment.

On the other hand, exports have been gradually improving, helping to alleviate the slowdown in the real economy.

Against a backdrop of heightened uncertainty in the global economy this year, 

world trade is expected to rebound to a certain degree given the base effect, following the economic downturn of 2023. 

Assuming per barrel oil prices in the low 80-dollar range (USD),  a won/dollar exchange rate of KRW 1,280 (a 1.5 percent dropoff from 2023),

and continued high interest rates,

the Korean economy is projected to grow 2.0% in 2024 compared to 2023, with an upturn in exports and increased investment in facilities supported by a gradual recovery in the IT industry. 

 This modest growth owes to the intensified negative impact of high inflation and high-interest rates, 

which are expected to cap growth momentum in consumption and constrain construction investment.

Now, we’ll examine a few graphs for more details. 

First up is the overall economic outlook for 2024.

In 2024 the Korean economy is projected to grow 2.0% year over year.

Exports are expected to grow and investment in facilities will rebound on the back of the gradual recovery of the IT industry. 

However, due to the intensified negative impact of high levels of inflation and high interest rates,

the growth momentum in consumption is expected to wane, and construction investment will contract.

Key external uncertainties include financial instability due to global inflation and sustained high interest rates,

geopolitical uncertainty arising from conflict and war, a deepening economic downturn in China, and the pace of recovery in the semiconductor industry. 

geopolitical uncertainty arising from conflict and war, a deepening economic downturn in China, and the pace of recovery in the semiconductor industry. 

Regarding the domestic economy, high levels of household debt may begin to exert an influence on the real economy.

Next up is our outlook on private consumption.

Private consumption is expected to experience a slowdown in growth, with growth forecast to increase modestly, at around 1.9% year over year.

Factors behind the slowdown include the increased burden of interest rates and household debt, 

decreased asset values due to the expansion of financial and geopolitical uncertainties,

falling asset values due to the expansion of financial and geopolitical uncertainties, and inflation eating into domestic purchasing power.

Next up is investment.

Facility investment is projected to experience a inch upwards, with projected growth of 2.1% compared to the previous year. 

This uptick in investment is buoyed by the gradual recovery of the semiconductor industry,

the execution of the planned investments by major companies, 

expanded investments in the automotive sector to meet steady demand for eco-friendly vehicles, and base effects.

On the other hand, despite an anticipated increase in government spending on social overhead capital (SOC) projects and civil engineering construction contracts, 

overall construction investment is set to dip by 0.2% year over year. Leading indicators such as new permits, groundbreaking activities, 

and construction contract values are all on a downward trajectory. 

Furthermore, the number of unsold properties has increased.

Finally, we’ll discuss the outlook for trade.

The recovery in the semiconductor industry, sustained robust auto export volumes, 

the base effect from the previous year, 

and a gradual recovery in global trade will work altogether to boost exports by 5.6% in 2024 compared to the previous year.

Imports are expected to decrease by 0.7% year-on-year. 

This modest decline owes mostly to falling oil prices and increased imports of intermediate goods due given more sanguine export conditions.

With an increase in export volume and a decrease in imports,

the trade balance is expected to achieve an annual surplus at the level of USD 26.5 billion.

Hello,

I’m Jae Yoon LEE, Research Fellow at the KIET Center for Growth Engine Industries.

I’ll be discussing the outlooks for Korea’s thirteen flagship industries in 2024.

In 2024, despite the high interest-rate environment, elevated levels of inflation, and constraints to growth in both the domestic and international economy, 

we anticipate a broad recovery in Korea‘s 13 flagship industries. 

The recovery will be underpinned by a gradual rebound in the global IT sector, which in turn will translate into expanded domestic exports, investment, and production.

Overall, growth is anticipated in the IT subsectors, including semiconductors, information and communication devices, displays, and biotech, as well as the shipbuilding industry.

No major changes are expected in foundational industries such as steel and petrochemicals, however. 

By contrast, the automotive and battery industries are forecast to experience a slowdown in their prior growth trajectories.

Now, let's delve into the category-specific outlook of the thirteen flagship industries through detailed graphs.

First, let's explore the export outlook for the 13 flagship industries in 2024.

In 2024, exports of the thirteen flagship industries are projected to increase by 5.2%. 

Despite the constrained growth of the global economy, a recovery in exports is anticipated for the majority of industries, excluding only the petrochemicals and batteries sectors.

In particular, it is expected that the emerging IT sectors will drive the expansion of Korean economic exports, 

fueled by the recovery in global ICT demand and the impact of the base effects.

The machinery industries are expected to see a 2.7% increase in exports, driven by steady demand from the US and EU markets. 

However, overall growth in automobile exports will slow by 2.0%, as exports surged last year to the tune of 19.2%.

Materials exports are forecast to increase by 0.7%. 
Despite uncertain external conditions, 

an increase in demand from emerging markets, the expanded exports of advanced materials,

and the base effects are expected to lead export growth in the steel (1.4%), textiles (2%), and refined oil (1%) sectors.

Regarding emerging IT industries, increased demand for global IT products and innovative pharmaceuticals, along with the base effect, 

are expected to fuel export growth in key sectors such as semiconductors (15.9%), information and communication devices (12.7%), and biotech (4.6%).

For the entire industrial sector, a 11.4% increase is expected, which is a noticeable rebound from the significant decline in 2023.

Next, we will cover the domestic outlooks for the thirteen flagship industries.

In 2024, a growth trend is anticipated in the majority of the thirteen flagship industries, excluding the automotive machinery, and textiles sectos.

This anticipated growth owes to the launch of new ICT products, increased demand for intermediate goods for exports, and improvements in economic indicators in the latter half of the year.

Regarding the machinery industries, the shipbuilding industry (84%) is projected to maintain strong domestic growth,

while the general machinery (-3.4%) sector should see its falling trajectory begin to level off, attributable to increased facility investment.

On the other hand, the automotive industry (-2.0%) is expected to transition to a decline, as deferred demand has been largely realized and purchasing conditions have deteriorated.

The materials industries are expected to witness domestic growth, with the steel (0.6%), refined oil (1.5%), and petrochemicals (1%) sectors all poised for gorwth,

driven by a recovery in forward industries in the second half of the year. 

 Yet uncertaintyies in the real estate market and a contraction in private consumption should conspire to cap growth.

With regard to the emerging IT industry, while domestic growth for the semiconductors (9.4%) and information and communication devices (5.4%) sectors is expected to recover

and the biotech industry (10.7%) is poised to maintain its high-growth trajectory,

weaker growth is projected in the batteries (3.3%) sector compared to the previous year, 

when domestic growth exploded by 68.8%.

This slightly lower growth figure is due to a slowdown in the electric vehicle market.

Next up: production outlooks for the thirteen flagship industries.

In 2024, production is expected to expand in the IT industry, propelled by simultaneous growth

in both exports and domestic consumption of information and communication devices and semiconductors.

The steel and petrochemical industries are projected to maintain production levels similar to the previous year. 

Production in the automotive industry is expected to decline due to sluggish domestic consumption and exports.

Regarding the machinery sector and its subsegments, production of automobiles (-2.3%) is set to dip due to sluggish domestic and global consumption. 

But the decline trend in the production of general machinery (-1.1%), is expected to moderate somewhat, thanks to a recovery in domestic demand. 

The shipbuilding (7.9%) industry is expected to continue its growth trajectory, driven by deliveries of backlogged orders.

In the materials sectors, production is expected to tick upward in the steel (0.9%), refined oil (1.8%), 

and petrochemicals (0.6%) sectors due to improved demand conditions and the normalization of capacity utilization.

However, the textiles industry (-1.4%) is forecast to decline on account of sluggish demand and weakened domestic production infrastructure.

With respect to the emerging IT industries, production in the information and communication devices (7.2%), 

semiconductors (17.5%), displays (3.6%), and biotech (4.6%) sectors is expected to increase due to the recovery of domestic and international IT demand.

Only home appliance production is projected to decline (-0.7%), as production moves overseas. 

Battery production should tick upwards (1.1%) slightly, held back somewhat by declining production of batteries destined for export.

Finally, let’s talk about imports.

In 2024, imports in the thirteen flagship industries will increase 5.8% year-on-year. 

Imports in the emerging IT sectors in particular are expected to jump, given the anticipated recovery in domestic consumption.

With regards to the machinery industries, the shipbuilding industry is projected to see expansion in imports of foreign equipment, 

and the auto imports are also set to increase, fueled by demand for foreign luxury cars. 

However, imports of general machinery look set to dip, in the continuation of an ongoing trend, 

and so overall imports in the machinery industries should fall by 1.3%.

The outlook for the materials industries points to an increase of higher imports in the refining and textiles sectors

due to the expansion of imports of petroleum products for petrochemicals and affordable clothing, respectively. 

Meanwhile, it is anticipated that imports in the petrochemicals and steel industries will remain similar to the levels seen in 2023.

Imports in the emerging IT sectors are expected to experience a significant increase of 10.4% compared to the previous year, 

owing to the expansion of domestic consumption in the domestic ICT and biotech industries, 

greater demand for international brands, and the rise in imports of intermediate goods intended for export.

 

 Hello everyone, this is announcer Hyunji KIM. 

Today, we will be talking Dr. Yiseon YOO from the Regional Policy Division at the Korea Institute for Industrial Economics and Trade (KIET).

She will be introducing the key findings of a major KIET research report from last year of which she was the lead author. 

The report is titled “A Study on 2050 Carbon Neutrality from the Perspective of Regional Policy: Policy Capacity and Strategies.” It’s good to meet you, Dr. YOO.

Good to meet you too.

Could you introduce yourself to our audience?

 Sure. My name is Yiseon YOO. I work in the Regional Policy Division at KIET’s Center for Balanced Regional Development. 

It’s a real pleasure to meet you. So, today we have some interesting things to talk about.

We’ll get to the details of the report later, but let’s start with this: What do you think will happen to local economies as the government pursues its carbon neutrality initiatives?

Carbon neutrality is a paradigm shift. It will require wholesale changes not only to our economy and industry but to consumption patterns and daily lives as well. 

Moreover, the state and its regions are obligated to promote carbon neutrality. 

We must devise plans and put them in practice to achieve carbon neutrality on a national scale.

We currently find ourselves in a situation where we need to consider entirely new ideas, turn them into policies, and actually pursue them.

In this process, new conflicts may arise, and it may not be possible to resolve these conflicts in the same ways that we used to.

In addition, regions differ in their capacity to promote carbon neutrality. This means that carbon neutrality may exacerbate existing regional disparities and even create new ones altogether.

It sure seems that way. We’re going to see many things change. and these changes may create new conflicts and even make old problems worse.

I heard that, in the course of pursuing this research, your team conducted a survey on local awareness on carbon neutrality and the ability of localities to promote it. 

your team conducted a survey on local awareness on carbon neutrality and the ability of localities to promote it. What did you find? 

The survey results confirmed that some level of awareness of carbon neutral policy.

We were also able to confirm that most survey subjects agreed that carbon neutrality is necessary.

But we also observed some negative perceptions of the policy.

ome respondents felt that the governments’ carbon neutrality scenario was unrealistic, or that the implementation horizon was too fast. 

 I see. So it seems like we need to have some measures in place to address these concerns.

And there also appears to be some differences between the regions when it comes to carbon neutrality. What do you think?

We were able to confirm that, overall, regions producing relatively higher levels of greenhouse gas (GHG) emissions are more proactive when it comes to carbon neutrality.

But we also observed some such regions were not.

