report no. 2130-ko filecop b% korea: development of the...
TRANSCRIPT
Report No. 2130-KO FILE C b%Korea: Development of the FILECOPMachinery Industries(A Case Study in Strategy and Tactics)March 19, 1979
Industrial Development and Finance Department
FOR OFFICIAL USE ONLY
Document of the World Bank
This document has a restricted distribution and may be used by recipientsonly in the perforquance of their official duties. Its contents may nototherwise be discl'osed without World Bank authorization.
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Currency Equivalents
US$1.00 = W 485W 1.00 = US$0.0021W 1 million US$2,062W 1 billion 2 US$2,062,000
Abbreviations
BOK Bank of Korea
DRC Domestic Resource Cost
EPB Economic Planning Board
FKI Federation of Korean Industries
KDB Korea Development Bank
KDI Korea Development Institute
KIST Korea Institute of Science and Technology
KOSAMI Korea Society for the Advancement of MachineryIndustries
KTA Korea Traders Association
MCI Ministry of Commerce and Industry
R&D Research and Development
RD&E Research, Development and Engineering
ROK Republic of Korea
FOR OFFICIAL USE ONLY
KOREA: DEVELOPMENT OF THE MACHINERY INDUSTRIES
(a case study in strategy and tactics)
TABLE OF CONTENTS
Page No.
SUMMARY ..................................................
I. MARKET OPPORTUNITIES AND RECENT PERFORMANCE .............. 1
Introduction ....... ...... . .... . .. 1Market Opportunities Facing the Machinery Sector .... 1Market Composition. 8Commodity Composition ..... .... 10Determinants of Export Growth: Prospects for the
Future ... 13
II. ECONOMIC TARGETS AND THEIR IMPLICATIONS .27
Introduction .. ...................... 27The Economic Targets . .. 28Resources for Expansion ... 32A Disaggregated View of Exports . .34
III. EVALUATION OF CURRENT CAPABILITIES OF THE MACHINERYINDUSTRIES ........................ 42
Introduction .... 42Qualifications to the Evaluations .. 44
Summary Evaluation ........... 45Plant Layout and Flow of Work .46Operating Practices .................. 51Condition of Machines and Maintenance ............... 57Product Quality. 59Labor Use and Skills .. 61
Engineering, Design, Testing and RD&E ............... 62A Program for Improvement .62
IV. ELEMENTS OF A DEVELOPMENT PLAN FOR THE MACHINERYINDUSTRIES . ......... 66
Introduction ....... ......... 66Guidelines for the Plan. 67Exploitation of Specific Opportunities 72Selected Product Lines ........ . .75
This report was prepared by a mission consisting of: F. T. Moore (Chief
of Mission), Mrs. J. Datta Mitra, H. Pack, H. Choi (Consultant), J. Ellison(Consultant), G. Robinson-(Consultant).I This document has a restricted distribution and may be used by recipients only in the performance
of their official duties Its contents may not otherwise be disclosed without World Bank authorization.
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Table of Contents (Continued) Page No.
V. COMPARATIVE ADVANTAGES IN FOCUSSING THE PROGRAM ........... 92
Introduction ..... .................................... 92
Labor Productivity and Relative Efficiencies ......... 92
Specific Industry Performance ........................ 99
Selected Comparisons with the Structure of the
U.S. Machinery Sector .............................. 106
Areas of Potential Korean Comparative Advantage ...... 110
VI. REVISING THE RESEARCH AND DEVELOPMENT PROGRAMS ............ 113
Introduction ......... ............................................... 113
Korea's Pattern of R&D Spending ...................... 113
Projected Investment in Science and Technology,
Fourth Plan ........ . ................. 121
Strategic Considerations for Future Development ...... 127
VII. SOME POLICY AND INSTITUTIONAL IMPLICATIONS ........... ..... 130
Introduction ....... ............. ..................... 130
The Incentive System .......................................... 130
Licensing and Technology Agreements ................. 132
Technical Assistance .............. .. ................. 136
KOREA: DEVELOPMENT OF THE MACHINERY INDUSTRIES(a case study in strategy and tactics)
SUIMARY
i. Korea's plans postulate a major increase in the role of the mach-
inery industries /1 in investment, production and exports. The magnitude
of the changes envisaged is demonstrated by the fact that the investment in
the machinery industries envisaged in the Fourth Plan period (1977-81) is
expected to be Won 1,478 billion in 1975 prices as compared with Won 542 bil-
lion in the Third Plan period (1972-76); exports are expected to increase
from somewhat less than $1 billion in 1976 to about $3 billion by 1981 and to
$9 billion by 1986. This represents an annual growth rate of about 37%
during the Fourth Plan period, with the highest rate of growth being expected
in the subgroups of general industrial machinery and motor vehicles. The
achievement of these targets poses a challenge which could be met only
if a concerted and carefully orchestrated effort is made on a number of
fronts. The primary purpose of this report is to present suggestions on
policies and institutional arrangements that would affect the development of
the program as a whole, as well as measures that would improve the capabilities
and performance of. existing enterprises. The central focus of the report is
on the market opportunities (domestic and international) open to the machinery
industries which sets the framework within which these industries have to
operate, a comparison of such opportunities with the economic targets of the
Fourth Plan and the current capabilities,of the industries. Other developing
countries which are attempting to industrialize may gain some guidance from
the discussion in this report of Korea's performance, its plans, prospects
and problems in respect to the development of the machinery industries.
Market Opportunities
ii. -While the domestic market for machinery has increased rapidly since
the beginning of the decade, there has been an undue proliferation of product
types and consequently low volumes of output of individual products. The most
effective approach to the task of raising the level of self-sufficiency would
appear, therefore, to lie in the concentration of development efforts in
particular product lines, where the aggregate of domestic and foreign demand
is likely to accommodate adequate volumes of production and provide the
conditions necessary for the introduction of new technology and skills. This
approach would also be in line with the Government's declared policy of
increasing the liberalization of imports, since there may be real limits to
the opportunities for import substitution of some machinery categories in
Korea. Product lines for which there appears to be a significant potential
domestic market are chemical equipment, machine tools, construction and
materials handling equipment, motor vehicles and shipbuilding, and electricity
generation and distribution equipment.
11 The term "machinery industries" covers general machinery, electrical
machinery, shipbuilding, railroad equipment, motor vehicles and precision
equipment.
iii. Although export markets have served as fairly significant outlets
for the Korean machinery industry, a closer look at the export data suggests
that the current optimism about the future prospects for machinery exports may
not be wholly warranted; in 1976, excluding electronics and ships, only 12commodity groups, out of a total of 113, registered exports in excess of
$5 million each. Relevant factors which will influence the future trends in
machinery-exports are the structure of the industry's exports, the configura-tion of Korea's major (geographical) markets for machinery and the competitionwith other developing countries.
iv. As in the case of traditional exports, the major markets of Korean
machinery exports continue to be the United States and Japan. This dependenceis hardly surprising since the United States ranks as the foremost world
importer of capital goods, and Japan, despite its more modest role as an
importer of capital goods, is now the second largest importer of equipmentfrom the developing countries. Korea has recently made a beginning in market
diversification into Western Europe, Oceania, Canada and the Middle East.However, compared to Korea's own diversification record in the traditionalexport categories, the drive into new areas of exports of machinery seemsrelatively modest. Moreover, competition from Latin American and Asianexporters, though in general product- and market-specific, is not insignificant.It is necessary, therefore, for Korea to pursue with greater vigor the goal
of more effective market diversification.
v. The existing pattern of trade in capital goods originating in the
developing countries suggests that the Koreans could benefit by emphasizingexports not merely to the untapped markets in the developed countries, butalso to the developing countries. In 1975, about half of the engineering
goods exports from developing countries found their way to other developingcountries. Relative to Brazil, India and Singapore, Korea appears to have
neglected opportunities for export to other developing countries. A study of
the trade patterns and potential markets for machinery among developingcountries could reveal a number of opportunities for the expansion of trade in
these countries.
vi. An impediment to Korea's efforts to increase its exports of machinery
is protectionism in the developed countries. Apart from overt barriers to
trade instituted by the developed countries, a most effective barrier is that
posed by quality standards and performance specifications postulated by
developed countries. The major means of overcoming these barriers would be
through the purchase of technology by developing countries, and the improvement
of production methods and skills with the help of the developed countries.Korean exports have already benefitted from such arrangements in the areas of
electronics and electrical machinery, but more effective efforts should be
made to expand the number and variety of such arrangements in other branchesof capital goods manufactures.
vii. A related consideration is the development of marketing outlets in
the developed countries. Korea has done so well in the past in expanding theexports of traditional commodities that the question might well be asked why
Korean exporters of machinery cannot achieve similar success. The fact isthat exporting machinery presents a different and more complex problem. Sincethe machinery market is characterized by a degree of product differentiation,the specifications, performance and quality of the machinery offered will becarefully evaluated by buyers. The marketing of machinery thus often needs tobe reinforced by a sales engineering organization and a service network isrequired.
viii. The question of the composition of export production also warrantsmore attention in Korea. While the strategy of product diversification haspaid dividends for Korea in the sphere of traditional exports, a similardegree of product diversification may not be appropriate in the case ofmachinery exports. Considerations of the scale of production, the phenomenomof learning by doing, and the greater difficulty of switching productioncapacity to the production of other lines of machinery suggest that a greaterdegree of product concentration may be advisable.
