Some Thoughts on Productivity Surge and Labor Glut amid Economic Downturn

In the midst of economic downturn, we see a surge in productivity since firms are generating good output with fewer workers. Many companies are also adopting the new pay band system which results in lower incomes for the same work. Meanwhile, people over 40 are being let go with their duties being handed to the younger ones who don’t get a raise. Moreover, global wage arbitrage would seem to persist.

The economic downturn the world has experienced may boil down to job creation. That may be the only thing that matters at this point. Instead we see job losses but a surge in productivity.

The U.S experience teaches us a lot. By the mid 1940, the U.S. did have the solid manufacturing base while other countries suffer in the aftermath of WWII. America manufactured top quality electronics, airplanes, cars and food and exported them to the world, providing enough jobs to go around. What has happened since then? Outsourcing manufacturing jobs to China in exchange for massive borrowing from it has generated not only the destruction of the industrial base but a debt culture.

Perhaps this economic debacle points to the importance of working in production of essentials in a self-sufficient way without outsourcing manufacturing to other global locations. Further, we have to recognize the fact that with technology advancing, there would be even less labor intensive world. The labor glut is a worldwide thing.

While we agree with the basic idea that a country has to base its economy around jobs, the challenge lies in how to come up with a real driver for real jobs. This may require a shift in their economic models both for the export-driven and consumption-driven economies. This may also require the elimination of fantasy jobs derived from fake wealth. Public policy does indeed matter if it serves the people’s interests. Corporations may have to reflect on where their profits mostly go to? In the meantime, people may have to change their perspectives on life and accept a much simpler life style.

The Dubai Mess and the Coming Economic Reality

There have been many reports and analyses on the Dubai mess this week, so I would just point out that we live in a world where financial matters are interwoven. The Dubai incident may be just one of many situations that are being held under wraps.

The bottom line is we are all long the real world economy. The entire world may have to bear the economic debacle in the meantime.

Worrisome Technology Transfer to China by Korean LCD Panel Makers and China’s Intentions

I have recently posted several pieces on Korean high-tech firms’ strategic focus change and new investments in the Chinese market.

Samsung and LG Display are the top two LCD panel makers in the global flat-panel display market and are setting up their LCD fabs in China. Their strategic investments looked rather worrisome due to several factors.

For one, there is a concern for Korea’s high-tech knowledge and know-how transfer to China. The Korean LCD panel makers claim that since they are already setting up the next generation fab lines (10th and 11th generations) in Korea, so building 7.5th and 8th generation fabs, respectively in China wouldn’t remain a matter of grave concern. However, some experts worry that sooner or later the Chinese would catch upon on high-tech process technologies, which would lead to other important technologies like solar batteries and OLED.

High-tech manufacturing capacity is one of the strongest competitive edges Korea has had. The two Korean high-tech firms contend that since the global LCD market is maturing and shrinking, they have no choice but to aggressively invest in the growing Chinese consumer market. Yet the question is: Why do they have to build LCD fabs in China? To export LCD panels and LCD TVs to the U.S. and other advanced economies, Korean high-tech firms have manufactured them mostly in Korea.

Again, China is Korea’s largest trading partner. Korean high-tech firms have shifted their strategic focus in China from a base of exports to other countries to the export market itself with enormous market growth potential.

Meanwhile, the Chinese government is reportedly attempting to raise the current tariffs of 3 percent on LCD panels. It has also been asking the two Korean LCD panel makers to invest LCD fabs in China.

China has been accumulating its high tech capacity and building its high-tech infrastructure which can be served as the backbone of further innovation for other high-tech products. Further, it will have the solid skilled people base. All their paths and policy undertaking the Chinese has taken seem to point to the locus of R&D and manufacturing shifting to China.

This move sparks some concerns: for instance, what is the ultimate motive behind China’s intentions to build its high-tech capabilities? Do the Chinese regard them as a means to build wealth for the well-being of the general public, raising standards of living?

Korea has never fully developed such supplier infrastructure as materials, capital goods, and specialty logic chips, while some Korean high-tech forms have become global leaders in several high tech fields like memory chips, LCD panels/TVs, and mobile phones. Its competitive edge lies in the scale-intensive hardware high-tech products. Lacking solid high-tech supplier infrastructure, strong engineering schools and a robust venture capital industry, high-tech manufacturing and R&D capacity is one of a few sources of competitiveness for Korea. Korea still faces a technology deficit problem.