So there’s a bit of a difference there.
Yes, there is. \

It is unfortunate that some regions remain passive in their approaches to carbon neutrality. But overall, the future is bright, isn’t it?

Please tell us any other noteworthy insights drawn from the survey.

Here is one thing that really sticks out for me. Among the survey questions, there was one where we asked respondents, “Who do you think should take the lead in promoting carbon neutrality?”

The overwhelming majority of local experts, companies, and industry experts answered that the driving force behind carbon neutrality should be the central government.

Carbon neutrality is a global movement, and one that Korea is just one small part of.

Achieving carbon neutrality will require cooperation and joint efforts with the international community,

and so respondents tended to assign greater importance to the role played by the central government.

Interesting. Since achieving carbon neutrality requires some degree of cooperation with the international community, 

the central government will continue to play a major role.

So your team explored regional awareness of and response to carbon neutrality through these survey results.

 I have another question for you.

This relates to one of the study’s keywords: What does carbon neutral capacity mean, specifically?

For this study we approached the concept of capacity from a policy studies perspective.

 Thus we defined regional carbon neutrality capacity as the ability of a region to reach consensus on, accept, and internalize the policies designed to make the National 2050 National Carbon Neutrality Vision a reality. 

There are three keywords here: consensus, internalization, and capacity.

A consensus on policy begins with an understanding of policy goals, means, and the implementation process. This is the source of efforts to achieve common goals. 

Internalization refers to making something external to you your own. In the context of policy acceptance, 

this goes beyond simply accepting the vision and policy of carbon neutrality established by the central government.

It means taking unique regional characteristics into consideration and proactively establishing and implementing policies to achieve specific goals. 

In order for any given region to go further and actually implement policies to achieve its goals, capacity is additionally required.

Capacity is determined by the human, material, and intellectual assets accumulated by a region. In this way, we can see how differences in possession of these assets produces regional difference s in capacity.

All right. So let’s sum everything up.

You said that there are three important concepts here: acceptance, internalization, and capacity. I took some notes.

You said that carbon neutrality capacity is defined the ability for any given region to reach consensus on, accept,

and internalize the need to implement policies to achieve the 2050 National Carbon Neutrality Vision. 

That just about covers it, doesn’t it?

That’s correct

So, I’m curious about what kind of indicators and methods your team actually used to assess regional carbon neutral capacity.

I’ll try to sum up the main features of the indicator suite.

The overall capacity index is based on measurements of two basic characteristics: sensitivity and responsiveness.

Circling back to what I was talking about earlier, we defined carbon neutrality capacity as an integrated measure of how sensitive a specific region is to carbon neutral policy (sensitivity) 

and a region’s awareness, efforts, will, and ability (responsiveness) with regards to carbon neutrality policy. 

Synthesizing these two measures can produce an index of comprehensive capacity. 

The higher a region’s sensitivity, the lower its acceptance, and the higher is responsiveness, the higher its acceptance.

Yes. After determining the basic components, we built an evaluation index that gauges the sensitivity and responsiveness of individual subsegments and products. 

We then standardized this index, after which we were able to estimate the policy capacity indicator using weighted averages.

I see. So let me make sure I got this right. The higher a region’s sensitivity, the lower its acceptance of carbon neutrality policy, and the higher a region’s responsiveness, the higher it’s acceptance. Right?

So we need to raise responsiveness then.

Yes. We need to lower sensitivity and raise responsiveness.

Well it that one big takeaway from this report is that we need to get going on raising responsiveness.

This makes me wonder about the results of your carbon neutrality policy capacity index estimation for each region. What did your team find? 

 We present the results of the estimation on a graph with four quadrants. Sensitivity is plotted on the horizontal axis and responsiveness on the vertical axis. 

The regions we need to be most concerned about are in quadrant four, as these are areas with relatively weak overall capacity; they are sensitive to carbon neutrality policy but not responsive.

It is also worth noting that capacity was estimated for three different policy scenarios in the report.

I mentioned earlier that we approached carbon neutrality policy from the perspective of policy capacity, so we estimated multiple scenarios to illustrate how regional capacity may vary depending on changes in policy. 

I mentioned earlier that we considered three basic government policy scenarios.

The first scenario was a total phase-out of coal-based power generation. The second was a large-scale conversion to future vehicles. And the third was the direct regulation of major GHG emitters in industry.

We sought to identify which regions were especially lacking in capacity for each scenario.

In a nutshell, we found that major metropolitan areas possessed the highest capacity, such as the capital Seoul and the surrounding province of Gyeonggi,

while the country’s more rural areas, such as the provinces of Gangwon, South Chungcheong, and South Jeolla, were more lacking in capacity.

The regions at the bottom of the capacity index varied depending on the policy scenario,

but overall Gangwon and South Chungcheong were found to be the most sensitive to carbon neutrality policy while having the lowest level of responsiveness regardless of the scenario used.

The estimation also allowed us to confirm that measures of regional capacity vary greatly depending on government policy.

This tells us that we need to be careful and consistent when introducing policy. 

That sounds about right.

Because, as you said, regional capacity is sensitive to government policy.That makes having the right policies in place very important. 

Your research described a number of implications carried for government policy. 

What kind of strategies did your team come up with to help us achieve carbon neutrality in the long term?

The strategy for achieving regional carbon neutrality we outlined in this study is basically consistent with the current policy framework. 

We set basic directions for increasing regional carbon neutrality capacity in ways that avoid conflicts with policies on the books today.

Recently, there has been a greater emphasis on regional leadership. Voices are calling for a change to the status quo in which the central government plays an outsize role. 

Regions are being called upon to directly plan their own projects that meet their own needs, while the central government plays more of a support role. 

If you look at some what the government of President YOON has said about regional development,

there are many references to a new paradigm, with phrases like regional leadership, 

autonomous capacity, regional self-governance, specialization, and regional self-reliance peppered throughout speeches and policy documents.

And while we are now seeing the importance of regional leadership being increasingly emphasized, there are still areas where the role of the central government remains uncontested.

For example, only the state can realistically implement a balanced development policy designed to narrow the gap between two or more constituent regions or promote the development of a specific region.

And so while we are seeing a greater focus on regional leadership, the central government remains a major player.

This presents us with an opportunity to reconsider the role of each entity.

Taking the above into account, our report proposes three strategies for realizing carbon neutrality.

The first aims to build a cooperative response system at the regional level.

The goal is to reexamine intergovernmental relationships and roles to achieve carbon neutrality and establish a response system based on cooperation between entities.

This is consistent with efforts to emphasize regional leadership. 

For the second strategy, we sought to design a plan to promote policies that strengthen local carbon neutrality capacity.

The goal is to develop policies and improvement measures to reduce sensitivity and strengthen responsiveness in areas with low carbon neutrality capacity. 

And the last one?

For the third strategy, we looked for ways to strengthen carbon neutrality linkages in existing regional policies.

There are numerous regional policies in effect now that were implemented long before the anyone knew what carbon neutrality even meant.

This strategy is designed to enhance the regional carbon neutrality capacity by linking these older regional policies with carbon neutrality. 

I see. I think we the third strategy you mentioned at the end is something we can all really think about.

Although we are living in an era where regional leadership is being emphasized,

the role of the central government is still important, and this makes it seems clear that we need to redefine the role played by each entity.

Dr. YOO, I would like to you ask you what challenges you faced in the conduct of this research,and what if any regrets you might have.

 I’d also like to know what you have planned going forward. 

Sure. This study was a piece of theoretical research.We sought to explore the concept of carbon neutrality in the context of balanced regional development. 

We took a look at several issues that could potentially emerge as Korea pursues carbon neutrality, and designed a suite of strategies to improve regional carbon neutrality capacity. 

The issues with theoretical research is that it often lacks a basis in the literature from which to build off of.

Moreover, in Korea, carbon neutrality remains a vision. We have seen the government promulgate goals and set objectives, but we have no concrete policies to analyze.

ur research was limited in this way, but this is a fundamental limitation of all theoretical policy research.

The regional carbon neutral neutrality capacity index presented in this study includes an evaluation indicator called “policy target” in the estimation formula. 

Industrial groups that are particular beneficiaries of government policy vary, however, and the capacity index results also vary accordingly. 

In the future, when we have actual policies to go off of, that the regions affected by policy may change over time. 

This means that caution must be exercised when applying the research results.

In addition, due to limitations in available data, the results were estimated at the regional level.

To make the index more usable, it is necessary to produce indicators for individual cities, counties, and districts.

 That is, to enhance the spatial resolution of the index. We also find a way to update the evaluation indicators through surveys and time series data.

So there are many ways to improve the index.

To give the strategies and specific measures proposed in this study more form and help achieve regional carbon neutrality, there remains much work to be done.

I was disappointed that we could not address the spatial scope of carbon neutrality realization in our study.

Further research on this topic could prove illuminating.

This is because pan-regional cooperation has become a popular new way to approach balanced regional development.

I think research on carbon-neutral spatial units in this context would be very interesting as well.

Pan-regional? This seems very promising.

Well, Dr. YOO, we will look forward to your future research and wish you the best of luck. 

Today, I talked with Dr. Yiseon YOO about the KIET report “A Study on 2050 Carbon Neutrality from the Perspective of Regional Policy: Policy Capacity and Strategies.”

How did you like today’s talk, Dr. YOO? Let us conclude with some final thoughts.

I had a lot of fun! It was great having the opportunity to describe my research in detail.

 Thank you for listening and asking questions. 

Thank you too, Dr. YOO. You spoke so well! 

It was nice to be able easily understand what you were talking about.

These days, everyone is paying attention to Korea, right? 

So I want to express my support for the central and regional governments and hope they work together to achieve carbon neutrality, making all of us proud.

Thank you for sharing with us today. And thank you to all our viewers for watching! Thank you.

 

 Hello everyone. This is announcer Hyunji KIM.

Today, we will be speaking with Sul-ki LEE, an economics Ph.D. and researcher from the ICT & Emerging Industry Division at the Korea Institute for Industrial Economics and Trade (KIET).

He is going to talk with us about a major KIET report from last year of which he was the lead author: “How to Promote the Korean Hydrogen Industry? An Industrial Policy Analysis.” 

Hello. I’m Dr. Sul-Ki LEE from the ICT & Emerging Industries Division of KIET. Nice to meet you, Dr. LEE. Please introduce yourself.

I studied energy and environmental economics for my degree.

My expertise in these fields has led me to my current position at KIET, where I am responsible for studying alternative energy industries, including the wind power industry and the hydrogen sector.  

I also conduct research on how energy, environmental, and climate-related issues impact Korea’s main industries.

You sure do have a lot on your plate.

You should have some interesting things to talk about.

Dr. LEE, I'm curious about the title of the report.

 What does fostering the hydrogen industry have to do with achieving carbon neutrality?

In a nutshell, fostering the hydrogen industry is one of the few things we can do that can help us achieve economic growth and cut greenhouse gas (GHG) emissions at the same time. 

A bigger economy and fewer GHGs at the same time? 

That sounds like a contradiction in terms. Could you please explain further?

 Sure. Recently, many countries have pledged to reach carbon neutrality, which will require a drastic reduction in GHG emissions. 

To prevent climate change from becoming irreversible, I think it’s a good idea for Korea to participate in this international movement, too.

But given the unique circumstances of our country, I think we need to take a very cautious approach.

I thought you were going to say something like, “we must participate in this movement at all costs.”

But what you’re saying is that Korea should engage in the carbon neutrality movement in a certain way, right?

Right. And I think that there are two basic reasons for that.