Elements of a Development Plan
ix. There are two factors that could retard the efficient growth of themachinery industries and that should be avoided. The first, as mentionedabove, is the failure to concentrate on a select number of products whichwould permit the achievement of the economies of scale and manufacture ofproducts of international quality. The second is the inability to realizesufficient specialization through a subcontracting system where small special-ized enterprises would provide the larger final producers with components.The lack of such specialization is evident in the case of the Changwon indus-trial complex, where there appears to be a tendency for each enterprise tooperate independently. Efforts should be made to apply the original conceptwhich envisaged that the complex would provide the environment and circumstancesfor the integrated development of the enterprises, so that producers ofcomponents and parts would exist together with producers of the final products.This could lead to the reduction of the investment funds required and conferthe benefits of both scale and specialization.
x. Both the factors referred to could result from the premature heavycapitalization of the sector, a tendency of the larger plants to do all thework "in house", and the proliferation of smaller plants which attempt toproduce an inadequate volume of many products. It is imperative, therefore,that the unit in the Economic Planning Board, which has been established toundertake project evaluation, should be strengthened to ensure that theinvestments in the machinery industries reflect these considerations.
xi. RD and E Program. The successful development of the machineryindustries will also depend heavily on a vigorous RD and E program whichwould serve the enterprises through the provision of relevant technology andprocesses and the improvement of the quality of the output. It is essentialthat such a program integrate the activities of the various research instituteswith the operations of the industries. Major RD and E programs should, thus,be identified as to their scope, how they fit in the development programs andthe cost and manpower requirements.
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xii. Technical Assistance. The machinery industries require a greatdeal of technical assistance. This would range from the provision of technicalinformation on machine processes, comparison of machine performance ofdifferent foreign producers, information on standards and measurements, suchas commonly found in trade and similar publications, adaptive research,development and testing to determine the aspects of machine design andoperation that could be incorporated in Korean enterprises, and testing theperformance of specific materials in particular uses with respect to wear andtear, metal fatigue, etc. In short, the three program elements would betechnical information, mechanical operations and characteristics, and materialssciences. While the report does not make specific recommendations on fixingresponsibility for this work, it could conceivably be undertaken by anindependent institute with governmental support, or through some cooperativearrangement within industry.
xiii. There are several major subsectors or product lines in which develop-ment should be planned, because of favorable market conditions and the exist-ence of some capabilities for production at present. These include thefollowing:
(a) Machine Tools: Emphasis on standard low-cost machines of goodquality for both the domestic and export markets. The productionof special precision machinery, such as may be required in theautomobile or machine-building industries (e.g. high precisionlathes, shapers, planers) should be avoided, but components forsuch machinery should be included.
(b) Plant Equipment (e.g. boilers, heat exchangers, etc.): Possibili-ties exist for power plant equipment and a variety of standardizeditems.
(c) Industrial Electrical Equipment: Switchgear, transformers andmotors should be included, but heavy transformers and switchingequipment for the power industry should be excluded.
(d) Motor vehicle components and sub-assemblies: Although the finalassembly of motor vehicles is planned to expand, a growingmarket for both domestic use and exports in components and sub-assemblies might offer the best immediate opportunities.
Evaluation of Current Capabilities
xiv. Finally, the report contains an evaluation of the current capabili-ties of a sample of plants covering a variety of machinery products. Itattempts to highlight the deficiencies observed and indicates the types ofcorrective action that are required. A program for the improvement of condi-tions and practices in the plants appears to be essential. The remedialactions are not primarily ones that the Government has responsibility for, norones they can legislate or impose. The actions must be taken largely by thefirms, with the Government providing the necessary incentives and an atmos-phere conducive to the taking of such actions. The elements of a corrective
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program would include: (a) adequate resources for modernization and rehabili-tation of the plants; (b) specific cooperative programs between the Govern-ment and the private sector to induce the firms to take corrective action;(c) liberalization of licensing to permit the acquisition of the requiredtechnology; (d) an expanded program of in-plant training for labor; and(e) technical assistance.
Conclusion
xv. In sum, the machinery industries are faced with different and moredifficult problems than those experienced by Korea's traditional exportindustries during the last decade. The machinery industries do not producesimple, homogeneous products based on established technology requiring verylittle in the way of product differentiation or marketing effort. On thecontrary, the machinery industries are more complex in character with produc-tion processes which must necessarily be adapted to changing technology andwhere explicit export activities would be of crucial importance. We haveendeavored in this report to suggest measures and approaches which will assistboth the Government and the private sector in responding effectively to thesenew challenges.
I. MARKET OPPORTUNITIES AND RECENT PERFORMANCE
Introduction
1.01 In this initial chapter of the report, the objective is primarilyto decribe the market opportunities that are facing the machinery industries.These opportunities are described in terms of the growth of demand for theseproducts, both domestically and in export markets. The Fourth Five Year Planplaces special emphasis on the growth of machinery exports, so it is neces-sary to pay particular attention to the growth trends in world trade in theseproducts and the recent responses that the Korean industries have made tothese trends. Chapter II, which follows, focuses on the economic targetsthat have been set for the machinery industries during the Fourth Plan.
1.02 Up until 1975, Korean trade data were classified according to the"Statistical Classification of Commodities for Korean Foreign Trade" whichin turn was based on the United Nations' "Standard International Trade Clas-sification" (SITC). Machinery and transport equipment were classified inSITC group 7, while precision equipment was included in SITC group 86. Since1976, Korean trade data has been classified according to the Brussels TariffNomenclature (BTN): the machinery industries are included in groups 84through 89, precision equipment encompassing groups 90 through 92. TheKorean government, however, generally uses a grosser classification for mostplanning purposes; the machinery industries are usually defined as threegroups: general industrial machinery (non-electrical); electrical machinery,apparatus and appliances; transport equipment (sometimes with shipbuilding,railroad equipment and motor vehicles shown separately). The classificationthat is applicable to each set of data used in this report is clarified inthe text.
1.03 The market opportunities define the framework within which Koreanmachinery industries have to operate. They must be compared to the economictargets of the Fourth Plan and to the current capabilities of the industries.Only then can a sensible development program be prescribed. This sequenceforms the central theme of this report.
Market Opportunities Facing the Machinery Sector
1.04 In this section, we shall explore the market potential facing themachinery industry both in terms of domestic demand, as well as of interna-tional markets. Table 1.1 below sets out the data on output, exports andimports for 1970 and 1975, the latest year for which output data were avail-able. The domestic market for machinery appears to have increased rapidlysince 1970. Though output, measured in current prices, more than quadrupledin the whole of the industry, imports tripled, to sustain a more than three-fold growth of domestic demand. In constant 1970 prices, 1/ the domestic
1/ Applying the wholesale price index for machinery and machine parts (1975= 161.7, 1970 = 100), as a rough indicator of price increases in thesector.
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demand for machinery of all types appears to have grown at an annual growth
rate of 14.6%. Though the overall self-sufficiency ratio improved by 14.3
percentage points by 1975, the share of imports in total supply remained as
high as 47%. The imbalance between demand and supply was much more severe
in the nonelectrical machinery sector. The share of domestic demand met by
domestic output actually fell from about 21% in 1970 to 17% in 1975, and
the share of imports in supply increased from 80% to 84%. Though the self-
sufficiency index was significantly higher in the transport equipment sector
in 1975, and more particularly in the electrical machinery sector, the share
of imports in total supply remained about 30% in both subsectors.
Table 1.1
Structure of Supply and Demand in the Machinery Industry
(In million dollars, %)
Nonelectrical Electrical Transport
Total machinery machinery equipment
1970 1975 1970 1975 1970 1975 1970 1975
Output (A) 527.7 2,171.2 77.9 161.0 208.4 1,094.0 241.4 916.2
Exports (B) 61.5 702.1 8.4 76.8 43.9 441.6 9.2 183.7
Imports (C) 589.5 1,909.2 305.7 849.5 132.9 512.4 150.8 547.4
DomesticDemand (D) 1,055.7 3,378.3 357.2 933.7 297.4 1,164.8 383.0 1,279.9
Supply (E) 1,117.2 4,080.4 383.6 1,010.5 341.3 1,606.4 392.2 1,463.6
Export weight 11.7 32.3 10.8 47.7 21.1 40.4 3.8 20.0
Import weight 52.8 46.8 79.7 84.1 38.9 31.9 38.4 37.4
Self-sufficiencyratio 50.0 64.3 20.8 17.2 70.1 93.9 63.0 71.6
Notes: Domestic demand = A + C - B; Self-sufficiency ratio = A/D; Supply:
E = A + C; Export weight - B/A; Import weight = C/E. Output is
based on current market prices. General machinery includes office
equipment, which in UN usage constitutes electronics. Electrical
machinery includes electronics. products, other than office equipment.
Sources: The Bank of Korea: National Income in Korea, 1975; Office of
Customs Administration: Statistical Yearbook of Foreign Trade,
1970, 1975.