LCD panels and TVs have been the major export items of Korea. By handing over Korea’s technological capacity to China a little by a little and moving its manufacturing operations to China, Korea may lose its path of sustainable growth. The two Harvard professors Pisano and Shih warn of the consequences of the U.S. manufacturing decline. Korea may head for the same fate as I noted in a prior post on the mobile phone business.

Given China’s aggressive technology accumulation drive and its clever technology transfer strategy, acquiring the next generation high-tech process and design technologies seems to be a matter of time. The notion of technonationalism seems to be very much alive in China.

Korea has come a long way to accumulate its high-tech R&D capacity, production process skills, and fab know-how. And yet, the Chinese may soon develop their own indigenous innovation capacity in several high-tech areas which may surpass Korean’s. Where would Korea’s technological competitiveness lie then?

Korean Chipmakers’ Impressive Performance but Hynix Up for Resale

According to iSuppli, the two Korean chipmakers, Samsung and Hynix account for a record high 57.25% market share in the global memory sector in Q3. Samsung is the only chipmaker which has achieved revenue growth in 2009 with 1.3% sales increase YOY among the top 10 semiconductor companies.

In the mean time, according to Korea Exchange Bank, nine creditors of Hynix, the world’s second largest memory chip maker, agreed to the resale of Hynix. They will launch a public offer for a majority stake in the chipmaker next month.

IMF Chief Warns of Second Bailout in the West and Asset Bubble in the East

From Times Online:

The public will not bail out the financial services sector for a second time if another global crisis blows up in four or five years time, the managing-director of the International Monetary Fund warned this morning.

"Most advanced economies will not accept any more [bailouts]...The political reaction will be very strong, putting some democracies at risk," he told delegates.

In his speech, Mr Strauss-Kahn also warned that the huge amounts of capital being pumped into China could fuel a pan-Asian bubble.

His comments come after warnings from economists that the economic conditions in China and the rest of Asia are such that asset prices could rip free of their fundamental values unless the bubble threat is addressed.

The Chinese banking sector is currently the scene of an unprecedented frenzy of new lending, which could reach up to 11,000 billion yuan (£97.7 billion) by the end of this year.

Mr Strauss-Khan said that the old paradigm of growth generation based on households in the US was dead. The future sources of growth and the recovery will "depend on a new balance between the US and deficit countries on one hand and emerging markets and surplus countries on the other".

http://business.timesonline.co.uk/tol/business/economics/article6928147.ece

Hong Kong’s Central Banker Admits Asset Bubble Blowing

Most of Asian economies are experiencing the asset bubble like the U.S., and Mr. Chan, chief executive of the Hong Kong Monetary Authority, admits there is major bubble blowing.

However, officials don’t seem to willingly correct the situation until all asset bubbles burst.

From Market Watch:

“With interest rates exceptionally low and with abundant liquidity around the world, Hong Kong faces the potential risk next year that asset prices may go up sharply and become increasingly disconnected from economic fundamentals," said Norman Chan, chief executive of the Hong Kong Monetary Authority, in a statement posted on the agency's Web site.

Chan said Hong Kong wasn't alone in facing these risks, as many other Asian economies were experiencing similar problems arising from substantial fund inflows.

"We can be certain that the larger an asset bubble has become, the greater will be the damage when the bubble bursts," Chan said.

http://www.marketwatch.com/story/hong-kongs-central-banker-sounds-bubble-alert-2009-11-20

China in the Lead Holding the U.S. Debt, Followed by Japan

From Zero Hedge:

As recently as 1970, foreign holders of U.S. debt were essentially non-existent. But their slice of our obligation pie has steadily increased, especially over the past two decades, until now foreign governments and international investors hold about 35% of Treasuries, as the following chart reveals...

Of about $11 trillion in U.S. debt, foreigners have about $3.8 trillion, with China in the lead at nearly $1 trillion and Japan not far behind at around $750 billion.

Most likely, though, this trend has already leveled off. The Chinese, Japanese, Russians, and Indians have openly announced their decision to cut back on further purchases and existing holdings of U.S. government debt. Beyond that, the source of funds previously allocated to their purchases -- trade surpluses -- has declined sharply with the recession. As a consequence, going forward, foreign buying is more apt to shrink than increase...

Adding it all together, even under the most conservative of assumptions, there are simply not enough buyers to cover the accelerating federal deficits. That leaves the lender of last resort, the Federal Reserve, as the only remaining candidate to satisfy the government’s grotesque appetite for funding. There is no viable alternative.