First, reaching carbon neutrality demands a much more aggressive reduction of GHGs than the Paris Agreement, which we are already party to.

But carbon neutrality is not just a way to save the planet.

It is also a means for Europe and the United States to pursue a long term vision in which the international energy order comes to orbit around a transatlantic axis,

based on European and American technologies. This necessitates some precaution from our perspective.

Second, Korea is almost entirely reliant on foreign energy resources, as you probably know.

Moreover, our economy is structured around exporting industries that are major GHG emitters. 

Lacking many natural resources, energy accounts for 25% of all Korean imports.

Most of the remaining 75% of imports are raw materials and intermediate goods that are essential in industry, which makes the role of energy savings or substitution limited.

This means we need to stop going through the motions in the pursuit of carbon neutrality, per se,

and instead pursue aggressive GHG reductions while strengthening the competitiveness of the hydrogen industry, up to the point at which it can drive economic growth. This is the basic argument of the report.

  So I think I understand. You’re saying that we need to consider these two reasons as we move toward carbon neutrality, and do so carefully.

  You’re also arguing that,

if we develop the hydrogen industry, it will do more than simply contribute to achieving carbon neutrality — the industry will fuel serve as a growth engine industry for our country.

Can you describe the theoretical basis upon which you base this argument?

Of course. To lay it out in more concrete terms, in order to implement any industrial policy, we need to first clearly understand industrial reality as it is.

The problem with the hydrogen sector and other new, undeveloped industries is that since they haven’t been around that long, they have not yet produced a trail of data that we can analyze.

This makes it difficult to determine the economic scale or current status of the industry.

Given this, Korea has been promoting hydrogen policies that don’t really take into account lingering uncertainties about how much of a ripple effect the development of the hydrogen industry will have in terms of economic growth or job creation. 

we sought to address these limitations by building an outline of the hydrogen industry at the individual enterprise level,

presenting a reliable lower limit for the economic scale of each stage of the hydrogen industry's value chain.

When I first heard the term “value chain,” I originally assumed it was something that could be analyzed in a systematic, comprehensive manner. 

But it’s more ambiguous than that, isn’t it?

 In the manufacturing sector, it’s just a set of firms that contribute a certain percentage of value to a product depending on what part of it they make. Does that sound about right?

Yes, that's right. When we assess the industrial competitiveness of an industry,

we take a comprehensive look at it from a more distant perspective. 

But we also chop up its value chain and analyze its individual stages to determine how much of a competitive advantage Korean firms in any given stage have over their competitors.

So what did you find in your analysis of the hydrogen industry’s value chain?

We found that the hydrogen industry’s value chain could be divided it six core stages: 

professional services, materials, parts and equipment, distribution, power generation, and miscellaneous services.

We evaluated the scale of each stage of the hydrogen value chain using three key data points: the number of enterprises, sales, and employment.

First, let's talk about the number of enterprises. In 2015, there were 58 enterprises in Korea's hydrogen industry. 

By 2019, that number had more than tripled, reaching 179 firms.

That’s a lot more businesses.

The industry has grown. But compared with other new energy industries such as wind power and solar power, hydrogen is still in its infancy. 

Looking at growth in the number of enterprises tells us that value chain expansion has been relatively even.

There has been slightly more rapid growth in professional services firms than others in the industry, however.

I'm looking at some graphs right now illustrating the stages of the value chain.

 To me, the parts and equipment graph stands out the most.

It does stand out. For the period we analyzed,

we found more businesses in the parts and equipment manufacturing sector than in other stages of the value chain. 

On the other hand, sales revenues were highest in the materials sector. 

We think this may be because there are large companies active in this stage of the chain. 

In 2015, before the hydrogen industry began to really take off, power generation accounted for most revenues. 

This was largely due to the RPS (Renewable energy Portfolio Standard) policy. 

But the industry grew consistently and evenly, and by 2019, sectors other than power generation were generating healthy sales.

Well that’s good. Anything else you’d like to add on this topic?

Just a couple more things worth mentioning before we move on. One is that we saw that sales were mainly generated by manufacturing and power generation firms. 

Employment, though, was concentrated in the manufacturing and professional services stages of the value chain. 

We saw that there were a large number of enterprises in the parts and equipment manufacturing sector, which you also noticed. 

But sales were low in this segment, even as these manufacturing firms collectively account for between 20 and 30 percent of employment across the entire hydrogen industry. 

Looking at average employment on a per enterprise basis, we see that materials firms on average employed the most people, at 47 workers per firm. 

Professional services firms were next, at 32 workers per firm.

These and other figures we present in the study paint a very different portrait of the hydrogen industry than other studies have done. 

The reason for this is because of how we define the term industry; for this study, we settled on the definition of an industry as “a collection of enterprises.”

A detailed explanation for why we did this would take forever, so I will just refer you to the report. 

Yeah, we can’t get into too much detail about a 200-page report.

 I’ll have to take a look at it later.

But we should talk about some other things you uncovered in your research. 

What did the value chain analysis tell us we need to do to facilitate the sustainable growth of the hydrogen industry?

Like I said, for our report we estimated the number of businesses, sales, and employment at each stage of the value chain in the entire hydrogen industry. 

As part of this, we also analyzed how many businesses entered and exited the hydrogen industry every year, and separated these firms into large and small businesses.

 We also evaluated the status of related industries that could potentially be identified as belonging to the hydrogen industry.

Our analysis carries several implications, but I’ll just discuss three of them today.

Three things. All right, let’s hear them.

First, the government promulgated its first real hydrogen industry development policy in January 2019, and has been promoting the policy ever since.

 Given the growth in the industry we have witnessed thus far, the policy seems to have been a success -- least in the early stages of its policy implementation, 

when we saw significant growth in the number of enterprises in the industry, and especially the rapid expansion of the number of professional services firms and parts and equipment firms. 

This is backed up by a bounceback in the entry rate into the hydrogen industry, which was trending downward up to 2019, after which it rebounded. 

Second, no significant growth was observed in the materials industry after the new policy was pushed through.

 I think we need a plan to address this. 

It is worth noting that it is a subsegment of the materials industry that is responsible for actually producing hydrogen.

The materials sector is overall a critical part of the hydrogen industry, as it produces key materials for major processes like water electrolysis and major parts such as fuel cell catalysts.

However, the structure of the industry currently revolves around byproduct hydrogen. 

This may be the reason the government policy seems to have had little immediate effect in the short term.

Finally, we need to talk about producing and transporting hydrogen. 

Going forward, it will be necessary to import large quantities of foreign hydrogen.

 Once this happens, firms involved in ammonia and hydrogen liquefaction will have an enormous role to play.

 Currently, firms in the materials sectors are involved in the ammonia segment. 

Ammonia is essential to transporting hydrogen, and so there will be a need to rapidly foster related industries and overhaul relevant institutions. 

Our analysis of the liquefaction sector revealed that Korea does have, to some extent, a domestic transportation network for liquefied gas in place. 

But there is a clear need to build up capacity in related hydrogen and industrial gas liquefaction segments. 

I see. To summarize, you’re saying that we basically need to develop hydrogen-adjacent industries in the future.

 You came to this conclusion through an analysis of the industrial value chain in which your team

assessed the effectiveness of the government's development policy, and found evidence that hydrogen-related industries are in need of support. 

Dr. LEE, I am also curious about what kind of industrial policy we need to implement to make our domestic hydrogen industry more competitive  in the future as our economy transitions to a hydrogen economy. 

 How will such policies differ from more general industrial policies?

Industrial policy is like having kids.

 Mature firms, like adult children, are fully grown and independent. 

Parents play a pretty limited role in the lives of adult children just like the government plays a limited role in the business of mature firms. 

The government’s role should in general be limited to facilitating organic market growth, helping out to resolve trade problems and other issues in key industries in cases in which individual companies lack the ability or capacity to do so. 

But parents play a very different role in the lives of newborn babies. 

They handle everything, down to eating and sleeping. They are quite directly responsible for the lives of these kids.

Of course! They’ve gotta take care of their babies.

New industries are like newborns. These sectors lack institutions and infrastructure. 

 Do you see how for these firms, industrial policy can assume a different form and play a different role? 

This is the perspective we took when we sat down to evaluate the government’s hydrogen industry policies and come up with ways to enhance the competitiveness of the hydrogen industry. 

 We used 11 indicators to assess the effectiveness of policies on the books. 

The results of our analysis carried several implications for policy. 

The 11 indicators suggested a number of tasks for policy, then. What are they?

There are two big ones. 

First of all, it is necessary for the government to draw up a plan to manage global supply chain risk.

 It can do this by first analyzing the structure of the supply chain for key hydrogen sector products and identifying potential risks and vulnerabilities.

Second, the government needs to step up and incentivize investment by domestic firms in hydrogen imports, storage, transport, and so on. 

A concrete plan would send an important signal to the market. 

I see. Looking at the 11 tasks for policy, I guess you could sum it up like this: 'We need to have the infrastructure in place for this industry to succeed.' 

Dr. LEE, would you care to mention any difficulties or challenges you faced in the conduct of this project?

? I'm also curious about what kind of project you’re going to be working on next.

The thing I was most disappointed about was the fact that we were only able to use data that went up to 2019.

Yeah, that is too bad.

The business survey data we based our study on is released with a two-year lag every May.

 This was a 2022 project, right? 

 So we figured we’d be able to use the data collected in 2020 after the new hydrogen policies were implemented in 2019, 

allowing us to see how the policy affected the industry, since we’d be able to compare 2019 and 2020 data with older data. 

But the government didn’t end up releasing the data until December of 2022. So we had to rely on older data for our study.

The 2021 was released on time this May, however, and so we are currently working on updating the results of our study. 

We should have those out soon. 

Looks like you’ll be real busy.

Most likely. And regarding future research, I am currently planning a project in a similar vein.

I think it is necessary we analyze the effects of hydrogen policy at this point. 

Regarding the development of the hydrogen industry, the government does appear to have demonstrated a commitment to active policy support for hydrogen. 

Once it understands what policies are seen as necessary, it tends to implement most of them with alacrity. 

 Now, we are trying to determine the best direction for future policies by estimating and evaluating the effects of the policies 

that have been on the books for almost a half-decade now, using techniques in economic analysis that we are most capable with.

Your work seems very important.

We can only find the right way forward if we know how we got here. 

Keep at it!

We talked about a lot today. 

Why is a hydrogen industry development strategy important to achieve carbon neutrality?

 Leave us with some final thoughts, Dr. LEE.

I study policy at a national research institute. 

This has given me the opportunity to introduce the results of my research to a wide audience, for which I am extremely grateful.

I promise that myself, my team, and all of KIET will continue to give our all in studying hydrogen, renewable energy, and industrial energy and environmental issues, 

and strive to ensure that our research informs effective policy. Thank you.

Thank you so much for your kind words today.

 I hope that Korea builds a strong hydrogen industry that helps us achieve carbon neutrality and drives new economic growth. 

 I know that many of our viewers are interested in the hydrogen industry these days. Please keep us updated.

Please keep us updated.

Sure thing.

That does it for today.

Thanks to everyone for your time and attention. 

 

RESEARCH BY EAR
The Power of Bits: Unlocking the Potential of the Service Economy

KIET, Jin Kyung GOO

Hello everyone! This is Hyunji KIM.

 I’m happy to have you with us.

Today, will talk with Dr. Jinkyung GOO from the Service Industry Future Strategy Division

at the Korea Institute for Industrial Economics and Trade (KIET)

about a major KIET research report: Strategic Approaches for

Vitalizing Data-based Ecosystem in Service Sectors.