1.05 Clearly, attempts to raise the self-sufficiency ratio cannot proceed
simultaneously on all (product) fronts in the machinery industries. Indeed
one of the major problems identified in the industry as a whole, and particu-
larly in the nonelectrical machinery sector, has been the undue proliferation
of product types, and the low volumes of output of individual products. In
1975, for example, about 80 different types of products were being produced
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(at the eight-digit level of aggregation) 1/ in the Korean non-electrical
machinery sector, and in only 2 of these (ploughs and rotary tillers, and
elevators) had production exceeded the $10 million mark. A more feasible
approach to the task of raising the level of self-sufficiency therefore lies
in the concentration of development efforts in particular product lines where
the aggregate of domestic and foreign demand is likely to accommodate ade-
quate volumes of production, and to sustain the conditions necessary for the
introduction of new technology and skills.
1.06 In the past, a major factor militating against sustained domestic
production of capital goods was the volatility of demand (both national and
international) which reflected itself in fluctuations in domestic production
and capacity utilization. Table 1.2 is indicative of the volatility of pro-
duction behavior in particular product lines.
Table 1.2
Production of Principal Products'(Numbers)
Pistons
Diesel Cotton Silk Air for motor Motor
engines looms looms compressors vehicles cycles
1970 4,318 393 2,822 909 382,675 12,705
1971 1,668 485 2,416 1,796 439,541 12,332
1972 4,331 926 7,212 1,456 250,167 9,390
1973 7,598 5,751 11,644 1,837 434,263 13,459
1974 9,405 1,417 4,179 1,282 648,910 11,495
1975 9,320 1,875 3,995 950 581,553 11,673
1976 14,271 4,311 13,985 1,895 552,534 16,799
Source: EPB: Annual Report on Current Industrial Production Survey, 1976.
The domestic reforms of 1972-73 went a long way to establish price stability,
to restore Korean business confidence, and to create domestic conditions
propitious for investment in the capital goods industries. Further the
relative recovery of the international economy from the recession of 1974/75,
is likely to provide a more stable international environment for the expan-
sion of Korean capital goods exports. A more serious cause for worry is that
export markets (for final products) may dictate quality requirements and spe-
cifications which cannot be guaranteed by the equipment currently produced
in Korea. Furthermore, there may be real limits to import substitution
opportunities in Korea, because in particular product lines, existing or
1/ According to the Korean Standard Industrial Classification, non-elec-
trical machinery is categorized as group 382.
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potential domestic output and imports may not be substitutes at all. We
shall look at the likely pattern of domestic demand, and the possibilitiesfor export, in some detail.
1.07 Domestic Demand. Notwithstanding the caveats set out above, a
closer analysis of the pattern of imports in the recent past, and of thenature of the investment targets laid down by the country's planners for the
Fourth Plan period, and for the longer term extending beyond 1981, suggeststhat adequate demand for particular types of capital goods is likely to besustained in Korea, well into the future. The data (see Table 1.3) onimports by product type demonstrates that import volumes of several productgroups continued to be higher than $10 million in 1974-76, suggesting thatat least in certain of these sectors, demand might be high enough to supportdomestic production units of adequate scale.
1.08 Further, the future domestic demand outlook for the machinery in-
dustries appears to be sufficiently optimistic. The Fourth Plan targets analmost 85% increase in the fixed capital formation budget 1/ for the period1977-81. A further 71% increase is targeted for the period 1981-86. More-
over, the planned sectoral allocation of investment provides a pointer tothe industries which might be expected to benefit from the pattern of al-location of the investment funds, during the Fourth Plan and in the decade
beyond. Table 1.4 sets out the sectoral allocation of investment envisagedfor the period 1977-81.
1.09 The largest increases have been targeted for the manufacturingsector, electricity generation, transport, and housing. Within the manu-facturing sector the subsectors to be emphasized appear to be chemicals,machinery, and iron and steel; within the transport sector, investment inhighways, motor vehicles and shipping are likely to receive the bulk of the
sector's investments; in the energy sector, transmission and distributionare expected to preempt about a third of the investment budget. Again withinthe agricultural sector, land development and farm mechanization are likelyto absorb about 44% of investment during the Fourth Plan. Thus, a preliminaryappraisal of the investment plan indicates that domestic demand is likelyto be rising for the f-ollowing machinery subsectors: chemical equipment,machine tools, construction, excavating and materials handling equipment,automobile manufacture, shipbuilding, electricity power and distributionequipments, and agricultural machinery.
1.10 The planned growth of GNP at about 10.2% p.a and at 10% p.a. overthe periods 1977-81 and 1982-91 2/ respectively implies that consumptionis expected to grow at about 7.9% over the Fourth Plan period and at about 9%
thereafter. This is likely to have implications not only for the productionof the consumer durables which fall under the rubric of the machinery sector,but also for the equipment industries which supply capital goods for theconsumer goods industries. It is possible that the growth of domestic con-
sumption will provide a market for the less sophisticated types of capital
1/ In 1975 prices.
2/ KDI: Long Term Macro Projections 1977-91, December 1977.
Table 1.3
Selected Korean Imports of Nonelectrical Machinery 1/(million dollars)
SITC /2 BTN /2 1974 1975 1976
711.1, 2, 3 84.01, 2, 3, 4, 5 Steam engines and boilers 25.2 44.7 96.0711.5 84.08 Engines other than air-
craft engines and gasturbines 29.9 62.1 37.5
711.7 n.a. Nuclear reactors 26.5 8.1 n.a.715.1 84.45 (excludes Machine tools 55.1 81.2 101.6
parts)717.1 84.36, 37, 38, 40 Textile machinery 138.5 103.7 134.9717.3 84.41 Sewing machinery 12.2 12.3 24.0718.4 ) Construction, mining 17.0 18.7 )
) 84.23 machinery ) 34.1718.51 ) Mineral processing )
machinery 14.8 17.5 )719.13, 14 84.13, 14 Industrial furnaces,
stokers, ovens 16.3 18.2 81.4719.15 84.15 Refrigerating equipment 12.5 8.0 4.5719.11, 19 84.17 Other heating, cooling
equipment 50.9 44.7 37.1719.2 84.18 Pumps and centrifuges 50.0 73.0 24.4719.3 84.22 Mechanical handling
equipment 43.2 91.4 87.2719.5 n.a. Powered tools, other 16.9 9.7 n.a.719.62 84.19 Packaging machinery 12.8 8.6 5.2719.8, 9 n.a. Accessories, parts 113.8 107.7 n.a.
/L The commodity groups which appear in this table registered imports of atleast $10 million during the period 1974-76.
/2 Korean trade data were registered under the SITC classification during1974 and 1975, and under the BTN classification in 1976. The tableattempts only a rough matching of commodity groups.
Source: Office of Customs Administration: Statistical Yearbook of ForeignTrade, 1976.UN, Bulletin of Statistics on World Trade in Engineering Products,1974, 1975.
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Table 1.4
Investment Allocation by Industries(In billion Won at 1975 prices)
Composition of1972-76 1977-81 the increase
Amounts % Amounts % Amounts %
Total Investment Outlays 11,408 100.0 21,084.9 100.0 9,676.9 100.0
Agriculture, forestryand fishery 1,341 11.8 1,563.6 7.4 222.6 2.3
Mining 139 1.2 261.5 1.2 122.5 1.3
Manufacturing, 2,805 24.6 6,694.2 31.8 3,889.2 40.2of which:- Light industry 1.112 9.7 2,554.9 12.2 1,442.9 14.9
(Textiles) (646) (5.7) (816.2) (3.9) 170.2 1.8
- Heavy & chemicalindustry 1,693 14.8 4,139.3 19.6 2,446.3 25.3
(Iron and steel) (493) (4.3) (867.0) (4.1) 374.0 3.9
(Chemicals) (635) (5.6) (1,287.8) (6.1) 652.8 6.7
(Machinery) (542) (2.4) (1,478.4) (7.0) 936.4 9.7
Electricity 770 6.8 3,206.0 15.2 2,436.0 25.2
Transportation 1,856 16.3 3,144.2 14.9 1,288.2 13.3
Communication 346 3.0 402.1 1.9 56.1 0.6
Social development & otherservices, 4,051 35.5 5,813.3 26.6 1,762.3 18.2
of which:- Housing 1,670 14.6 4,055.4 19.2 2,385.4 24.7
Source: EPB, The Fourth Five-Year Plan.KDI, Long Term Macro Projections 1977-91, December 1977.
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goods which already are or will be well within the capacity of the Koreanmachinery sector to produce. However, as in the case of exports, a finaljudgment must take account not only of the levels of income achieved, andthe propensities to consume and import, but also the material balance re-lationships adopted by the Korean economy.
1.11 Exports. Export markets have served as fairly significant outletsfor the Korean machinery industry. As Table 1.1 demonstrates, about a thirdof overall machinery output found its way to international markets in 1975;the proportion was as high as 47% for general machinery and 40% for electricalequipment. Moreover, as Table 1.5 illustrates, the export growth rate of theaggregate machinery sector has also been remarkable. The volume and growthrate of electrical products was remarkable even in the 1960's, but in the1970-75 period, the export growth rates of all three of the major machinerygroups outstripped (in nominal terms) the growth rate for exports as awhole. However, a closer look at the export data suggests that the currentoptimism about the future prospects for machinery exports may not be wholly
Table 1.5
Export Trends of the Machinery Industry
Annual compoundExport value % shares rate of growth
($ million) in total exports %SITC Categories 1970 1975 1970 1975 1970 1975
71 General 8.4 76.8 1.0 1.5 27.4 55.7Machinery (13.6) (10.9)
72 Electrical 43.9 441.6 5.3 8.7 87.1 58.7Machinery (71.4) (62.9)
73 Transport 9.2 183.7 1.1 3.6 53.0 82.0Equipment (71.4) (26.2)
Total 61.5 702.1 7.4 13.8 62.0 62.7machinery exports (100.0) (100.0)
Total Exports 835.2 5,081.0 100.0 100.0 36.7 43.5
1/ In current prices.