The Fed will take up the slack in the only way open to it, by printing money out of thin air and exchanging it for promises from the Treasury. That means an escalation of monetary inflation and, somewhere down the road, serious price inflation as well. We don’t know exactly when that will happen, only that it must...

www.zerohedge.com/article/guest-post-what-if-they-stop-buying-our-debt#comments

The U.S. Facing Capital Flight

The U.S. is experiencing capital flight.

Korea faced it during the Asian financial crisis.

http://research.stlouisfed.org/fred2/series/BOPIP

Meredith Whitney Expects a Double Dip Recession

I posted up her interview about a year ago on another blog before I started this blog.

She sounds more bearish than a year ago.

http://cosmos.bcst.yahoo.com/up/player/popup/?rn=289004&cl=16675795&src=finance&ch=4043681

Korean Chaebols' Strategic Bets in China and Concerns

The Korean media outlet reported this week that Korean chaebols like Samsung, LG, and Hyundai are investing in the Chinese market as a key export market.

Hyundai hint at a plan to build a third factory in China to meet surging demand. Hyundai’s car sales has soared by 89% YOY.

Samsung is also reportedly setting up a large-scale LCD panel plant in Suzhou, China. Samsung has about 40% of the global manufacturing facilities in China.

In the mean time, LG is also planning to invest in a TV/LCD panel factory in Guangzhou, China.

Korean chaebols’ strategic focus on China has shifted from regarding China as a manufacturing base to be shipped off to other overseas markets to directly targeting the Chinese market as its domestic demand grows.

As I’ve recently noted, increasing trend of moving manufacturing facilities to China by Korean chaebols leads to the loss of manufacturing jobs in Korea.

According to the Korean major news outlet this week, Korea’s consumer spending has increased while income has dropped this year.

The same question goes to China: Where does the domestic consumption expansion of China come from?; Is it based on real income growth or credit?

Overconsumption with borrowed money was the culprit behind the U.S. economic crisis.

Korean chaebols has had a pretty good track record of making strategic bets in emerging economies. As other countries’ MNCs make similar investments based on the notion “Let’s take advantage of reinflated bubbles while they last,” one can’t blame Korean chaebols’ strategic move in China.

And yet, it wouldn’t make some concerns go away.

The central governments and MNCs seem to understand bubbles for a period.

However, the question is: Are the ordinary people intelligent enough to be informed politically and economically?

Can the U.S. Maintain the Leadership Position in the High-Tech Sectors?

There is a debate going on as to how to restore American competitiveness through technological innovation and manufacturing on Harvard Business Review site, which made me rethink a couple of issues and post up this piece. In fact, I was kind of disappointed at the quality of debate (after all, the contributors in the debate are among the most intelligent people in the States), so I commented on two articles there.

Conundrums and challenges the U.S. faces in terms of technological innovation are not limited to the States. Many of the issues the U.S. has to deal with can be applied to other countries, both advanced economies and newly industrialized ones like Korea to some degree. In this context, it is interesting to look at the U.S. experience and learn from it.

The U.S. economic growth had been fueled by innovation and entrepreneurship to a large extent until financial engineering reigned. While the U.S. has had the best technology in many areas such as software, specialty logic chips and capital goods, the best engineering schools, the world-class high-tech firms, whether the U.S. can keep the leadership position in the high tech field doesn’t appear to be that promising due to several factors.

Owing to its relatively high standard of living, stable political system, and superior social/industrial/scientific infrastructure, the U.S. has attracted the best talent around the globe. However, the U.S. is currently facing tough economic times. It is running on major deficits. Hiring freezes, rising layoffs and credit crunch have choked startup enterprises’ growth and entrepreneurial spirit.

Increasing outsourcing and offshoring trend has stirred up some concerns in the U.S. Many of the major U.S. high-tech firms have not only outsourced manufacturing jobs but set up R&D centers in emerging economies like China and India. The more the U.S. high tech firms become international corporations, the more they tend to move to wherever they can be more profitable. The notion of technonationalism gets diluted. Of course, as I’ve pointed out recently, this problem is not restricted to the U.S. Korea is facing the similar conundrum.

All politics aside, one of the reasons for offshoring and outsourcing by the U.S. corporations lied in cost savings mainly through labor arbitrage. However, some argue that the U.S. workers’ wage has been squeezed down to the benefit of the top 1%. Consequently, the issue of income disparity of corporate America should be factored in.