Hello, Dr. GOO.

Hello.

This is Jinkyung GOO from the Service Inudstry Future Strategy Division of KIET.

I study the service industry.

My team and I conducted the study you mentioned earlier this year

as the service industry pursues a strategy of digital transformation.

let's get to it.

Today we will talk about the service industry and data.

I am curious: what does data mean these days in industry?

People (myself included) are very busy these days.

You don't have time to go grocery shopping,

and you don’t even know what you’re out of at home.

Imagine that, in this scenario, a friend comes up to you and says,

“Hey, you’re out of toothpaste and laundry detergent.

I think you’d like some whitening toothpaste

and the new Hinoki scented detergent.

It's so nice.

Should I buy it for you?”

You’d be very grateful! What a good friend that would be.

But such a friend doesn’t exist, right?

Actually, it does, in the US:

Amazon's artificial intelligence (AI) speaker, Alexa.

How does Alexa know what I need and what my tastes are?

I’ve gathered that,

since we’re talking about data today,

that Alexa might have used data on previous purchases

to make the suggestion. Am I right?

That’s correct.

Amazon knows my order history and frequency,

and has data on consumers with similar profiles.

Alexa recommends products that consumers may want based

on their order histories, and allows consumers

to place orders through the speaker just by talking.

That’s pretty cool.

I wish I had one too.

Especially these days, since we’re all so busy.

That’s the kind of friend busy consumers need.

But can’t companies use this kind of data too?

Companies that know consumer tastes can recommend products based on purchase histories.

Having this data makes marketing efforts more effective,

and companies that know their customers are more likely to satisfy them,

minimizing returns and exchanges and reducing associated costs.

Pretty amazing. It seems that data is already playing doing some heavy lifting for companies.

I imagine that companies in all kinds of industries could make good use of data.

But it seems that in the service sector it’s basically a requirement,

given the diversity of the customer base.

How are service companies using data these days?

First of all, service sector firms and manufacturing companies use data in slightly different ways. In manufacturing,

for example, firms use data to develop or improve products

and increase the efficiency of manufacturing processes.

But data is used in many more ways in the service industry.

In the retail and distribution sectors, firms can use data to predict customer behavior and offer customized services.

In the medical industry, companies collect not only patients' medical data but even genomic information to help prevent and treat diseases.

In the financial industry, customer data can be used to help prevent insurance fraud.

So we can see that, in the service industry, companies are utilizing data to develop entirely new services,

pioneer new markets, and generate new value for individual consumers.

It seems like data is being used in a much more diverse way than I previously thought.

That makes me curious about how our data is currently being used in the service industry.

If you can think of anything noteworthy worth mentioning here, please do so.

In performing a cross-country comparision of the data industry, we found that the Korean domestic data industry is growing at a faster rate than any other country’s data sector.

But we also found that the domestic service sector does a relatively poor job of utilizing this data.

A 2019 survey by the national statistics agency Statistics Korea (KOSTAT) on corporate activity revealed that only 438 service industry firms with more than five employees had utilized big data.

Many of them were IT companies, however.

In non-IT sectors, only financial, medical, and distribution and logistics firms were found to utilize data.

In certain industries, many companies did not utilize data at all.

So we can see that firms in just a handful of industries actually make use of big data.

I see. So while the data sector is growing fast, many industries are failing to make good use of data.

I’m curious about one industry in particular. You mentioned that firms in the financial and insurance sectors are using data. How so?

Firms in the domestic financial and insurance industry make more active use of data than any other service sector companies.

This owes to the nature of financial data.

In this sector, data can be divided into financial market data,

which is generated in transactions of financial products such as stocks and bonds, personal financial data,

which comprises information on personal income, assets, and financial transactions, and public financial data, held by the Financial Supervisory Service (the Korean equivalent of the Securities and Exchange Commission).

Critically, financial data is standardized.

For example, if you go to a bank, the forms you have to fill out to open an account (or conduct any transaction, for that matter)

and the information you have to enter on those forms is the same regardless of which bank you use.

In other words, data generated through financial transactions are consistent in terms of both content and format.

This means that data collected by one financial institution can be easily used by another, without the need for any conversion.

This makes financial data comparatively easy to collect and utilize.

So you’re saying it’s a matter of convenience.

In addition, financial and insurance most heavily utilize data in marketing efforts.

For example, credit card companies offer various cards with different benefits depending on the customer.

Recently, we can see that these firms are offering cards with benefits based on

consumer lifestyles and interests, rather than simply gender or age.

Such cards typify the kind of financial products that exist thanks to customer data.

Insurance companies meanwhile use data to identify groups or individuals that pose an especially high risk of insurance fraud,

and better manage risks through a moral hazard analysis.

Interesting. So this lets companies better prepare for potential abuses.

Data sure seems smart.

But, even though financial data is being actively used,

there are clearly some limiting factors What kind of policies might help address these?

There are some limitations worth discussing.

Outside the standardized data I just mentioned, there is in fact a paucity of data that companies can actively utilize.

For example, when you open an account at a bank, they don't ask you whether you like working out or reading.

But if credit card companies or insurance companies had this kind of information, they could use it to develop products curated to individual lifestyles.

This is why it is critical to use financial data alongside data from different industries.

Financial companies often cite the difficulty in securing diverse data as an obstacle to its active utilization.

Policies should be implemented that enable financial firms to use consumer data from other industries in the development of financial products.

There is another issue here: there is no reliable estimate of the value of financial data,

despite it being the most standardized of all consumer data.

We need to build trust in data transactions by developing a standardized model for valuing data.

Currently, data providers unilaterally set their own prices.

But if we can improve trust in data, more and more firms will be encouraged to make use of it.

I see. So for financial data, companies need to be able to combine it with data from other industries,

and we also need a standard model for assessing the value of data.

This makes me wonder about how the medical industry uses data?

Medical and health industry data includes patient treatment data, clinical research data, genome data, and so-called “life log” data.

There are two basic types of medical data: private data, generated by general hospitals and clinics, and public data, which is held by the National Health Insurance Corporation (NHIS), the National Cancer Center (NCC) and the Korea Disease Control and Prevention Agency (KDCPA).

The Korean government mandates participation in a nationwide health insurance scheme,

and so standardized information on this health insurance, including premiums paid and benefits disbursed, is accumulated in the public domain.

But the content and format of private medical data varies depending on the source, and standardizing this data is difficult.

Medical data can be used to develop new products or provide more personalized medical information.

This are indeed typical use cases for medical data.

These data are also used to prevent, diagnose, treat, and manage diseases.

The new field of digital therapeutics, which has recently begun to make headlines, has produced a number of new services utilizing medical data.

One such service is Livongo Health, available in the United States,

which provides coaching to improve diet, exercise, and lifestyle habits for individuals suffering from chronic diseases such as diabetes or high blood pressure.

It also provides devices that enable customers to measure their own blood sugar and blood pressure,

and the company can use this data to offer solutions such as customized exercise routines or diets.

In addition, Teladoc, the parent company of Livongo Health, compiles this medical data collected

from individual patients and provides data-based telemedical treatment services.

You mean, it’s all done remotely?

Yes. Data makes this possible.

And recently, we’re seeing an increasing diversity of businesses based on medical data.

For example, these data have become more valuable,

and businesses based around buying and selling medical data have begun to emerge.

One such firm is American medical information exchange platform Patients Like Me.

Patients upload their medical information to the platform.

The company manages it, anonymizes the data, and sells it to interested parties.

That’s pretty neat.

It feels like it’d be easier to take care of myself,

and make monitoring my own health a part of my daily life.

And listening to you talk, I’m beginning to think that maybe the value of medical data exceeds just its economic value to industry.

I'm curious if there is any way to make better use of it.

You’re right.

It is indeed exceedingly valuable.

As many viewers may be thinking, medical information comprises incredibly sensitive personal data,

and individuals are understandably reluctant to disclose this kind of information.

This is why we need to reach social consensus with regards to how we collect medical data,

and the government needs to develop policies that encourage voluntary disclosure.

There is also the problem of medical data generated in the private sector.

The terminology, format, and technical method used to create medical charts differs depending on the source.

This makes such data nearly impossible to standardize, and thus difficult to utilize.

We need to establish quality standards for unstructured data.

I see.

I have more thing I’m curious about.

Please tell me how data is used in the retail, wholesale, distribution and logistics industries.

Retail data may be thought of as any and all data generated in the process of a consumer purchasing a product.

These data include order histories,

transaction data on where and how much we bought,

consumer profiles, which is information about us,

and recently, with the development of online retail, logistics data on the delivery of products to consumers.

Compared to financial data and medical data,

you might feel that retail data is much more intimate.

Among the three types of data we have discussed so far, retail data is the least standardized.

Take for example order histories.

To build an order history, you need to start by knowing exactly what a consumer bought.

But there is no standardized product database from which to extract this information.

And so we have no standardized way of identifying what product is what.

The barcodes you commonly see when purchasing products are optional identifiers; there is no requirement to use them or for them to be standardized.

They are common because large discount stores grew so big that they eventually asked manufacturers attach barcodes to products to aid in product management.

This is how we came to see barcodes on common domestic goods.

But as online retail has expanded, many online retailers have found no need for barcodes to manage their inventories.

And so the one semi-standardized product database through which we could identify products is gradually shrinking.

It is also worth mentioning the value of retail data in other industries.

Retail data directly testifies to individuals’ consumption patterns,

and thus could be used to develop financial products or even medical products,

as consumption habits can speak to the way individuals

eat, exercise, and go about their daily lives.

As you mentioned,

retail data is utilized across industries.

So it seems strange that such data is so unstandardized.

It is.

Currently, retail data is most common used in marketing.

This is because targeted marketing is much more effective than mass marketing,

but customer data is essential to provide personalized marketing services.

Surely you’ve seen ads for products you’ve expressed interest in appear in your social media feeds?

I sure have. At times I’ve felt,

oh that’s quite convenient...but also a little scary.

Those ads can be annoying, can’t they?

Still, I end up buying a lot of stuff because they tempt me.

Recently, as online retail has grown,

we have seen increasing emphasis on the importance of logistics and delivery.

When you order something online,

the thing you most want to know is: when will I get it?

It’s really important.

It is.

Starting in 2022, Naver introduced a delivery guarantee service.

Basically, this is a package tracking service that not only informs consumers of every stage of delivery,

but maximizes the chances that parcels are delivered on time by combining various data,

including consumer order histories, logistics information, and parcel delivery information.

That sounds great.

Whenever I buy something,

I always make sure there is some kind of delivery guarantee first.

I only buy things if a guarantee is available.

As someone who does a lot of online shopping, I can really feel why the use of retail data is so important.

This kind of information seems essential for everyone, including to the consumers like me who have to buy products as well as to the companies that have to sell them.

So you’ve talked about how actively firms are using distribution data.

But how can we encourage even more active use of it in the future?

First of all, in order to promote the use of retail data,

we need to build a a standardized product database, as I said earlier.

It will also be necessary for the various distributors to trade and share product and transaction data.

Many spheres of our lives are related to consumption in some way,

and so we generate a large amount of retail data.

But little of this has been accumulated and shared, making it difficult utilize the data that we do have.

I am beginning to see that what is most necessary is accumulation and standardization.

So far, you’ve described the state of data utilization in the financial,

insurance, retail, and logistics sectors so far, and have described some of the challenges firms in these industries face with regards to data use.

Could you now describe the implications of your research?

What is needed to activate a healthy data utilization ecosystem in the service industry?