NB: Figures in brackets represent shares in Total Machinery Exports.
Source: Office of Customs Administration: Statistical Yearbook of ForeignTrade, various issues.
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warranted. The high growth registered by electrical machinery and transportequipment exports in the 1965-70 period, and by the non-electrical machineryand transport equipment groups in the 1970-75 period is attributable in part,to the low export base in each of the subsectors in 1965, and in the non-electrical and transport equipment sectors in 1970. Moreover, the 1976export data reveal that abstracting from exports of electronics and ships,only 12 commodity groups (at the BTN four-digit level), out of a total of113 machinery export groups, registered exports in excess of $5 million. 1/However, an adequate prognosis of future trends in machinery exports requiresa more detailed analysis of the industry's export product structure, theconfiguration of Korea's major (geographical) markets for machinery, and acomparison of Korea's trade pattern with those of other less developed coun-tries. This is attempted in the sections which follow.
Market Composition
1.12 The observed dominance of Korea's major trading partners, particu-larly the U.S. and Japan, in the sphere of the country's traditional exports,has a counterpart in the area of Korea's machinery export activity. Till 1975,the US and Japan have generally absorbed around 60-70% of Korea's aggregateexports and about 50-60% of the country's machinery exports. The detailedexport data, however, suggest that in the sphere of machinery (SITC 7), twoother countries, Federal Republic of Germany and Hong Kong, have played animportant and sustained role since the mid-1960's. 2/ However, since in thecase of Hong Kong almost 98% of Korea's machinery exports in 1975 consisted oftransistors, valves, and related electronics products, the bulk being destinedfor reexport, we shall not discuss the Hong Kong market further, but ratherconcentrate on analyzing the import behavior of Korea's other major partners(see Table 1.6).
1/ The 12 BTN groups comprise the following exports: internal combustionpiston engines (84.06), sewing machines (84.41), generators, motors,converters (85.01), electrical capacitors (85.18), electrical apparatusfor making breaking and protecting circuits (85.19), electrical fila-ment, discharge and arc lamps (85.20), thermionic, cold cathode andphoto cathode valves and tubes (85.21), insulated electrical cable wire(85.23), motor vehicles (87.02), bicycles (87.10), aircraft, gliders,kites and rotochutes (88.02), and floating docks (89.03).
2/ The relatively high share of Viet Nam in the 1960's (as high as 22% ofthe total machinery exports in 1967) appears to have been induced bythe Viet Nam war. The country's share in Korean exports of machineryhad dropped to less than 1% by 1974.
- 9 -
Table 1.6
Market Shares in Korean Exports of Machineryand Transport Equipment (in %)
Total Non Electrical Electrical TransportMachinery Machinery Machinery Equipment(SITC 7) (SITC 71) (SITC 72) (SITC 73)
1967 1975 1967 1975 1967 1975 1967 1975
USA 39.2 36.3 13.9 40.8 19.7 46.3 18.6 10.5Japan 10.5 20.0 12.0 24.4 7.3 25.8 5.4 4.3FRG 5.2 5.7 12.0 6.4 3.5 3.4 - 11.0Hong Kong 8.9 4.1 - 0.9 15.8 6.3 - -Total: four
countries (%) 63.8 66.1 37.9 72.5 46.3 81.8 24.0 25.8Total machineryexports in $million 14.2 700.7 4.0 76.3 7.4 440.9 2.8 183.6
Source: UN: Commodity Trade Statistics, 1967, Statistical Papers, Series D,Volume XX, No. 1-20.UN, Economic Commission for Europe: Bulletin of Statistics on WorldTrade in Engineering Products, 1975, New York, 1977.
1.13 Dependence on the US, Japan and the FRG is hardly surprising. TheUS, which ranks as the foremost world importer of machinery and equipment,was also the leading importer of LDC machinery and equipment in the 1960s and1970s (see Table 1.7). Japan, despite its more modest role in the worldeconomy as an importer of capital goods, had nevertheless edged into secondplace by 1974 1/ as an importer of equipment from LDCs, followed closely bythe FRG. The UK, formerly the second largest importer of LDC capital equip-ment, had by 1974 slipped into fourth place. Korean market strategy there-fore apparently sought to exploit the pattern of dominance established by theUS, the relatively high growth rates averaged by the US, Japanese and Germanimports of machinery from the LDCs (56.5%, 47.5%, and 56.8% per annum respec-tively over 1967-74) and Korea's traditional ties with the US and Japan. Inmore recent years it has also sought to diversify into high growth markets inthe Middle East. Up to 1973, for example, the share of the Middle East inKorea's exports of machinery had been negligible. By 1975, the area accountedfor about 3% of Korea's exports of machinery of all types, and about 8% of herexports of nonelectrical machinery.
1/ The latest year for which the complete UN Commodity Statistics datais available.
- 10 -
Table 1.7
Machinery (SITC 7) Imports from the LDCs, 1967 and 1974(US$ million)
1967 1974Absolute Absolute
Country Values Shares Values Shares(%) (%)
Us 131.6 53.3 3,047.3 70.5
Japan 24.8 10.1 376.8 8.7
FRG 14.7 6.0 343.8 8.0
United Kingdom 66.4 26.9 286.7 6.6
France 5.4 2.2 122.9 2.8
Canada 3.9 1.6 146.3 3.4
Total six importers 246.8 100.0 4,323.8 100.0
Source: UN, Commodity Trade Statistics Series D, 1967, 1974.
Commodity Composition
1.14 Within particular geographical markets and overall, Korea has
followed a strategy which has already paid dividends in the sphere of the
country's traditional exports, that of product diversification. Abstracting
from the category of electrical machinery, where Korea's preeminence among
other less developed countries in electronics products is already well-
established, the diversification activity is in evidence even in the category
of nonelectrical machinery. Admittedly, Korean machinery exports in the
late 1960s were of relatively restricted variety and volume; nevertheless,
the increase in "density" in recent years appears significant, both at the
broad three-digit level as well as at the level of the detailed commodity.Within the larger group SITC 71 for example, the number of three-digit groups
with exports over $1 million rose from two in 1967 (comprising textile andleather machinery SITC 717, and machinery and appliances SITC 719), to five
in 1975 (including apart from the two mentioned above, power generating
machinery SITC 711, office machines SITC 714, 1/ and special industrialmachinery SITC 718). However, compared to Korea's own diversification record
in the traditional export categories, the drive into new areas of machinery
and transport equipment seems relatively modest. Moreover, as we have
pointed out before, the export volumes registered in individual export lines,
1/ In UN usage, office equipment is generally included in the electronics
products group.
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at the more disaggregate commodity level, have been generally low. We shallamplify this statement by looking at Korea's performance in her major marketsin detail.
1.15 Machinery Exports to Korea's Traditional Markets. A fair degree ofcommodity diversification has taken place in Korea's traditional markets, theUS and Japan, particularly in the period since 1970, but the record is one ofmixed success. Tables 1.8 and 1.9 are illustrative of trends. A comparisonof columns (5) and (6) serves to highlight Korean efforts to penetrate newproduct areas, particularly in Japan in the period between 1970 and 1975.A significant degree of commodity diversification does appear to have beenachieved. In 1970 for example, Korean exports to the US of nonelectricalmachinery and transport equipment consisted only of small volumes of officemachines and special machinery (SITC 714 and 719). In the Japanese market,metal working machinery was Korea's sole export in 1970. By 1974 and 1975,however, US and Japanese imports from Korea covered power machinery, agri-cultural machinery, textile machinery, at least 7 types of special machinery(SITC 719), and exports of automotive parts, bicycle parts, and ships andboats. Nevertheless, it is fair to point out that in both markets, exportvolumes in individual product lines continued to be relatively modest, and inthe US market Korea's share of LDC exports of machinery appeared to be low.
1.16 In the U.S., the Korean share of LDC exports in 1974 appears tohave been significant (more than 10%), only in sewing machines, ball androller bearings, machine parts and accessories, and bicycle parts. The USmachinery market has clearly been more deeply penetrated by the LatinAmerican LDCs. The Mexican presence is overwhelming, but Brazilian exportsare also in evidence in tractors, forklift trucks, and textile machinery.Also remarkable is the number of machinery categories in which other Asiancountries have forged ahead of Korea: Hong Kong in pumps and centrifuges,and mechanical handling equipment, Malaysia in various categories of agri-cultural machinery, Singapore in equipment for special industries. Thus,with the exception of sewing machines and bicycle parts, Korea's share ofthe US market in 1974 was generally lower than 1%. This is in sharp con-trast to Korea's performance across a wide range of traditional exports;plywood, paper, clothing, cutlery, travel goods and handbags, and footwear,where Korea's share of the US market in 1973 was uniformly higher than 5%.