The demise of U.S. manufacturing is appalling, resulting in the intended and unintended consequences. Sending the manufacturing jobs to China in exchange for selling its treasuries has generated the profound impact including the weakening middle class base. Since MNCs tend to prefer to locate their production or R&D operations in a region where they sell their products to take advantage of physical proximity to the consumer market, currency exchange rates, and various incentives, the destruction of the middle class coupled with dwindling purchasing power points to further deterioration of the America’s manufacturing foundation.

R&D undertaking is closely related to the overall health of the economy not only because the state of the economy affects the availability of R&D capital but because it would further increase manufacturing and R&D outsourcing and offshoring. Sustaining and expanding America’s innovation competitiveness can’t be decoupled from the financial reality. When a country is heavily burdened by the financial reality at both the public and private levels, the production centers of the economy are eroding quickly. Perhaps both the U.S. financial crisis and the Asian financial crisis teach us that although we may all agree growing and sustaining a country’s competitiveness through technological innovation and production is critical when making advances in standards of living, we shouldn’t overlook the problem of dissonance between the manufacturing industry and the financial sector.

The U.S. has been trying to revive the economy with borrowed money without revamping the broken system. This may work for a period. And yet, the bottom line is: will government measures trump market forces?

The U.S. seems to be moving more towards a state-led economic system in which a dubious collusion between state and big business has negative ramifications. A government’s role and the degree of its involvement in fostering high-tech R&D should be probed and determined in this context.(Since I’ve elaborated on the government’s role in innovation and technology before, I wouldn’t go into the details.)

Nurturing and attracting talent is critical since talent is everything in the high-tech business. Nowadays, it is a worldwide phenomenon that smart kids don’t want to get into engineering schools: too much hard work for less money compared to financial jobs, for example. Besides, when the social conditions deteriorate, the U.S. would lose top-notch talent in the high-tech sectors to an alarming degree.

Any country with the high-tech base should invest in the next generation of high-tech products like bio technology and alternative energy, fully utilizing and bolstering their indigenous R&D capacity. Moreover, they need to take a long term view on innovation. In reality, making this long-term commitment happen seems to require top leadership’s foresight and determination.

The U.S. still has the right combination of talent and potential for innovation. However, it should make the right moves including appropriate investments in appropriate areas and oversight of its innovation-related investments. And above all, the U.S. economy needs to reestablish itself. Otherwise, the U.S. would be likely to lose its leadership stance in the high-tech sectors.

The world has never been in this situation.

By and large, the world economy has been engaged in similar interventions: fiscal stimulus, easy monetary policy, currency devaluation.

Many parts of the world have been experiencing asset bubbles.

The world has never been in the situation like this.

A certain policy has some positive and negative ramifications, intended or not.

One thing seems to be sure.

Without economic fundamentals improving and jobs coming back, any economy is in for a decline.

Recognizing and Shaping Appropriate Government Roles: Some Lessons from the Korean Policy Framework

In the course of industrialization and technological development, the Korean government has employed both direct and indirect measures to spur economic growth and technological innovation.

The Korean government used trade protectionism, pursued export promotion policies and provided subsides to favor a few chosen chaebols, among other interventions. It is arguable that policy instruments for rapid economic development in the 1960s and 1970s had moved in the right direction, or they had crippled the development of other important factors needed for robust economic development over the long haul. At the later stages of industrialization, the government changed little in response to global market changes and the political and social environments. The productivity improvement of the government sectors has been long overdue.

The government’s frequent intervention in markets and unnecessary regulations often distorted a free market economy. A dubious collusion between the government and chaebols not only led to political corruption but resulted in misallocation of resources and huge non-performing loans. Technological competence acquired by chaebols didn’t generate technology spillover effects on innovation at other domestic companies. Further, insufficient R&D funds were given to SMEs, triggering the polarized R&D structure.

Whether the Korean government’s promotion of a particular industry through various kinds of taxation and financial incentives was desirable is debatable. Although this policy initiative might had been necessary to build the industrial foundation in the early stage of industrialization and helped chaebols grow, it may have caused unintended consequences such as lost opportunities in other promising sectors and problems of skewed industrial structure in the later stage.

All in all, the Korean policy framework predicated on the state-led economic development model imposed both advantages and drawbacks on the economic landscape of Korea.

Japan has had the similar industrial structure and predicaments. In fact, Korea has emulated the Japanese-style economic development model in the process of industrialization.