Data has often called the oil of the 21st century.

This is because, if leveraged, data can drive industrial growth.

But, just like oil, data must be refined and processed before it can be utilized.

And handling data poses some of the same risks as handing oil: you might get burnt.

Mishandling data carries serious privacy risks.

This is why we need a system through which we can safely trade such a dangerous but useful resource,

and the kinds of governance and management institutions and regulations that can facilitate it.

Government policies are needed in order to regulate the collection, management, and trade of data.

For any given entity, the more data in its possession, the more useful it is.

But it also becomes necessary for said entity to utilize not only the data it has directly collected but also data collected by others.

To enable this, we created a data exchange to promote data trading.

There are several data exchanges operational in Korea,

but they are not particularly active.

There are several reasons for this.

First of all, companies do not put their data up for sale on the exchanges.

So in many cases, there is no demand for the data available on those exchanges.

There are just too few buyers of the available products.

This could be for many reasons,

but what is likely is that the data exchanges do not provide essential market functions such as

classification, processing, and pricing of data.

A slightly bigger problem is that exchanges play no role in mediating any legal disputes that can arise.

In particular, for data containing personal information,

there is always a high risk of some legal dispute occurring, which poses a risk to companies hoping to utilize such data.

This is a bit of thorny issue, isn’t it.

I think trust and a clear sense of responsibility are necessary in data trading.

As you just said, the more data you have, the better.

The value will vary depending on who uses what data and how they use it.

That’s right.

Again, I can return to the oil metaphor here.

Some people heat their homes with oil,

while others use it to run their cars.

Data is similar in that it can have many uses.

It can create value depending on the field and the method by which it is utilized.

This has created significant demand for data experts in various fields.

As part of our investigation, we conducted a fact-finding survey targeting companies.

We surveyed firms that utilized data as well as firms that didn’t.

We found that both types of firms cited a lack of quantitative and qualitative data experts

as the biggest obstacle to more data utilization.

So this is an urgent problem.

The Korean government has introduced and implemented a training program

that funds data training at certain graduate schools and government-funded vocational schools in a bid to cultivate data experts.

But the supported training period is too short,

and cannot hope to produce real experts.

There remains a need to reinforce worker expertise through government-funded vocational education, linkages with graduate schools,

and the expansion of terminal degree programs in data science.

In addition, in order to meet the demands of industry, it will be necessary to not only cultivate additional professionals

but also expand data education for blue collar employees as well.

Earlier, when we spoke about the use of financial, medical, and retail data,

we also talked about the importance of combining multisectoral data.

In order to increase the usability of this combined data,

we need a set of standardization guidelines.

As of now, there are separate guidelines used for combining data in finance, medicine, and so forth.

But this does not help promote the utilization of multisectoral combined data.

We need a set of comprehensive standardization guidelines.

I see. So there are still some shortcomings, but if we keep at it,

step by step, we should eventually be able to better utilize retail and other data.

Finally, Dr. GOO, I would like to know what kind of challenges you faced in the pursuit of this research,

and if you have any regrets about how it panned out.

Also, please let us know what’s on the docket for your next project.

We previously looked at the characteristics and utilization of financial, medical, and retail data.

Excluding the financial industry, we found low levels of data utilization in the domestic service industry.

Because the domestic data trading market is developing so slowly,

it is difficult to say that Korea's service industry has a data ecosystem at all.

There is no smooth flow of data between ecosystem constituents.

Right now, we have a situation in which companies collect their own data and use it within their own companies.

That’s it. Based on the model outlined in a Gartner report, Newman (2011) -- who coined the term data economy —

described four evolutionary stages of the data economy.

The Korean service industry sits somewhere just after stage one.

Right now firms do not collect data with the intent of eventually contributing to a shared data ecosystem.

Rather, it appears that they are at a slightly advanced level of data accumulation.

So while we studied the data utilization ecosystem of the service industry for this research project,

we found it to be at such an early stage of development that it was hard to say there was a data ecosystem in place at all.

Thank you. We talked a lot about your research project today.

How do you feel having described the results to us?

I very much enjoyed being able to talk with you in detail about the research today.

Thank you for listening and asking questions.

We at KIET are going to try to better communicate with the public through this medium in the future.

Thank you again for speaking to me today.

I hope that our country’s service industry makes better use of data going forward.

Thank you Dr. GOO for the interesting talk,

and thanks to all of our viewers for watching. Have a good day.

 

RESEARCH BY EAR 
(Chips/Batteries/Bio-tech) Into the Wild: K-Industries' Survival Strategies

KIET, Heekwon KYUNG & KIET, Kyung In HWANG 

Thank you Dr. KYUNG. 
It took us a while to get through the intro.

It certainly did.

Now that we’re past the introduction, 
let’s get down to brass tacks.

First of all, what would you say are the main drivers of change in each of the industries addressed in the report?

 The factors are all different, right?

The 45 outside experts consulted for this project were in nearly unanimous agreement

with regards to the main factors driving change in the semiconductor, future car, and biopharma industries.

For semiconductors, experts cited geopolitics as the principal overriding concern.

For future cars and biopharmaceuticals, they said supply side factors -- that is, technological development -- will play the most important role in driving industrial change. 

Looking first at the semiconductor industry,

we expect the US — which is currently pouring huge sums to bring domestic chip facilities online — to play an ever-larger and more important role throughout the sectoral value chain.

The more vertically-integrated semiconductor firms like Samsung Electronics and They call it IDM, a comprehensive semiconductor company such as Intel in the U.S. and Samsung Electronics in Korea.

As these companies are aggressively expanding into the advanced process foundry sector, 

it is expected that the comprehensive semiconductor sector will become the most important part of the value chain in the future.

TSMC is expected to maintain its position at the top of the global contract manufacturing and foundry stages of the value chain.

But both the US and the EU are currently investing significant resources with the ultimate goal of reducing their dependence on Taiwan. 

And so Taiwan's share of the market will eventually fall, with Intel and Samsung coming to help fill the gap.

Why do the US and the EU feel that they need to address their reliance on Taiwanese chips?

There are two things worth addressing.

As I mentioned earlier, in the depths of the global COVID-19 pandemic,

we saw serious disruptions on the production side in the auto industry, 

and the damage was greater than we originally thought.

Yeah, I remember how at the time if you ordered a car you had to wait over a year before seeing it. 

The parts shortages got so bad that they were installing old parts on new cars and sending them to dealerships. 

 Another issue is the Russia-Ukraine war.

 The US Secretary of Commerce said that anti-tank guided missiles like the Javelin require a lot of chips, but that these are manufactured mostly by TSMC.

The US cannot help but see this overreliance on key components manufactured in a country just across the strait from its main geopolitical rival as a major security risk.

 Back to talking about the semiconductor value chain, the US has maintained approximately 70 percent of the global market share in integrated circuit design and fabless for over a decade.

I have no reason to doubt that America's dominance will continue.

Taiwan should assume second place, led by MediaTek. 

IDMs are expected to vertically integrate foundries, advanced post-processing, and even some design.

 Since we are now approaching a time in which line width miniaturization is knocking up against hard physical limits,

major companies like Samsung are investing billions of dollars every year in the auxiliary stages of the value chain,

including advanced packaging technologies such as hybrid bonding and wafer level fan-out. 

Korea is currently ranked first in memory semiconductors, and wants to be first in system semiconductors too by 2030.

Yeah, that's the target announced by the government. 

It’s an ambitious plan,

but the reality is that Korean firms currently possess just a one percent share of the global fabless market.

Just one percent?

Yes. Of course, this figure only refers to the market share held by pure-play fabless companies.

Some chips are designed by integrated firms, like the line of AP Exynos smartphone chips made in-house by Samsung Electronics and SK Hynix. 

And if you combine all the chips made by Korean companies used in high-definition CMOS image sensors for smartphone cameras, the overall market share goes up a little,

that ultimately only gets us to about three percent of 
the non-memory chip market.

Any way we look at it, Korea is weak in chip design. 

And like I just told you, in terms of pure fabless firms, 
Korea has a meager one percent share of the global market.

The foundry situation is not much better. 
We’re going to show you some sales data now. 

 You can see in the figure that TSMC earned revenues of about USD 20 billion for its 5nm process last year. 

Samsung Foundry, by comparison, 
made about 1 billion on its 5nm node. 

TSMC sales were 20 times greater.

More than 20 times more?

That’s right. 
And while Samsung was the first firm to begin mass production of 3nm node chips last year, sales amounted to just over USD 200 million. 

I wanted to come back to TSMC here to emphasize how the ecosystem in which the company exists is what powers its overwhelming market share of advanced processes.

I have another point I wanted to get across. There is this popular perception of TSMC’s dominant position in the foundry market as owing to the vibrant ecosystem in which TSMC operates and its capable SME partners.

But I see it like this. It has been what, five or six years since Samsung launched the Galaxy S line of phones and began selling 300 million units of them every year. 

This led Apple to launch a flurry of patent lawsuits and ultimately turn to TSMC to supply virtually all of its AP chips. 

But Apple is the only company in the world that can provide annual demand for more than 100 million units per year of cutting-edge processes of each generation, 5nm, 3nm, and so on. 

So, in order for Samsung to catch up with TSMC, the most important issue is securing yearly demand for advanced processes on the order of tens of millions of units. 

But isn’t this an area where the government needs help corporate leadership by using some of its diplomatic capacity?

It certainly seems that way to me. 

Right now, automotive semiconductors used in new cars built by firms such as Tesla and AI chips are looking like high-growth demand markets.

The semiconductor situation is a tough one, isn’t it?

Yeah, it’s not easy out there. 

Next up is the auto industry.

What’s the future landscape of this sector look like? We’re looking at major changes going forward, aren’t we?

Two basic trends can sum up the overall direction of the automobile industry over the next 10 years:

electric propulsion, and convergence with ICT and software driven by the development of autonomous driving technology.

Up til now we have been in the era of the internal combustion engine vehicles (ICE), in which Japan and Germany have shown much strength.

This is especially true in parts ecosystem for ICE vehicles, as well as in procurement and production competitiveness.

We all know how famous Toyota is in this regard.

But with the transition to electrification and autonomous driving, the United States, with its large platform companies

such as Google and advanced system semiconductor firms such as Intel and NVIDIA is set to once again take the lead in the automobile industry.

 I’m not sure if you’re into investing in stocks,

 but the famous investor Warren Buffet, at one of Berkshire Hathaway’s annual shareholder meetings,

pointed out that when the internal combustion engine was a new technology, there were close to 2,000 automobile companies in the United States alone.

 But Japanese and German firms caught up, 

and now, as you may know, 

there are currently only two American automakers left standing after a series of technological changes: GM and Ford. 

This example serves to illustrate why the current inflection point in the industry is so scary.

I think that the current shift toward electric power and autonomous driving in the automobile industry will eventually separate 

the winners from the losers, with major impacts on players in the existing global division of labor.

Many countries have implemented policies to facilitate the spread of EVs; 
it seems that adoption is poised to take off, isn’t it?

Yes, as you said, the automotive sector is transitioning from ICE-based cars to EV.

I think “transition” is the key word here.

Several organizations provide data on the outlook for EV sales, and while numbers can differ, 

the overall consensus is that around 8 million EVs were sold in 2022.

Deloitte forecasts that by 2030, this is set to jump to 31 million units a year, an increase of four times over. 

Of new car sales. 

Yep. Sales of new EVs are set to exceed 30 million units by 2030.

Experts predict a fourfold increase compared to now.

And by 2040, 60 percent of all new cars sold will be electric vehicles... 