1.17 Korean successes in Japan have, however, to be distinguishedsharply from the country's efforts in other foreign markets, since Koreanmachinery exporters appear very clearly to have spearheaded the LDC penetra-tion drive into the Japanese market. As Table 1.9 illustrates (see columns(7) and (8)), Korean shares of LDC exports which were negligible or nonexist-ent in 1970, were remarkably high in 1975, in a fairly wide range of commodi-ties (agricultural machinery, 100%; and mechanical handling equipment, 44%,etc.). Beginning from a base share of less than 1% in 1970, Korea had by 1975,preempted 3% of the overall machinery market (SITC 7) in Japan. Though thebulk of this effort was due to tie-ups with Japan in the area of electronicsand electrical machinery exports, Korean shares of the Japanese market in anumber of individual nonelectrical machinery and transport equipment lineswere not entirely negligible in 1975 (19% of Japanese imports of cultivating
- 12 -
machinery, 9% of the Japanese import market for sewing machines, 4% of the
ball and roller bearings market, and 26% of the bicycle parts market).
1.18 However, a look at the export record of other LDCs suggests that
Korean efforts in the Japanese market have not gone unchallenged. Individual
Asian LDCs appear to have penetrated areas in which Korea appears to have
made little headway: India in piston engines, Singapore in construction and
mining equipment, machine tools, ball and roller bearings, and ships and
boats, and Malaysia in air conditioning machinery. Singapore appears also
to have outstripped Korea in the bicycle parts market, heating and cooling
equipment, and railway vehicles. Moreover, competition from other LDCs in
the Japanese market is definitely increasing.
1.19 Diversification into New Geographical Areas. Korea in 1975 was
clearly only just beginning to diversify into the high growth machinery
markets in Western Europe, Oceania and Canada. In Canada, Korean exports
appear to have been concentrated on relatively few commodities. In 1975 the
bulk of Korean exports ($25 million out of a total of $34 million) were
composed of electrical machinery, and the bulk of this again consisted of
electronics. In the transport sector, the dominant export ($5 million out of
a total of $6 million) consisted of ships and boats, and in the nonelectrical
machinery sector, the sole export (apart from office machines which really
fall into the category of electronics products) was sewing machinery. In New
Zealand, the major market in the Oceania group of countries, 94% of Korean
exports consisted of freight and railway cars. Korean exports to the Nether-
lands and Belgium-Luxembourg, consisted almost exclusively of electronics,
and all of Greece's imports from Korea consisted of ships and boats.
1.20 Even the German market which absorbed almost 6% of Korea's total
machinery exports in 1975, appears to have been relatively unexplored by
Korean exporters in the areas of nonelectrical machinery and transport
equipment. Table 1.10 sets out the 1971-75 trends in some detail. Apart
from office machines Korea appears to have made new inroads in only two
distinguishable areas: textile machinery (other than sewing machines) and
automotive electrical equipment. Korean efforts appear all the more ten-
tative when the experience of other LDCs is taken into account. There
appears to have been significant penetration by Brazil in a large number
of product categories, and to a lesser extent by Argentina and Mexico. The
relatively wide Brazilian presence, however, is testimony to the close busi-
ness and production ties between Brazil and the FRG. More remarkable is
the diverse Asian presence in the FRG. Setting aside the Brazilian record,
the collective LDC share of the German market cuts across almost all machinery
categories. Moreover a diverse group of individual Asian LDCs made fresh
entries into product areas which they had left unexplored in 1970. Their
very diversity is at once a cause for optimism, and for more hard-headed
appraisal of Korean prospects in the German market. The assorted Asian
presence suggests that penetration into new product areas is possible, and
that apart from Brazil no particular LDC (primarily Asian) exporter is firmly
entrenched in a fairly wide range of product categories (aircraft and piston
engines, pumps and centrifuges, however, appear to be the preserves of India,
- 13 -
and automobile electrical equipment of Iran), but their very diversity, and
the occasional switches in leadership between 1970 and 1975 suggest that thecompetitiveness among Asian countries for the German market cannot entirely be
ignored.
Determinants of Export Growth: Prospects for the Future
1.21 Developed Country Markets. Considering that over 62% of Korea's
aggregate machinery exports (and over 70% of the country's nonelectrical
machinery exports) were absorbed by the US, Japan and Germany in 1975, thekey determinant of Korea's future machinery export prospects is the future.
growth rates of investment in these economies. Unless ICORs change radically
in the future the expected GDP growth rates in these economies can serve as a
useful proxy for growth rates of investment. The Bank's current projections 1/
peg the expected growth rate of the US, Japan and the FRG at around 4.0%p.a., at a little over 6.2% p.a., and at 4.0% p.a. respectively, for theperiod 1979-90, and that for the whole of the OECD (north) at 4.2% p.a. over
the same period. The estimate for the US is somewhat lower than the actualgrowth rate estimated for 1977, 4.8% p.a.; however, the estimated 1977 growth
rates for Japan and the FRG, i.e., 5.2% and 2.7% p.a. respectively, were
lower than those projected for the future. So too is the preliminary 1977estimate for the OECD north, 3.5% p.a. On balance therefore it appearslikely that demand for Korean machinery exports will be sufficiently buoyant
in Korea's traditional markets, the US and Japan, as well as in economieswhich have favorable records of absorption of LDC machinery: the Federal
Republic of Germany, Canada, the Netherlands, and other countries of OECD
north.
1.22 Trade Barriers. One of the major determinants of the expansion of
LDC manufactured exports is protectionism in the developed countries. Most
of the tariff and nontariff barriers in existence since the 1950's have been
aimed, however, at products which constitute Korea's traditional export basket:
clothing, textiles, and footwear. During the 1960's a marked reduction intariffs took place in the OECD countries primarily through the Kennedy Round
of Trade Negotiations. A further round of tariff cuts is being negotiated in
the Tokyo Round of Multilateral Trade Negotiations. However, quantitativerestrictions, particularly on textiles and clothing are not only likely to
persist, but are even being strengthened. In recent years, particularly follow-
ing the 1975 recession, there has been a trend towards rising protectionism. 2/
Textiles, clothing, and footwear are the categories in which Korea has been
hit, but barriers have also been raised against consumer electronics productsand fabricated steel products. In addition to these overt measures, there
have been a whole host of warning signals aimed at the developing countries:
1/ IBRD: Prospects for Real Growth and Inflation in OECD Markets, mimeo,February 8, 1978.
2/ Donald B. Keesing: "World Trade and Output of Manufactures: Structural
Trends and Developing Countries' Exports." IBRD, Staff Working PaperNo. 316, January, 1979.
- 14 -
public pressures for protection, restrictions against Japanese exports, and
diplomatic activity. To date, however, these actions have been mild and inany case have not made fresh encroachments into the sphere of LDC machinery
exports. The outlook for Korean capital goods exports therefore still appearsto be relatively optimistic.
1.23 Apart from overt barriers to trade instituted by policy makers
in the developed countries, a most effective barrier is that posed by the
quality standards and performance specifications required in developed
countries. Some of these are formally enforced as in the case of exportsof electrical equipment and appliances to the FRG, Sweden and Switzerlandand of automobile exports to the US. One of the major means of overcoming
these barriers has been the purchase of technology by developing countries,and the development of supply capacities, production methods and skills with
the help of developed countries' firms. The predominance of Mexican machinery
exports in the US market, and Brazilian capital goods exports in the German,are a reflection of these production tie-ups. Korean exports have alreadybenefited from such arrangements in the sphere of electronics and electrical
machinery, and policy planners expect to expand the number and variety ofsuch arrangements in other branches of capital goods manufacture during theFourth Plan period.
1.24 Marketing Arrangements. A related consideration is the development
of marketing outlets in the developed countries. In the field of traditionalexports such development has been initiated both by developing country ex-porters, as well as by businesses in developed countries - corporations,
outlets, large buyers, and trading firms, looking for low-cost sources of
supply based on low-cost labor, and accommodated by technological and organi-
zational innovations and declining transport costs. Korea has already adopted,particularly in the area of traditional exports, an institutional arrangement
which greatly helped the Japanese export drive and continues to serve Japanese
trade even today - the general trading company (GTC). Korean GTCs have beenhandicapped by the lack of financial resources and overseas sales networks;
they are also comparatively small by international standards. The governmenthas attempted, since their inception in 1975, to aid GTCs by offering them anumber of privileges and financial incentives. These cover subsidized export
credit, special opportunities to participate in international bidding, exemp-
tions from regulations restricting the number of overseas offices, permissionto import restricted items, permission to hold foreign exchange up to $0.5million, and tax benefits normally extended to exporters. As a consequencethe number of GTCs expanded enormously, extending the range of commoditiesmarketed. During 1975, the GTCs share of total exports was 12.6%, by 1977
their share was estimated to have reached 30%. Indeed their expansion has
- 15 -
been so rapid that Government has stepped in to reduce undue competition andto promote economic scales of marketing activity. 1/
1.25 While these measures appear to have stimulated export diversifica-tion and the participation of small size firms in export activity, they are,by themselves, insufficient to induce GTCs to undertake the marketing strategyand effort which is required to sustain the export of engineering products.The marketing of machinery requires a competent sales engineering organiza-tion which can undertake detailed market surveys, has a close knowledge ofproduction capabilities in Korea, and an understanding of the engineeringrequirements of the buyer, as well as a strong supporting after-sales servicenetwork. While the latter function can sometimes be relegated to localdealer/distributor networks, it is much more difficult to delegate the salesengineering function to local agents, since close association with the pro-duction end of the process is imperative. Japanese trading companies there-fore generally have their own core staff of specialized technical personnel.Korean GTCs being relative newcomers to the field, have yet to determinewhether the technical requirements of engineering goods exports are likely tobe adequately served by the sort of centralized marketing arrangements theyoffer, and to determine the nature and magnitude of the investment and organ-ization which will be required to sustain large exports of capital goods.