Probing into the Korean policy framework teaches us how public policies not only accelerate the economic development and technological advancement but incur some structural risks, intended or not. In some cases, costs of the government’s direct interventions seem to have outweighed benefits. Bearing in mind that each country operates in different political, economic, historical, and cultural contexts, one might have to realize that there is a limit to what governments can do and there are unintended consequences of government’s excessive measures.

Government interventions might have to be geared toward providing support environment where innovation and entrepreneurship can flourish on a level playing field (e.g., tax incentives for emerging business and technology, a healthy financial market mechanism, and solid National Innovation System) and building social infrastructure in which human capital can be nurtured and mobilized and foreign firms are willing to locate their production and R&D centers.

Regardless of what economic system a country has, it feels to me as though government interventions a country adopt and pursue would be key defining factors to grow the economy in the coming years, given the current global economic conditions, like it or not. That’s why one has to be more mindful of policy decisions, and a government needs to think long and hard when instituting various government-sponsored programs.

Concerns over the Efficacy of Korea’s Technology Policy

It would be fair to say that the Korean government’s technology initiatives have helped Korea to become a high-tech power house. And yet, some questions can be raised regarding the efficacy of Korea’s technology policy.

For one, the effectiveness of the national R&D management including funding allocation for science and R&D programs and evaluation mechanism has been under question. The diffusion of public R&D outcomes has proved problematic. The government has failed to nurture more upper-stream research which the private sector can’t pursue easily.

Although the process of accumulating technological capacity in Korea has been successful to a large extent, the enormous challenge lay ahead.

After initial stage of assimilation and adaptation, more carefully planned, integrated policy interventions and its role may need to be redefined and reestablished. Among these interventions, revamping industrial structures and developing the solid supplier base across the value chain would require holistic, concerted efforts.

The Trajectory of Korea’s Technology Policy

Again, a portion of my analysis is only posted.

The Korean government recognized the economic advantages of export-oriented manufacturing based on cheap, well-educate labor force in the 1960s. In this context, the government promoted labor-intensive Light Industries and pursued a “catch-up” strategy to manufacture low-technology assembly-type products. In order to enhance the process technology capacity, the Korean government started to launch the technology development initiatives and build a technology infrastructure…

By the late 1970s, the economic setback due to overinvestment in the HCI sector and low capacity utilization forced the government to upgrade the industrial structure and deepen technological competence…

In the 1980s, the Korean government transformed the industrial structure into more technology-intensive industries. Foreign companies got reluctant to transfer their technologies to Korea, afraid of the growing technological competence of Korean firms…

The real high-tech progress took off after the mid-1990s. The share of high-tech products in total exports increased from 14.4% in 1985 to 32.9% in 1995 and then to 38.4% in 2000.

The Characteristics of Korea’s Technology Policy

Korea, once a developing country and now a newly industrialized one, has achieved remarkable economic growth and technological progress since the 1960s. As a result of accumulating technological capability and developing competitive products, Korea is now the world leader in a few high-tech fields such as LCD panels and memory chips.

Consequently, probing into how the Korean government has fostered technological advancement and how it could have done better in terms of its technology policy framework can offer some valuable lessons for both advanced and economies.

I would share some of my analysis on Korea’s Technology Policy in the next few postings: the characteristics of Korea’s technology policy, its trajectory, its efficacy, and so on.

A part of my analysis would be only posted.

The Korean government has seen technological innovation as the engine for economic growth. Hence, it has committed to enhancing innovative technological capabilities. In this context, an array of policies has been designed and implemented to establish infrastructure, facilitate technological innovation at firms, and promote specific high-tech industries.

Korean technology policy has the following characteristics, among others:

-The government had built a technology infrastructure in the early days of industrialization.

-The government used various incentives (e.g., accelerated depreciation allowances) to encourage private enterprises to expand their R&D investment.

-The Korean government’s R&D policy has mostly been centered on chaebols.

-Industrial policy is closely intertwined with technology policy. Human resource development policy is also related to technology policy.

-The reverse brain drain of R&D manpower had been an effective tool to source advance technological knowledge until the later stage of industrialization.

-The Korean government was directly involved in business development and even played a market shaping role, along with assistance in technological development in key technology-intensive industry.

-The contribution of GRIs to the National Innovation System has been questionable with the exception of a few cases.

Small Government Desirable, But If Not Feasible, What To Do?

We may all agree that big government is a problem: it has caused all sorts of intended and unintended consequences around the world including a dubious collusion between big government and big business.

