S.Korea’s reshoring companies pale amid lack of support, incentives

Reshoring, or a corporate U-turn to the home country from an overseas location, has been the global trend since the outbreak of the COVID-19 pandemic amid the escalating US-China trade conflict.

Governments around the world offered generous incentives and tax breaks to welcome their companies back home, resulting in a growing number of companies creating jobs in their home countries.

Industry data showed, however, that the number of such reshoring companies is unimpressive in Korea due to “little carrots” to entice them back home.

According to Ministry of Trade, Industry, and Energy data obtained by Koh Dong-jin, a ruling People Power Party lawmaker, only 20 Korean companies per year, on average, have returned to Korea over the past five years.

Most of them were small- and medium-sized enterprises (SMEs). Only four large companies made the move during that period.

In 2019, only 14 companies transferred their operations back home from overseas locations. The number of reshored companies increased to 23 in 2020 and 25 in 2021, propelled by the COVID-19 pandemic. But the trend then reversed, with numbers falling to 24 in 2022 and 22 in 2023, for a total of 108 returning firms over the past five years.

The Korean government introduced the "Reshoring Support Strategy 2.0" this past May, offering up to 40 billion won ($30 million) in U-turn support per company. But only 13 companies have been selected for reshoring as of August, none of them large corporations.

If this trend continues, the annual number of reshoring companies could drop below 20, industry officials said.

CASES IN JAPAN, US & EUROPE

In contrast, neighboring Japan has seen a growing number of large companies return each year.

In June 2023, Panasonic moved its air conditioner production base from Guangzhou, China, to its Kusatsu plant in Japan's Shiga Prefecture.

Other large companies such as Toyota Motor, Honda, Yaskawa Electric, Subaru and Canon have also reshored.

Data showed that some 600 to 700 Japanese companies return home annually, far exceeding the 151 Korean companies that came home over the past decade.

The US has seen a significant return of manufacturers since former President Barack Obama launched the "Remaking America" reshoring initiative in 2010.

Between 2011 and 2019, a total of 3,327 companies returned to the US for an average of 369 firms annually. In 2021, 1,844 US companies returned home.

In addition, the US is attracting global manufacturing plants with laws such as the Inflation Reduction Act (IRA) and the CHIPS and Science Act.

The European Union also offers generous subsidies to reshoring companies.

MORE FAVORABLE CONDITIONS REQUIRED

Although the Korean government continues to expand supports for reshoring companies to strengthen its supply chain, returning companies are fewer than expected, industry officials said.

Experts said Korea’s relatively small market size and high labor costs are key hurdles. They urge the government to create a more favorable business environment in terms of employment and infrastructure.

“In a global race to attract manufacturing plants, Korea faces challenges due to its smaller domestic market. To encourage reshoring, the government needs to drastically ease regulations to create a more business-friendly environment in addition to incentives,” said lawmaker Koh, previously a Samsung Electronics Co. executive.

CURRENT REGULATIONS

The Korean government has been offering incentives and tax benefits under the Reshoring Act introduced in 2014.

Currently, reshored companies are exempted from corporate taxes for seven years and receive a 50% tax cut for the three years afterward.

In reality, however, reshored companies have received only 2 billion won in tax benefits over the past five years. Most of the 416.7 billion won in state aid during the period was in the form of investment subsidies.

Among the four large companies that have reshored, publicly known firms are Hyundai Mobis Co. and LG Chem Ltd.

Hyundai Mobis closed its Chinese auto parts plant and returned to Korea in 2019, while LG Chem announced in 2022 it would build a biodegradable bioplastics plant in Korea, reversing an earlier plan to build one abroad.

To further promote reshoring, experts suggest that not only incentives but also regulatory reforms such as easing restrictions on operating in the Seoul metropolitan area, are needed.

According to the International Institute for Management Development's world competitiveness ranking released in July, Korea ranked 47th out of 67 countries in business conditions and 39th in government efficiency.

“Last year, 2,816 Korean companies went overseas through foreign direct investment — over 100 times the number of companies reshoring. We need to seriously assess whether Korea’s business environment is attractive enough for companies to return and reinvest after leaving China and other foreign countries,” said Koh, the lawmaker.

Write to Jung-hwan Hwang and Yeong-Hyo Jeong at jung@hankyung.com
In-Soo Nam edited this article.