1.26 Developing Country Markets. The discussion so far has centeredprimarily on export prospects and trade and marketing arrangements in thedeveloped countries. Another and quite crucial determinant of LDC exportsof machinery, a factor which is apparently little discussed in Korea, is therole played by developing countries themselves as importers of capital goodsfrom other LDCs. In 1974, for example, over 87% of developing country ex-ports of nonelectrical machinery and transport equipment was absorbed byother developing country markets. This statistic is considerably higher thanthose applying to other categories of exports. In textiles and clothing,for example, the shares of developing countries in LDC exports were 56% and21% respectively. The share is highest (after machinery) in chemicals, 62%.Table 1.11 sets out the trends in the worldwide exports of engineeringproducts (defined as SITC 7) between three regions, comprising developedmarket economies, centrally planned economies and developing economies, overthe period 1965-75. Developing countries have not only been absorbing anincreasing share of developed country exports of engineering products par-ticularly since 1972, they have also absorbed a large and rising share of LDCexports over the same period. Indeed, over the period 1970-75, LDC exportsof engineering products to other developing countries have been expandingat a faster rate (36.8% p.a.) than similar exports to developed countries
1/ GTCs are required to fulfill certain minimum criteria to qualify forrecognition. These relate to paid-in capital (2.0 billion won), annualexport performance ($150 million), performance targets for individualexport items (each to exceed $1 million) and for each overseas marketcountry (exports to exceed $1 million in each market), the number ofoverseas branches (20), and minimum shares for exports directed to theMiddle East, Latin America and Africa (15%, 3% and 3% respectively).
- 16 -
(34.8% p.a.). In 1975, 49% of engineering goods exports from LDCs found
their way to developing country markets. This is perhaps not very surpris-
ing. First, the LDCs taken together as a group grew at an average rate of
about 6% p.a. over the period 1970-75. Second, insofar as income levels
determine the quality and sophistication of the capital goods used by par-
ticular importers, it is not surprising that developing country manufactures
of capital goods should be more appropriate for developing country markets.
Korean export efforts have not taken enough advantage of developing country
markets; only 24% of Korean exports of engineering goods found their way to
other developing countries in 1975, compared to Brazil's 67%, India's 76%,
and Singapore's 45%. The ratios cited for Brazil, Singapore and India are
obviously not intended to serve as norms to which the Korean trade pattern
should aspire. They are merely meant to be indicative of the market poten-
tial which Korea might attempt to tap, at least at the margin, as it expands
its production and marketing effort. Moreover, the Bank's projections imply
that developing countries as a group will continue to be an important source
of demand for engineering products. Growth rates for the developing country
group are projected to be as high as 6.8% p.a. over the period 1975-85. This
compares favorably with the 4.2% p.a. postulated for the OECD. 1/
1.27 It is not enough of course, to discuss developing country markets
in the abstract. Here, admittedly, the information on developing country
destinations for particular export categories is rather thin, especially
when compared to the available knowledge of developed country absorption of
developing country exports by origin, destination, and by type of product.
Though the UN Bulletin of Statistics on the Export of Engineering Products
goes someway in filling the void, information on destinations and product
types is available only for the exports of a limited range of developing
countries. Table 1.12 sets out the data for Brazil and Singapore for 1973
and 1975, and for India for 1975, for the broad groups of engineering goods
exports: SITC Categories 71, 72 and 73. More detailed information is avail-
able in the UN source. For Brazil, the most important regional destination
is naturally the developing country region labelled "Other America," for
Singapore and India, the developing countries of Asia. But the importance
of the Middle East is clearly on the increase for Brazil, Singapore, and
India; in 1975 the region was second in importance only to the Far East.
Also noteworthy is the larger share of Africa for both Brazil and India. In
the case of both countries, about 12% of total machinery exports was absorbed
by African countries. The African share was even higher, in both cases, in
the area of transport equipment.
1.28 Finally, the question of export production composition warrants
more attention in Korea. We have already pointed to the low volumes of pro-
duction and export of particular products in the capital goods group in
Korea. A strategy of product diversification has admittedly won great divi-
dends for Korea in the sphere of traditional exports, 2/ but the conditions
1/ IBRD: Prospects for Developing Countries, 1970-85, November 1977.
2/ IBRD: Growth and Prospects of the Korean Economy: Annex I. Report
No. 1489-KO, February 23, 1977; pages 3-7.
- 17 -
of capital goods production may not warrant an equal degree of product diver-sification and switching. Production scale considerations, the phenomenon oflearning by doing, and the greater difficulty of switching production capacityto the production of other capital goods, perhaps require a greater degreeof product concentration than Korea's traditional exports. Here two leadsare available for Korean exporters/producers to follow in determining a moreselective product range. The first might consist of a closer study of LDCperformance in particular product categories, in the leading developed countrymarkets. Table 1.13 sets out for six developed countries: the US, Japan,Canada, the FRG, France and the UK, the particular product categories in whichLDC exports were either greater than $10 million in value, or comprised morethan 2% of the total imports of these developed countries. LDC comparativeadvantage lies obviously in various categories of electrical equipment andelectronics, including office machines; in the sphere of nonelectricalmachinery and transport equipment, shares are relatively large in aircraftand piston engines (parts and components), agricultural machinery, sewingmachines, heating and cooling equipment, pumps and centrifuges, machineparts of various types, bicycle parts, trailers, aircraft parts, and shipsand boats. These are generally categories in which Korea already has someestablished production capacity.
1.29 A second method of product identification which might complementthe first, consists of a study of the product breakdown of LDC exportsabsorbed by other developing countries. Table 1.14 which is illustrative,draws on data for Brazil, India, Singapore and Korea in 1975. Developingcountries appear to absorb 97% of Brazil's exports of agricultural machinery,96% of its machine tools, 79% of its sewing machines, and 90% of its specialindustrial machinery. Developing country shares are also significant forIndia and Singapore in internal combustion engines, special industrial ma-chinery, railway and road vehicles. By comparison, developing country sharesare high only in Korean exports of ship and boats. If Brazil, India andSingapore can be accepted as proximate guides, export expansion potentialappears to exist for Korea in developing country markets, in the areas ofpower generating machinery, agricultural machinery, textile and leathermachinery, pumps and centrifuges, mechanical handling equipment, bearings,and perhaps in automobile equipment. In some of these areas, Korea hasalready established production capabilities; moreover, the combined demandsof the domestic market, developed country markets, and the untapped LDCmarkets might be such as to warrant the concentration of development effortsin certain of these areas, during the Fourth Plan.
1.30 Special Problems in Marketing Machinery. Korea has done so well inthe past in expanding exports that one may wonder why this report emphasizesthe marketing problem. The fact is that exporting machinery is a quite dif-ferent and more complex problem than exporting consumer goods such as radiosand sweaters. It is worthwhile to dwell a moment on this point.
1.31 There are several elements that distinguish the market for machinery.First of all, machinery is bought on specifications by buyers who know exactlywhat they want and who make comparisons among alternative sellers. They donot buy on the basis of taste or whim. Korean machinery will be compared to
- 18 -
machines that can be purchased from Western Europe, the U.S., Japan, or
Mexico, India, and Brazil. Specifications, performance, and quality will
be carefully evaluated. In other words the competition is broader in scope,
and the evaluations of the buyers will be based on measurable factors. As
is pointed out in Chapter III, the current capabilities in Korean plants may
make it difficult to meet the competitive standards.
1.32 Second, while it is certainly true that a considerable market exists
for standard items or designs of engineering goods, it is also true that the
machinery market is characterized by a fair degree of product differentiation.
Buyers are often in the market for machines which incorporate custom features,
special tooling, fixtures, etc. While some of these special design features
may be fairly simple to incorporate, others are more difficult. At the least
it does mean that the machinery marketing agency has to be staffed with a
core of technical personnel who can gauge the extent of the engineering
inputs required to incorporate the features specified, and who are familiar
with the design and technical capabilities at the suppliers' factory. In
other words the marketing of machinery may need to be reinforced by a sales
engineering organization.
1.33 Third, buyers of production machinery require a service network.
They don't want a machine out of commission for lack of parts for any sig-
nificant period. Warehouses and service facilities must be available close
by to bring the parts and make the repairs in not more than a few days; a
week or two weeks is generally not acceptable. It is going to take time and
money to establish these service facilities and to build up buyer confidence.
1.34 Fourth, buyer confidence must also extend to the firm itself and
its facilities. Even though products are evaluated quantitatively, buyers
frequently want to see the plant and its facilities, and to form an opinion
of the capabilities of the enterprise. This is part of the process of
building up a reputation for the firm that buyers around the world will
recognize and accept as a symbol of quality and performance. Several times
during the visits to the Korean plants the mission engineers observed that
although the product itself appeared to be acceptable, the plant facilities
would not create confidence and buyers probably would fear that later on
there might be problems with the product that the firm would not be capable
of correcting. For these (and other) reasons, this report suggests that one
way to expand rapidly is to promote joint ventures with firms that do have
an international reputation.