However, in reality, a global economy has run on big government. Consequently, in order to survive and prosper on the global stage, one can’t undermine the powerful nature of the government apparatus.

When government intervention becomes a source of corruption, pursues the benefit of special interests, and chases short term gains to the detriment of the long term economic health, then irrespective of what government system a country has, it would run into deep trouble.

Public policies matter, but only when they are crafted for the benefit of the general public and future generations.

More Offshoring Continues in Korean Car Industry

I’ve recently discussed a ramification of Samsung’s increasing overseas production of mobile phones, while decreasing domestic production. This offshoring trend has not been limited to the electronics industry.

Hyundai and its affiliate Kia produced and sold over 1.5 million cars overseas this year, which is quite impressive. The production figure in October, nearly 180,000 was more than 40% increase from a year earlier.

What’s intriguing about this number is that the number of cars produced and exported from domestic plants fell by 12.5 percent in October also from a year earlier.

Like Samsung, Hyundai has intentionally moved its production offshore. It has five overseas factories including locations in the U.S., China and India, while Kia has two plants in China and Slovakia and is expected to operate another plant in the U.S. this month.

Amid dwindling worldwide car market, Hyundai has aggressively expanded in booming markets: China and India in particular. Hyundai has focused on increasing its local production using overseas plants rather than exporting domestically produced cars.

Again, Korea has to be mindful of the eroding manufacturing base, as I noted in the case of Samsung.

IT products and automobiles have been the two major export items of Korea.

Gold Hit a New All-Time High

The price of gold has hit a new all-time high.

Gold is rising in all major fiat currencies.

Although one would assume there wouldn’t be a currency collapse, amid printing, debasing, and inflating, the surge in gold is worrisome.

Hot money flowing into Asia

According to Marc Faber, the Fed’s easy money policies have flooded emerging economies with liquidity.

As hot money has flown into the Asian countries, they have every reason to be concerned about, given the opportunistic nature of that capital and its potential detriment to the overall health of their economies. Speculative capital has flown into Korea, China and India, and some in Southeast Asia, causing asset bubbles. What would happen when those bubbles burst?

It is interesting to see how different economies have employed different monetary policies in terms of controlling inflation, their financial system, and asset prices amid hot money influx

I’m also concerned about how the Asian stock markets would react when the next leg down of the U.S. stock market takes place. It might be safe to say that if the Asian markets remain strong after the U.S. market falls, then they have decoupled from the U.S. Time will tell.

Despite Samsung’s Impressive Profit Report, Production of Domestic Suppliers Shrinking

According to Samsung, its mobile phone business occupied 21% share of the global mobile phone market. Its mobile phone sales rose quarterly-on-quarterly 16% in Q3. This increase is impressive in that Samsung made it while the worldwide mobile phone market has shrunken by 3 to 7% due to the global economic crisis.

Despite its outstanding profit report, a serious concern over Samsung’s stance in the overall Korean manufacturing landscape is growing.

Samsung has moved its production offshore including locations in China, India, Vietnam and Brazil mainly due to cost-competiveness.

Although Samsung claims that its core manufacturing technology and manufacturing facilities for high-end mobile phones would remain in Gumi plant of Korea, history has taught us that increased offshoring and outsourcing do more harm than good for a country’s competitiveness, as I’ve recently pointed out.

Given the fact that Samsung has received much favors and subsidies from the Korean government in the course of its growth, it is ironic to see how it is becoming more of MNCs in advanced countries that have exploited labor and resources around the globe.

While Samsung’s domestic production of mobile phone has been shrinking since 2005, its overseas production is increasing. In 2005, the domestic production in Samsung’s Gumi plant makes up 75% of Samsung’s total mobile phone production. However, it fell 29.3% in the first half of the year.

This means that many of Korean suppliers to Samsung are losing their production capacity and sales profit due to Samsung’s offshoring.

Korea has to be mindful about how the U.S. outsourcing production to China has hampered the well-being of America not just production-wise, but financially and politically. We have seen a profound impact of America’s outsourcing to China.

Perhaps to a lesser degree, but one has to be concerned about Korea’s eroding manufacturing base as Samsung is becoming more of a platform corporation in Korea while offshoring its manufacturing operations.

This trend may add fuel to the fire of Korea’s jobless recovery. Moreover, the U.S. case has demonstrated that demise of manufacturing sector can lead to the destruction of the middle class.