That many?

Yes. Up to 60,000,000 cars.

Maybe it’s because I’m a bit old fashioned, 

or maybe because it’s just what I know best, 
but I feel something like a lingering attachment to gas-powered cars.

EVs don’t really do it for me.

But after 2025, EV adoption is set to really pick up speed, isn’t it?

It sure is. EVs are associated with ideas like carbon neutrality and eco-friendliness. 

For the average consumer, typical ICE cars are like appliances — they are means of transportation that happen to generate a lot of carbon emissions and are overall not environmentally friendly. 

And so many people are making the switch to EVs, and the market for these new cars is expanding.

What’s the major component of an EV?

The battery.

Yep. You know that I study the battery sector for KIET.

Let me tell you a little about batteries.

Please do.

Like I said, EVs are the biggest factor on the demand side of the equation in the battery sector. 

With the anticipated growth in EVs, the battery market is set to soar. 

One think tank forecasts that by 2030 the battery market will expand ten times over compared to now, 

eventually coming to dwarf the memory semiconductor industry by a factor of two. 

The battery industry does indeed have good potential for continued growth.

And importantly, it is a market in which Korean companies are currently doing very well.

In terms of market share, we occupy about 49 percent of the global market, excluding China.

China sits at 27 percent and Japan at 19 percent, So we are far ahead. Of course, if we include the Chinese domestic market in the estimation, China comes out ahead.

But the Chinese market is focused on domestic companies, and  taking this into consideration, 

I think it is fair to say that we are actually the number one country.

I think the battery sector is one of those areas with the kind of strategic value that you were talking about earlier. 

And I think the two key factors that are currently driving the new industrial paradigm are carbon neutrality and digital transformation.

Batteries represent a key technology for both. 

For example, batteries are very important in future mobility industries such as EVs and Urban Air Mobility (UAM), as we have discussed.

And in order to achieve carbon neutrality, we must move into an era of renewable energy, and here too batteries are a very important technology and field. 

So, depending on who ultimately takes the lead in the battery industry in the future, 

 the sector is of such importance whoever comes to rule it could eventually come to dominate other related industries.

Other countries know this, and are currently implementing unprecedented industrial policies to help make this a reality.

We’ve been saying this a lot.
But the word unprecedented may be understaning the current situation,

I think. In geopolitical terms, a lot of people are saying that these policies are almost like acts of war. 

The Inflation Reduction Act (IRA) went into effect in the US last year,

and Europe has its own laws such as the Battery Act and the Critical Raw Materials Act (CRMA).

Batteries, semiconductors, and bio-tech are all at the forefront of the US-China conflict.

We see this in the IRA especially. 

The United States is attempting to reorganize the global battery supply chain into one where it is the global leader. 

The reason for this is that China dominates the supply chain for all the minerals that go into batteries. 

 The US saw this as a threat to a field it assessed as possessing strategic value.

 In order to check this, it started to implement industrial policies related to batteries, and the IRA is the crown jewel of this policy suite.

Europe, too, is currently pursuing laws such as the Core Raw Materials Act, recognizing that its dependence on China for minerals is too high.

So, while it is true that Korean companies and the country as a whole are both doing very well in the battery industry,

if we do not address the evolving international situation we could eventually face a significant crisis.

Thanks for your input, Dr. HWANG.

It’s not easy being on top of any field.

Staying on the topic of future cars, let’s talk a bit about the development of autonomous driving technology. 

In the future, chips, electronics and software will form the core components of what we are now calling Software Defined Vehicles (SDV). 

For SDVs, technology and services will become very important.

Nowadays, there are numerous smartphone apps intended to be used in your car. 

The big two are Apple AirPlay and Android Auto, but there are many others.

What we’re seeing in this space is that software developers and entertainment firms that otherwise have nothing to do with actual vehicle production are emerging as major players in the automobile industry value chain. 

 It looks like the big software and platform tech firms such as Google and Microsoft are converging in almost all fields related to finished car production.

 In the report, we looked at a potential business model in which big tech firms could feasibly outsource the manufacturing of a vehicle to a manufacturer.

The hypothetical example gets the most attention is the Apple Car.

And this is a thorny issue to talk about, but we believe that a radical change in strategy, policy planning, and implementation is needed at every level of government in order to address this threat. 

We need to break down the boundaries between ministries and allow hitherto unrelated fields to converge, generating synergies and producing real innovation. 

So far, we’ve covered three of the big four industries covered in the report.

Now, I would like to move on to the biopharmaceutical industry.

Could you summarize the future outlook for the biopharma sector? 

What kind of industrial strategies should we be weighing?

The biopharmaceuticals sector may be a bit unfamiliar at first, but it is a very important industry,

and I wanted to talk about it in some detail.

 First, what is a biopharmaceutical? 
Well, you know the pills we normally take, right?

Those are chemically synthesized drugs. 

Biopharmaceuticals are different, because they are developed from a totally different set of raw materials:

not chemicals, but microorganisms and animal cell cultures.

In other words, we are talking about treatments made from biological agents.

They are usually much more expensive than the widely-used chemical drugs. 

I briefly mentioned earlier how these drugs are priced way out of the reach of the general public, 

 even in fairly well-off countries in Northeast Asia such as Korea, Japan, and China, to say nothing of how rare they are in developing countries in the Indo-Pacific.

Additionally, our country's medical insurance system places strong restrictions on drug prices.

But the US is different.

In the US, there are two national health insurance systems, Medicare and Medicaid,

that operate alongside a slew of private health insurance companies.

You probably know that the medical care system in the US is very complicated.

Yeah, I could never figure it out. 

Basically, the American system makes it possible for firms to charge astronomical prices for drugs.

And so the United States is the largest market for biopharmaceuticals.

These high prices allow large pharmaceutical companies to recoup their investment costs, which is why they are pouring enormous amounts of money into the development of advanced new drugs.

Just how much money?

Last year, the total amount invested into cell and gene therapy Acquisitons was close to USD 225 billion.

 So we are talking mind-boggling amounts of money here.

Given the sheer scale of the investment, we expect the United States to continue to lead in terms of R&D and demand.

The entire biopharmaceutical market was estimated to be worth about USD 340 billion in 2020, according to market research agency IQUVIA.

But explosive growth is expected, and the market is set to be worth as much as USD 600 billion by 2026. 

This projection tracks the trajectory of the semiconductor industry. 

The next largest market for biopharma drugs after the United States is Europe.

Swiss companies in particular are very strong in new drug development, manufacturing, and distribution.

As far as I know, Korea is strong in biopharma contract development and manufacturing, right? 
Vaccines, biosimilars, and CDMO.

Aren’t Korean companies such as Lotte and Celltrion investing in facilities and making strategic acquisitions in this field? 

Yes. Whenever we analyze an industry, we typically see good prospects for growth if a large company is involved.

Kind of an indirect way of looking at it. 
That’s certainly something we’ve seen before. 

Yes, because large companies have to really think about entering a new sector before taking the leap.

An analogy with the chip sector may help explain the current state of the biopharma industry.

Large American and European pharmaceutical companies such as Johnson & Johnson, Amgen, and Roche are active in every stage of new drug production, from development to production.

They are like IDM companies such as Intel.

But there are also biopharma firms that are like fabless chip designers; 

they only develop the new drugs and outsource their actual production to the equivalent of foundries. 

So the structure does resemble that of the semiconductor industry. 

Yes, it does. The firms that are like foundries that mainly engage in drug production are called CDMO firms in the biopharma sector.

Based on data from market research outfit Frost & Sullivan, the CDMO market was valued at almost USD 20 billion last year,

 but robust growth of 15 percent annually is expected in this segment.

This would value the sector at over USD 60 billion by 2028. 

Profit margins in this industry are also quite healthy.

Samsung Biologics up in Songdo, Incheon is the world’s second-largest CDMO firm, isn’t it?
*Songdo refers to the Songdo International Business District in the South Koean city of Incheon

Looking only at CDMOs and not general pharmaceutical companies, Korea's Samsung BioLogics looks set to be the largest such firm in the world by 2025.

One thing we would like to emphasize here is that Korean firms were instrumental in helping to mass-produce mRNA-based COVID-19 vaccines for American companies during the pandemic despite serious supply chain disruptions.

Their ability to deliver in a time of crisis greatly enhanced the global credibility of their industrial and technological prowess as well as their ability to manage supply chains.

This is what I found through conversations with the executives of several major Korean bio companies.

But here too we have to mention the US-China conflict.

The US is also working to contain China in the bio sector, right?

The strictness of its quality control regime is one way in which it does this.

Everything must be approved by the FDA, down to the beakers and rags, in order for a drug to be approved and sold in the US. 

Korean firms can comply with these demands, and so the country is emerging as a critical production partner for large global pharmaceutical companies.

This is why many experts are looking at the biopharma sector as the second coming of the semiconductor industry,

and arguing that the government give it the same kind of support that the chip sector got.

It wouldn’t be a huge exaggeration to say that the bio cluster around Songdo could be the hub of the biotech supply chain in Northeast Asia.

We should seriously consider how we can turn Songdo into Korea’s version of the Hsinchu Science Complex.

*The Hsinchu Science Complex is a chip cluster home to TSMC and other Taiwanese semiconductor firms. 

Listening to what you said, I’m left with the impression that Korea’s core strength lies in mass production.

We saw during the coronavirus pandemic in particular how our mass production capabilities in the biotech sector were put to good use,

and like you said this won Korean firms the trust of many global pharmaceutical companies, setting us up for robust growth going forward.

Sticking with the biotech field for a moment, we’ve talked about CDMO,

but there is also the biosimilar market, which is also to rapidly expand.

It is. These days, government health insurance budgets are under a lot of pressure,

so the US and Europe are pushing policies to promote the introduction of biosimilars.

Biosimilars refer to products that are similar to biopharmaceuticals whose patents have expired and are distributed at a lower price after undergoing clinical trials.

In other words, they are generic drugs. 

You should be able to see a table on your screen now. 

The data show that by 2030, 10 blockbuster biopharmaceutical patents are set to expire.

A blockbuster drug is defined as one with annual sales of more than USD 3.5 billion.

The market for biosimilars is set to skyrocket as the patents for these drugs begin to expire. 

Sales of the drugs in the table alone are estimated to be about USD 80 billion, 

so were are looking at the creation of a potentially massive new market in the near future.

What makes the biosimilar market appealing compared to the electronics or chip sectors is that the prices of mobile phones and electronics plunge a year or two after being released.

But for biopharmaceuticals with some stable share of the market, a high rate of return can last for a very long time. 

The business model is in this respect even stronger.

We know that major companies including Celltrion, Samsung Bioepis, and Dong-A Socio Holdings are already conducting phase 3 global clinical trials.

We’ve been talking for a while now, 
so I’d like to ask you one final question.

I know that while working on this project, you spoke at length with representatives from numerous firms,

KIET experts, university professors, and government officials from the Ministry of Trade, Industry and Energy as well as the Ministry of Strategy and Finance.

Please tell us briefly about any new insights you have gained through these dialogues,

and any suggestions you have regarding our government's policies.

Of course. First of all, 
while the industries may seem superfically quite different, 

in terms of the value chain that links them together, they are in many ways quite similar.

 I mentioned earlier how design and production occupy separate stages of the value chain in both the chip sector and the biopharma industry.

This tells us that we should not make judgments or design policies based solely around knowledge or information on one particular industry, 

but rather take advantage of all the knowledge that Korean firms and other entities collectively possess.