1.35 Fifth, buyers also expect that the firm will be undertaking improve-
ments in design, adaptations to increased performance, and new models so that
the buyer can keep his equipment equal to competitors; but, as Chapter III
documents, capabilities in Korean firms for engineering design, testing, and
R&D are notably weak.
1.36 Finally, although there is a market'in some types of product lines,
for different qualities of machinery, the price elasticity of demand is not
great. Machinery is basically not bought on price considerations when the
price differences are small. Korea can expect to sell what might be called
- 19 -
"low quality--low price" machinery items, provided the price differential withhigh quality and high precision items is substantial. How much of a differen-tial is "substantial" will, of course, vary by type of item but differencesof 5% or 10% would probably not be effective. Thus Korea must either beprepared to meet the high quality standards, or establish an attractive lowprice for low quality items. Given current capabilities and cost levels, itmay be somewhat difficult to pursue either path.
1.36 For all of the above reasons, the marketing of machinery productshas special problems. They are not insuperable but neither can they usuallybe solved overnight. It will take time to build up the capabilities and themarket reputation. In the machinery business there is no Sears Roebuck orJ. C. Penney to which Korea can sell a large volume of output in a ready-mademarket as it has done in the past in some consumer goods.
- 20 -
Table 1w8
SELECTED /a US IMPORTS OF KOLCHINERY FROM KOREA AND D6ELOPWC COUNTRIES - CURRENT VALUES AND SHARF.S. 1970 - 74
Sh- of pri-ip.1 Sh.'. of prift-
US i.p.rts (in US$ .1., US imports Kore.n h.re Kqtea. share L�ti. A-ti-n LDC cipal A.ia.1970 _ 1974 from Korea of LDC of US mrket .. p.rt.r is US LDC xp.rt.r in
SITC Torsi LDC Total LDC, (i, US$ ml,) exports (Z) M -rket /c (I) US -rk.t /d (2)
group imports share imporc. har. 1970 L974 1970 1974 1970 L974 1970 1914 1970 1974
(1) (2) (3) (4) (5)_ (6) (7) (8) (9) (IU) (11) (12) (L3) (14)
7 Machi.ery and transport q.ip-t 11,171.3 5.0 24,700.7 126-3 30.6 284.3 -5.4 -9.4 0.3 1.1 1.4(t) 3.7(l) 1.5(1) 1.6(l)
71 M..hi..ry, ... eloctric 3,017.3 2.6 6,432.5 5.6 0.4 24.9 0.5 6.9 0.0 0.4 t.1(1) 2.7(L) O.6(1) O.6(1)
711 Power -chimry, ontlectric 782.0 1.4 1,531.3 Z.A - 0.1 - 0.3 - 0.0 1.30) 1.80) - O.UM
711.5 Pist.n engines, aonair 665.3 1.6 1,19L.2 3.3 - 0.1 - 0.3 - 0.0 0.80) 2.2(l) - 0.0(1)
711.8 Engines, NES 7.3 - 11.8 0.1 - - - - - - - - - -
712 Agri..It.r.1 machi..ry 263.9 0.6 742.7 1.3 - 0.1 - L.2 0.0 S.0 O.2(1) 0.4(1) 0.2(2) 0.5(2)
712.1 C.1ti-ti.g -chinery 7.3 - 11.8 0.1 - - - - - - - 0.40) - -
712.2 H. -.. ti.g oxchi... 126.3 0.4 304.5 1.2 - - - - - - a.2m 0.6(L) - 0.1(2)
712.5 Tract.ra, a..r..d 90.5 - 302.8 0.1 - - - - - - - 0.1(2) -
712.9 Agri..It.re machines, other thanc.1ti-ti.g & har-.ti.gmechi..s. d.iry f.r. equipment& tr..tors, no.road 9.6 9.4 41.7 14.3 - - - - - - 2.1(3) 1.20) - 7.4(2)
714Lb Offic. machines 504.6 10.9 1,020.5 21.3 0.3 19.8 0.7 9.1 0.1 1.9 4.0(1) 10.70) 3.6(1) 3.3(1)
7 1 5 Mt.1..rki.S -. hi..ry 163.7 0.4 305.2 1.2 - - - - - - O.2(1) 0.10) 0.1(7) U.2(4)
715.1 Kachines tool. for metal 134.6 0.5 273.7 1.3 - - - - - - 0.2(2) 0.10) U.2(7) 0.3(4)
715.2 Mt.l.orking ma.hi-ry, otherthan machine t.ols for et.1 29.1 - 31.5 0.5 - - - - - -
717 Textile, leather me.hinery 361.0 0.6 613.5 2.9 - 2.1 - 11.5 - 0.3 0.1(2) 0.5(2) Or. I ( 1) 0.2(l)
717.1 Textile machi-ty 241.3 0.2 397.6 0.5 - - - - - - 0.1(3) 0.2(2)
717.2 Skin, leather w-king -chines 6.5 - 6.8 0.2 - - - - - -
717.3 S-i.g =.hi..s 113.2 1.5 209.1 7.6 - 2.0 - 12.6 - 1.0 0.2(4) 1.1(2) 0.2(i) 0.5(i)
718 M..hin.. for special industries 205.7 0.5 453.4 1.6 - - - -- - - 0.3(1) 1.0(1) U.1(3)
718.1 pope., t.. ill machinery 50.2 - 88.8 0.3 - - - - - -
718.2 printing. binding mchinery 64.3 0.2 L04.8 0.6 - - - - - - - 0.5(l)
718.3 Food me.hinery, no�d.om.tic 20.3 1.0 43.7 2.4 - - - - - - - 0.5(l) 0.5(4)
718.4 Construction, mining machinery 49.0 1.2 175.3 2.1 - - - - - - 0.8(1) 1.8(1)
718.5 Crushing, etc. glass machinery 21.8 0.9 40.9 3.5 - - - - - - - 2.01) 1.0(3)
719 Other special -chi..ry 736.3 0.8 L.765.9 3.5 0.1 2.7 1.7 4.3 0.0 0.2 0.4(l) IAG) 0.1(1) 0.3(3)
719.1 co.li.g equipment 66.2 0.5 L21.1 6.4 - 0.1 - 1.3 - 0.1 0.30) 5.5(L) - 0.0
719.2 Pump., centrifuges 111.9 1.3 333.4 2.1 - 0.3 - 4.3 - 0.1 0.5(l) O.8(1) 0.3(l) 0.4(l)
719.3 Mechanical handling equipment 97.7 0.3 226.2 3.1 - 0.1 - 2.1 - 0.0 O.2(1) 0.6(l) - O.I)LO
719.32 Forklift trucks, etc. 22.2 0.9 64.5 2.6 - - - - - - - 1.7(2) - -
719.4 D-..tic ppli..ce .. .... 1-tric 25.3 0.8 36.2 2.0 - - - - - - - 2.2(1) 0.8(1) 1.10)
719.5 Powered to.l. 81.1 0.5 208.0 1.9 - - - - - - 0.3(2) 1.50) - 0.2(3)
719.6 Nonelectric mchi.e.. NES 39.0 0.8 88.8 5.2 - 0.2 - 4.3 - 0.2 - 1.4(1) 0.5(l) 2.L(l)
719.7 Ball, roller, etc. b"rings 79.9 - 216.8 1.3 - 0.3 - 11.4 - 0.1 - 0.1(1) - 0.87(3)
719.8 Other -chines, nonelectric 131.8 0.5 275.0 5.1 - 0.2 - .1.1 - O.L 0.3(l) 3.2(l) - 0.3(l)
719.9 Machin. parts, acc"sorice, NES 103.6 2.2 260.4 5.0 - 1.4 - LO.6 - 0.3 1.7(l) 2.4(l) 0.1(1) 0.3(j)
72 Electrical machinery 2,271.9 20.9 5,416.9 45.4 30.1 248.1 6.6 10.1 1.3. 4.6 4.7(1) 11.3(l) 6.2(1) 6.5(l)
729.4 At.moti- Iectrl:..l equipment 57.7 0.9 143.3 4.6 - 0.1" - 0.5 - O.L 0.7(2) 8.9(2) - 0-SM
73 Tran.p.rt equipment 5,882.0 0.5 12,851.3- 1.7 - 11.4 - 5.3 0.1 0.2(l) 1.0(1) 0.10Y 0.1(1)
731 Rail..y �.hicles 14.5 22.8 43.2 6.3 - - - 22.1(1) 6.0(1)
731.5 F.S...g.r car., not p.-r.d 3.9 82.1 - - - - -
7 3 1. 7 Rail.ay l.c.-ti- car p.rts,NES 10.6 33.0 37.5 7.2 6.9(l)
732 Road motor Vehicles 5,479.5 0.3 11,830.8 1.0 - 0.3 0.3 0.0 0.20) 0.70) 0.00) 0.0
732.1 F.see.g.r wtor �ehicl.s,excl.di.& busee 3,913.3 - 7.635.9 0.4 - - - - - 0.4(l) - 0.00)
732.8 Motor -hicl. part., NES 891.5 L.1 2,586.6 2.7 - 0.2 0.0 0.3 I.O(L) 1.80) O.O(l) 0.00)
732.9 Motorcycles, etc. parts 327.9 L.3 969.7 1.2 - - - - - 0.2(1) O.O(l) O.O(j)
733 R-d -hicles, o-t.r 66.3 2.4 368.1 12.3 - 10.7 - 23.6 2.9 - 2.9(l) 0.�(I) 0.4(l)
733.1 Bi.y.le., noomotor, parts 56.1 2.9 347.5 12.4 - 10.5 - 24.4 3.0 - 2-80) O-5(1) O.k 1)
733.3 Vehicles, NES, ..- tor,trailers 10.1 - 20.5 10.7 - - - - - -
734 Alr-ft 274.3 0.3 510.2 5.0 - - - - - - 4.9(1) - -
734.9 Aircr.ft parts 226.0 - 386.3 6.6 - - - - - - 6.5(l) - -
735 Ship., b..ts 47.4 17.5 99.0 25.8 - 0.4 - 1.6 - 0.4 3.6(i) 1.3(l) 12.5(l) 6.6(L)
735.3 Ships & b"to, n.ow.r 47.4 17.5 99.0 25.8 - 0.4 - 1.6 - 0.4 3.6(1) 1.3(1) 12.5(l) 6.6(L)
/a Excludes SITC categories hich .... titt. electrical machi.." and Iectr..i.s.
lb SITC category 714 is included under electronics products in the UN definition.