If we apply insight gleaned from the combined historical experiences of many industries and leverage this collective intelligence,

perhaps we can have gain some insight into the areas of weakness in which we wish to become strong. 

That’s a good point.

I expect this to eventually happen.

I won’t go into detail, but generally,

in semiconductors, Korean firms are strong in standardized production of memory chips and in contract manufacturing at foundries.

And in biopharmaceuticals, we are strong in CDMO.

As you said, Korean firms’ competitiveness in mass production of standardized products is very good.

Achieving this level of competitiveness was not easy, 

either, we are talking about extremely complex technologies, after all. 

But by contrast, Korean firms are weak in fabless and new drug development; that is, in creating new products and new markets.

This represents a crucial difference between the Anglo-American countries and the Northeast Asian countries.

In the latter, economic growth occurred via catch-up. But it was the former that made new products and created markets. 

Take for example the iPhone, which created a market that did not exist prior to 2007, and new anticancer drugs.

New drug ventures and fabless unicorns like Apple have produced annual revenues in the billions of dollars.

For Korea to achieve this kind of performance, the emphasis of government policy must be to maximize the creative potential of the private sector — that is, 
in the bigger picture, the whole ecosystem.

I think we should focus on creating a foundation and infrastructure where talented workers and startups can operate freely.

This is another way of saying that we need to seriously improve the operating environment of the private sector in a way that allows it to take the lead.

Currently, the governments of Korea, Japan, and China all approach the issue the same way.

“If the government and companies invest this much money this year, what will market share and sales revenues look like in 2030,” and so on.

I mean, this looks at economic growth like it’s only about inputs and outputs.

But is this really the right perspective? That's what I'm trying to say.

So to look at the issue in a more positive way, 
what we need is more support and…

Yes. Next, regarding fabless and new drug ventures,

 I am now planning a study on venture capital for next year.

Korea, China, and Japan are all experiencing significant difficulties in creating global-level innovative companies.

We often talk about this. But key limitations of Northeast Asian economies often boil down to the structure of their financial systems. 

So I’m trying to study the venture capital ecosystem of Sand Hill Road in the United States,

the firms of which financed the rise of many Silicon Valley titans in semiconductors and biopharma including Intel, Apple, and Genentech. 

Following insights gleaned from this pursuit, we would like to explore policies for incubating innovative companies in strategic industries in Korea. 

Sounds like some very interesting research.

It will certainly be a lot of work.
Good luck!

Yes, today we spoke with Dr. Hee-kwon KYUNG about a major KIET report from 2022:

Policy Proposals in Response to the Era of Global Supply Chain Restructuring Processes over Industries of Strategic Values. 

We spoke at some length about Korea’s strategic industries:

semiconductors, car batteries, and biopharmaceuticals, and some of the issues these sectors are facing.

We also discussed and how companies and the government are looking to develop these industries in the future.

Dr. KYUNG’s report is nearly 400 pages long, and I anticipate that many of its findings will be of use to policymakers and other interested parties.

And while we discussed quite a bit today, there is a lot more to discover in the report, and I hope that our talk today leads some of you to seek it out.

Well, thank you for watching. 
That concludes this interview.

Thank you, Dr. KYUNG.

 

RESEARCH BY EAR 

(Chips/Batteries/Bio-tech)

Into the Wild: K-Industries' Survival Strategies

KIET, Heekwon KYUNG & KIET, Kyung In HWANG 

Hello, my name is Kyung-in HWANG, Associate Research Fellow at the Korea Institute for Industrial Economics and Trade (KIET). 

Today, I will be talking with my colleague Hee-kwon KYUNG about the KIET report Policy Proposals in Response to the Era of Global Supply Chain Restructuring Processes over Industries of Strategic Values from 2022, 

of which he was the lead author. (You can find a summary of this report in the January 2023 issue of KIET’s Monthly Industrial Economics (in Korean)).

Hello, Dr. KYUNG.

Hello. I am Hee-kwon KYUNG. I study semiconductors in the ICT & Emerging Industry D  ivision at KIET’s Center for Growth Engine Industries.  

Dr. KYUNG, this major project produced a report that is nearly 400 pages long. Can you summarize it for us?

 Of course, Dr. HWANG. As perhaps many of you watching this video likely already feel,

the ongoing U.S.-China hegemony competition is poised to have a profound impact on Korea’s diplomatic relationships, national security, 

and even on its strategic flagship industries, in which we should expect major structural changes to unfold going forward.

We approached this research from the perspective that the current geopolitical reality is not a crisis for the semiconductor,

future car, battery, and bio-pharmaceutical sectors that make up Korea’s core strategic industries, but rather an opportunity for them to take the next step forward. 

Korea has found itself in this situation before in the course of its development.

So our team of 12 researchers worked with 45 outside experts across a number of fields to ascertain directions for future industrial strategies over the course of 2022. 

I’m here today to try and briefly encapsulate the findings of this massive undertaking for you in this video.

You originally submitted the prospectus for this research in March of 2021, now over two years ago.

About two and a half years now. It’s been a while.

Things have changed a bit since then. 

But can you elaborate on your primary motivation in pursuing this line of inquiry at that time?

The idea that Korea’s economic and industrial development has been inextricably linked with the vicissitudes of international politics has been the subject of much discourse over the years.

There is frank expression used to describe Korea’s place in global affairs: We constantly find ourselves at the crossroads of prosperity and ruin, and it’s hard to tell which way goes where.

I want to begin today’s talk with the normalization of diplomatic relations between the United States and the People’s Republic of China, which took place on January 1st, 1979. 

Following normalization, in the 1980s China opened up under the leadership Deng Xiaoping and began heavily promoting a policy of export manufacturing,

tracing the path pioneered by South Korea and Japan. At this time, the US and China were in, to borrow an English expression, the...

 Honeymoon.

  Yes, the honeymoon phase. It was also in this early period of China’s development that we began to see the division of labor go global, 

with Apple iPhones and Nike sneakers designed in labs in California and Oregon and then manufactured overseas, in the PRC but also Southeast Asia and Taiwan. 

This was, in other words, the time when globalization as we know it really took off, and which continued into the mid-2010s. 

But both KIET and the outside experts we worked with for this project saw US-China ties begin to fray around 2017, 

 with the relationship transforming into one characterized more by competition than cooperation and the emergence of a neo-Cold War: a new battle for global supremacy.

As a result of this fundamental change in the global order, over the next 30 years, 

we expect the global division of labor, the global geopolitical situation, and the global economy to be virtually unrecognizable from the state of affairs
 as we 
know it.

You were saying this all began in 2017, right?

And that the bigger point is that at this juncture, 

both the government and Korean companies in key sectors need to take another look at their long-term strategic directions to better prepare for the future. 

I suppose this was the most important thing about this project.

Yes, that’s correct.

International politics has always had a 
decisive impact on the course of development in Korea. 

And you’re also saying that the necessity of the project stems not only from the US-China conflict, and that it’s about more than just national security and diplomacy.

Those are all part of the reason we decided to pursue the research,

 but we also need to think about some of the fundamental limitations of the Chinese economy. 

As you well know, Korea and Japan now find themselves in a similar situation. 

When both countries were in their early stages of economic development, villagers from rural areas migrated into cities in search of work in the manufacturing sector.

These inflows of migrant workers supplied factories with ample cheap labor, generating economic growth based on cost competitiveness.

But the economies of both countries eventually reached what we call the Lewis turning point. 

The Lewis turning point?

Yes, the Lewis turning point is the point in time at which the supply of cheap labor from rural areas starts to dry up, leading to a rapid increase in wages. 

 After the Lewis turning point, technological developments and institutional improvements that were put off when labor was cheap and plentiful begin to occur, 

but not quickly enough to offset the higher cost of labor. 

The term used by economists to describe this effect is called the law of diminishing marginal productivity. 

 Many countries fall into this trap, and it is not easy to climb out of it. 

And so as the manufacturing sector leaves in search of lower production costs, the country enters a phase of structural low growth.

 Over the past 20 years in Korea, and in Japan as well, the annual economic growth rate has continued to fall by one percent every five years.

 And while this is a matter of some debate, China is believed to have passed the Lewis turning point in the early 2000s. 

So now we see Southeast Asia (especially Indonesia), India, and South America (especially Mexico) gradually assuming more prominent global roles in the manufacturing industry. 

We also expect some production to move to Africa as well.   

 To summarize, the past 30 years have been dominated by China’s emergence as the world’s factory, fueled by its world-beating cost competitiveness. 

But this era may have ended, and we anticipate the future will see the rise of new manufacturing powerhouses to challenge China at the top.

Thanks for the summary. 

There are three main industries that your team tackles in the report:

semiconductors, future cars/batteries, and biopharmaceuticals. 

But the US-China conflict affects not only these three industries but also many others. Is there a reason why you focused on these three industries in particular?

First of all, as the title of the report suggests, 

 the semiconductor, EV battery, and biopharmaceutical industries covered this time all have varying degrees of strategic value for Korea. 

In the classic geopolitical sense, the things that have strategic value are essential to a country’s survival. 

 So traditionally these have been things with more military, diplomatic, and security value than economic or industrial value. 

Security has always been prioritized over the livelihoods of the people. 

Moreover, in geopolitics it is commonly accepted that strategic value and economic value cannot be used as currency in political exchange. 

For example, it would be extremely unlikely that Korea would be able to extract concessions from China vis-a-vis North Korea if the South Korean president attended a Victory Day parade or something, 

or if we provided some help to the Chinese semiconductor industry.

 But the semiconductor industry is a field where strategic and economic value coexist. 

Put another way, Korea’s capacity in large-scale, advanced semiconductor mass production provides not only economic value, 

but political value as well; it gives Korea leverage to pursue its diplomatic and security interests at the bargaining table

with powerful countries such as China, Russia, Japan, and the United States. 

I know that the book Chip War by the American professor Chris Miller...

Yes, a very well-known book.

...covers some of what you just spoke about.

The key to the hegemony competition between the great powers being semiconductors. 

Yes. That book covered in detail the failed effort by the Soviet Union to acquire semiconductor technology during the Cold War.

The main point of the book was that the semiconductor and microelectronics revolution that started in Silicon Valley,

and the commercial success of companies such as Intel, Apple, AMD, and Qualcomm were decisive, 
 

driving forces that propelled the US to victory in the arms race with the Soviets and ultimately to victory in the Cold War.

And so the semiconductor industry and technology in general has become an integral element of the geopolitical landscape.

I understand what you are saying.

Another thing I'm curious about is that, as you said, the semiconductor industry is a strategic industry with strategic value.

That’s easy enough to see. 
But is biopharmaceuticals also a strategic industry?

Since semiconductors and batteries are hot topics these days, 

I was often asked “Why do you do bio?” in the pursuit of this research. 

The biopharmaceutical industry was briefly in the spotlight for its role in developing vaccines for the COVID-19 virus,

but as the majority of major developed countries are aging in the future, the outlook for this industry is extremely promising.

Moreover, there is potential for major innovation in the sector due to the emergence of gene and cell therapies made possible by advancements in mRNA technology.

To put it simply, we may see this sector produce miracle cures for serious diseases such as cancer and dementia.

 Life extension technologies are also being developed.

We’re short on details, but do know that major medical centers in Seoul are cultivating and manufacturing bespoke treatments 

that go for hundreds of thousands, or even millions of dollars per round using these new technologies.

Wow. There’s demand for this?

There sure is. Innovative new bio-drugs are already being prescribed.

Another thing to consider. If another pandemic like the coronavirus outbreak occurs again in the future,

 the strength of the domestic biopharmaceutical industry base will be directly linked with the survival of our people.

A strong bio sector will also enhance Korea’s diplomatic standing at the bargaining table with other countries, 

just as the chip sector already does to some extent.

Moreover, demand in the market for drugs mainly comes from government health care systems.

In other words, the medical market strongly resembles a typical procurement market in nature.

The United States accounts for about 60 percent of global medical demand; Europe accounts for about 20 percent.

American efforts to contain China thus represent both a direct and indirect opportunity for Korea’s biopharma industry, the competitiveness of which is improving at a rapid pace.

We believe this phenomenon will continue on into the future.

You’ve laid out the general theory of the Korean economy, but is there a reason why semiconductors and biotechnology in particular are important?

I’m not sure if this is a term used anywhere else,

but in the report I wrote that these industries are protected by an so-called “integrity barrier.”

I think you’re probably the first person to use the phrase.

I seriously doubt that. It’s hard to make something truly new in this world.

Anyway, to explain, China, India, and other developing countries are following the export-driven model of economic development pioneered by Korea and Japan.

And they’re now not only catching up with us in many sectors, powered by cheap labor and cheap inputs -- they’re beginning to surpass us in some areas.

 But, as you well know as an economics Ph.D yourself, 
the semiconductor and biopharmaceutical sectors 

 are fields in which success cannot be guaranteed simply by intensively pouring in large amounts of labor and capital.

 Instead it is critical to have high-level scientific knowledge and a large, high-quality workforce that embodies it.

You know, people with masters’ degrees and doctoral degrees.

It is also necessary for production workers to have know-how and hands-on experience on floor — that is, tacit knowledge. 

 Moreover, in the chip sector, a stable supply of cutting-edge equipment and materials necessitates a relationship with the United States, and the ability to navigate the issues that such a relationship poses. 

And in the bio-pharma sector, firms must pass stringent quality control measures the world’s two major regulatory agencies: the Food and Drug Administration of the US and the European Medicines Agency of the EU.

Together, these agencies control access to the world’s largest drug markets. As Korea has lost its ability to compete on cost, 

it is for these specific reasons that I singled out the semiconductor and bio-pharma sectors as capable of guaranteeing the survival and continued growth of Korean exports and employment,

as well as Korea’s materials, parts and equipment ecosystem.

n fact, as is the case with biopharma sector, semiconductors account for a significant proportion of our economy.

 I think this it itself quite meaningful. 

But what about electric vehicles and batteries?

Is there a reason why these sectors too should also be seen as having strategic value as you mentioned earlier?

We expect the EV and battery market to continue growing well into the future as many countries are looking to implement climate change mitigation measures and pursue a strategic policy of carbon neutrality.

But more importantly, while the bio-pharma and semiconductor industries do not actually require much labor,

the automotive sector is both a pillar of employment and the economy as a whole. 

The automotive sector is well known for its job-creating effects.

Automakers also have many partner firms.

The chip sector is big, but the truth is that firms and the markets that make up the demand for semiconductors are much bigger.

Take for example the auto sector. 

One of the most important factors motivating the US and EU semiconductor laws was the damage to the automobile industry caused by the chip shortage.

I know that tons of chips go into modern cars. 

Last year, the total value of the semiconductor market was estimated to be about USD 550 billion.

But even this large market is dwarfed by the scale of the automobile market, which was valued at close to USD 2 trillion. That’s almost four times as big. 
And that’s just in manufacturing. 

We know that, in the service sector, AI is heavily used these days. 

The market cap of Apple and other big tech firms is also measured in trillions of dollars.

Circling back to the auto industry for a moment, in this report 

we single out electric propulsion and software convergence as major trends that will determine the future direction of the automobile sector over the next 10 years or so. 

Considering the synergies between the Korean auto industry and the semiconductor, ICT and electronics sectors, firms, as well as among the numerous SMEs in the auto industry, 

 it is critical that we work to adapt to future changes and continue to maintain a domestic automotive production base and ecosystem. 

The same holds true for major manufacturing powers such as the United States, China, Japan, and Germany.

It is for these reasons that I saw how the auto industry could function as a stronghold to help Korea maintain its position in the global economic order. 

 

Hello, my name is Sangsoo PARK, Research Fellow at the Korea Institute for Industrial Economics and Trade (KIET).
 
You have doubtlessly heard much about the development of robots these days, and maybe even have some experience with them. Robots are now part of our everyday lives; there are cleaning robots, collaborative robots, logistics robots, and even robot baristas.
 
The robot industry is attracting more interest than ever, and many people have great expectations for the kinds of robots we will see in the
future.
 
Today, I would like to talk to you about the robot industry. I will describe some of it salient characteristics, as well as some of the issues it is facing, in a way that is easy to understand.

The outlook for the Korean secondary battery industry

English subtitles are added to this video.

0:00:30 Chapter 01 Defining the batteries sector
0:01:16 Chapter 02 The status and competitiveness of the Korean battery sector

0:04:29 Chapter 04 Key Challenges in the Secondary Battery Industry: Stronger ESG in the EU, and Intesifying Global Competition
0:06:43 Chapter 05 The outlook for the Korean secondary battery industry
 
Korea leads the world in R&D and mass production.

We are cautiously optimistic that the Korean battery industry may eventually come to dominate the entire value chain.

Hello, this is Kyung-In HWANG, Associate Research Fellow at the Korea Institute for Industrial Economics and Trade. 

I am here to talk about the batteries industry, a hot topic of great interest. 

Today I will discuss the competitiveness of Korea’s battery sector,

and spell out in layman’s terms some of the major issues facing the industry. 

Defining the batteries sector

The battery industry is defined as an industry devoted to the production of storage batteries that can be used and recharged semipermanently.

It is possible to create various kinds of batteries through the electrochemical processes that make the technology possible, 

but as of now lithium-ion batteries dominate the market. 

Batteries are employed in a diverse array of applications, including (but not limited to) electric vehicles (EVs), IT devices, and energy storage systems.

Moreover, they are growing in importance amid major industrial trends such as electrification and decarbonization. 

The status and competitiveness of the Korean battery sector

Korean battery firms have performed exceptionally well in the global market.

Korean battery makers possess a dominant 49 percent share of the global market outside China,

with a significant lead over its main competitors China (with a 27 percent share) and Japan (19 percent).

Chinese firms dominate their domestic market, however, and if this large market is included, Chinese battery makers hold the largest overall position globally.

But Chinese firms account for 98 percent of the domestic Chinese market, 

and in consideration of this, it would be fair to say that Korean firms are the biggest global players in the industry. 

Korean firms are global leaders in number of competitive aspects as well.

Korea leads the world in R&D and mass production, for example. 

It does, however, trail China in the sphere of raw materials sourcing and procurement. 

But Korean cathode materials firm Ecopro is now the number-one NCM (nickel-cobalt-manganese) cathode materials player worldwide in terms of market share,

 and critically, the battery equipment sector has achieved a 90 percent localization rate.

In sum, Korea’s competitiveness in raw materials sourcing and procurement is gradually improving. 

We are cautiously optimistic that the Korean battery industry may eventually come to dominate the entire value chain.

Key Challenges in the Secondary Battery Industry
: The Inflation Reduction Act

A major extenuating factor in the battery industry is the Inflation Reduction Act (IRA), which took effect in the US in August of 2022. 

The IRA includes a number of requirements that must be met in order for EVs sold within the US to be eligible for federal tax credits.

Among these, one of the most important requirements is a clause that stipulates a certain percentage of the minerals and components 

that go into EV batteries must be produced either within the US or in a country that has signed a Free Trade Agreement (FTA) with the US. 

But this is not necessarily bad news for Korea. 

Korea is an FTA partner with the US, for one,

and so some battery materials such as cathodes and anodes that are manufactured in Korea 

and exported to the US can satisfy the IRA requirement.

The IRA also contains strong incentives for firms to invest in battery manufacturing capacity in the US. 

One of these incentives takes the form of the Advanced Manufacturing Production Credit (AMPC) program.

Any Korean firm that takes advantage of this by making a large-scale investment in battery production stateside would be able to claim an enormous tax credit.

Given what we know about the scale of North American investment plans already announced by Korean manufacturers, 

we are looking at billions of dollars of operating income over the next decade or so.

Experts have pointed out that the IRA seems designed largely to contain China.

Korea’s biggest competitor in the battery sector is China.

And so any changes to the global battery landscape wrought by the IRA seem likely to indirectly benefit Korea. 

 Key Challenges in the Secondary Battery Industry
: Stronger ESG in the EU, and Intesifying Global Competition 

In June, the European Parliament passed a new regulation governing battery use within the European Union (EU).

The new law, which we will refer to here as the EU Battery Regulation, brings into legal force a number of new regulations, 

many of them ideologically related to the Environmental, Social, and Governance school of corporate management.

These include several new obligations, including the mandatory use of recycled materials in batteries, and the institution of a carbon footprint reporting system.

The law also establishes a so-called Battery Passport system and mandates its use. 

We can see here how this regulation differs from the American IRA:

The IRA is telling companies that, if they want to sell batteries in the US, should make them in the US.

The EU law and related battery policies are, by contrast, 

telling companies the the EU is only going to allow “clean“ batteries out of environmental concerns and for reasons related to fair trade. 

Navigating these new waters will prove difficult.

But it also gives Korean firms the opportunity to set the global standard by being the first to build a virtuous closed loop recycling system. 

Another major issue we need to discuss is the intensification of global competition in the battery sector. 

And this demands that we talk about China.

Chinese firms are working to expand their footprint in overseas markets by leveraging their competitiveness in lithium iron phosphate (LFP) batteries. 

The EV penetration rate is rapidly increasing in vehicle markets worldwide,

and in some markets EVs represent between 10 and 20 percent of new car sales. As sales boom,

demand for lower-cost EVs is expected to grow,

and Chinese companies are focusing their attention on this potentially large market. 

Yet another challenge revolves around the battle for supremacy in next-generation battery technologies,

such as solid state batteries and lithium-sulfur batteries.

Japanese firms in particular are pouring resources into new battery techs in hopes of making up for Japan’s weaker position in the current-generation battery market. 

With the intensification of global competition in mind, 

we can see that in order for Korean battery makers to maintain their market lead and hold onto their competitive advantage in ternary batteries, 

 they need to enhance their competitiveness in other product groups (like iron phosphate batteries, for example), 

which are likely to play a major role going forward.

Developing next-generation batteries also represents a major challenge that Korean firms must tackle. 

The outlook for the Korean secondary battery industry 

Batteries are emerging as a key technology in two major global trends:

carbon neutrality (decarbonization) and the digital transformation.

We should expect robust growth in the EV market in particular, as the world transitions to an era of electric propulsion. 

Overall, we anticipate the total market for batteries to grow 10 times over by 2030,

eventually dwarfing the market for memory semiconductors by a factor of two. 

At this moment, Korean battery makers are performing well,

and exceptionally so in the US and Europe, where they possess a clear advantage in terms of mass production, 

and continue to stake large claims in the market by rapidly expanding production capacity. 

In addition, the various stipulations of the IRA in the US and the Battery Regulation in the EU may actually work to Korea’s advantage,

as may the ongoing restructuring of the global supply chain led by the US and Europe. 

In consideration of what we have discussed today, 

we feel that Korean firms’ share of the global market (excluding China) should grow to 55 percent by 2025, up from 49 percent today. 

Both batteries and battery materials as a whole could become two of Korea’s top five export items in that same timeframe. 

We should expect big things from Korea’s battery industry in the future. 

Thank you.