/c The awnbers in brackets are codes for th. particular Latio Amrican d.,el.pig co-tries vhose export shares are recorded in C.lumos (11) and (IZ).
The ountry codes 4re as follwa: (1) M"ico. (2) Bra.il, (3) Argentim, (4) Colombia, (5) Pa- E. C.Z.
Ld The numbers is brackets re od.. for th. principal Asi" de�eloping countries whose export hare. &v. recorded in Col,utns (13) and (14). Tb. country
codes are as f.II-s: (1) IL..g Kong. (2) Malaysia. (3) Sig.p.te, (4) Philippines.
Not.; T.L..n la no longer included in IJN trade statistics.
Source: UN Commodity Trade Statistics, 1970, 1974 St.ti.tic.1 P.P.ra S.ri.s D; Vol. XX, No. 1-20, Vol. XXIV, No. 1-28.
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'table *.11
TOTAL TRADE IN ENGINEERING PRODUCTS (SITC 7) BETWEEN REGIONS: VALUlES (IN MILLIONS OF US DOLLARS, F.O.B.) AND SNARES (X)
Regions of destination Share ofCentrally Developed Share of Centrally Developedplanned market Developing region in planned market Developiig
Regions of origin Year economies economies countries Total world Total world economies economies countries Total world(1) (2) (3) (4) (5) (6) (2) t (5) (3) * (5) (4) * (5)
Centrally planned economies 1965 3,879.9 342.1 1,409.8 5,631.8 12.5 68.9 6.1 25.0 100.01970 7,207.7 800.1 2,069.4 10,072.2 11.3 71.6 7.9 20.6 100.01972 9,999.9 1,186.3 2,440.5 13,626.7 11.0 73.4 8.7 11.9 100.01973 L2,971.9 1,546.6 2,751.7 17,272.2 10.6 75.1 9.0 15.9 100.01974 14,056.7 1,647.6 3,077.3 19,784.4ta 9.7 n.a./a n.a./a n.a./a 100.01975 16,074.6 2,111.3 3,449.5 23,617.3/a 9.8 n.a./a n.a./a n.a./a 100.0
Developed market economies 1965 1,183.1 26,951.5 11,055.4 39,190.0 86.9 3.0 68.8 28.2 100.01970 2,376.7 57,617.9 18,419.6 78,414.2 87.7 3.0 73.5 23.5 100.01972 3,308.2 80,380.6 24,739.8 108,429.6 87.5 3.1 74.1 22.8 100.01973 4,698.7 104,049.1 33,197.5 141,945.3 57.4 3.3 73.3 23.4 100.0 i1974 6,356.3 123,764.0 48,799.0 178.9L9.4 88.1 3.6 69.2 27.3 100.U11975 9,854.5 134,762.9 67,531.3 212,153.6 88.3 4.6 63.5 31.8 100.0 4
Developing economies 1965 1.3 74.4 188.0 263.7 0.6 0.5 28.2 71.3 100.01910 7.6 504.5 455.6 967.7 1.1 0.8 52.1 47.1 100.01972 12.2 1,031.7 839.4 1,883.8 1.5 0.7 54.8 44.6 100.01973 19.2 2,006.4 1,172.2 3,197.8 2.0 0.6 62.7 36.7 100.01974 1.6 2,471.0 1,906.0 4,378.6 2.2 0.0 56.4 43.5 100.01975 26.5 2,246.0 2,182.1 4,454.6 t.9 0.6 50.4 49.0 100.0
Total world 1965 5,064.3 27,368.0 12,653.2 45,085.5 100.0 11.2 60.7 28.1 100.01970 9,587.0 58,922.5 20,944.6 89,454.1 100.0 10.7 65.9 24.4 100.01972 13,320.3 82,598.6 28,019.7 123,938.6 100.0 10.8 66.6 22.6 100.01973 17,689.8 107,604.1 37,121.4 162,415.3 100.0 10.9 66.3 22.9 100.01974 20,414.6 127,882.6 53,782.3 203,082.4 100.0 10.1 63.0 26.5 100.01975 26,585.6 139,125.2 73,162.9 240,225.7 100.0 - - -
/a Includes exports from Rumania not broken down by destination.
Source: UN (Economic Commission for Europe) : Bulletin of Statistics on World Trade in Engineering Products, 1975, New York 1977.
Table 1.12
REGIONAL SHARES_(.) IN EXPORTS OF ENGINEER1NG GOODS FROM BRAZIL. SINGAPORE AND INDIA - 1973, 1975
Country SITC 7 SITC 71 SITC 72 SlIC 73
of Engineering products Machinery, nonelectric Electrical machinery Transport equipment
origin Destination 1973 1975 1973 1975 1973 1975 1973 1975
Brazil(1) Africa 7.7 12.1 3.9 4.8 1.2 1.7 20.4 28.6
(2) North America 26.2 18.7 18.9 18.5 51.6 41.7 11.5 5.8
(3) Other America 52.3 51.3 57.9 53.1 34.8 45.3 61.7 52.1
(4) Oceania 0.9 1.0 1.8 2.0 0.2 0.1 0.0 0.0
(5) Asia, Middle East 0.7 1.3 0.5 0.9 0.1 0.4 1.4 2.4
(6) Asia, Far East 0.6 2.1 1.2 2.0 0.2 0.5 0.1 3.3
(7) Europe 7.5 9.8 7.0 11.5 11.8 9.6 3.9 7.4
(8) Japan 4.1 3.7 8.9 7.2 0.0 0.8 0.8 0.4
Total Developing Countries: (1)+(3)+(5)+(6) 61.3 66.8 63.5 60.8 36.3 47.9 83.6 86.4
Singapore(1) Africa 1.8 1.7 0.6 1.1 2.0 2.1 3.6 1.4
(2) North America 39.1 27.5 30.0 7.8 55.0 40.7 12.1 24.2
(3) Other America 0.5 1.2 0.4 0.8 0.5 0.5 0.6 3.8 .-
(4) Oceania 4.4 6.7 7.4 17.7 0.6 1.4 9.0 2.9
(5) Asia, Middle East 1.0 4.6 0.7 6.1 1.0 2.9 1.6 6.8
(6) Asia, Far East 36.2 37.3 38.9 43.6 24.4 29.9 64.3 47.2
(7) Europe 15.1 17.9 17.8 16.1 15.5 21.1 8.4 12.0
(8) Japan 2.0 3.2 4.2 6.8 1.0 1.6 0.4 1.6
Total Developing Countries: (1)+(3)+(5)+(6) 39.5 44.8 40.6 51.6 27.9 35.4 70.1 59.2
India /a(1) Africa 19.6 11.9 16.9 31.2
(2) North America 1.2 2.0 0.4 0.8
(3) Other America 1.0 0.9 0.5 1.6
(4) Oceania 2.1 2.8 2.2 1.0
(5) Asia, Middle East 20.4 19.5 26.2 17.5
(6) Asia, Far East 35.4 45.0 22.8 32.4
(7) Europe 19.7 17.6 30.7 15.6
(8) Japan 0.6 0.2 0.3 0.0
Total Developing Countries: (1)+(3)+(5)+(6) 76.4 77.3 66.4 82.7
/a Data on destintions not available for India for 1973.
Source: UN (Economic Commission for Europe): Bulletin of Statistics on World Trade in Engineerinig Products, 1975, New York 1977.
- 25 -
Table 1.1.3
IMPORTS OF MAJOR MACHINERY ITEMS BY SIX COUNTRIES
FROM THE LDCS AND THE LDCs' SHARE, 1974(US$ million)
SITC description Value %
71. Machinery, Nonelectric7114 Aircraft engines, incl. jet 57.8 3.9
7115 Piston engines nonair 80.7 2.7
7129 Agriculture machinery, n.e.s. 6.3 3.9
7141 Typewriters, cheque writers 8.3 2.4
7141 Accounting machines, computers 173.9 19.8
7143 Statistical machines 63.0 2.7
7149 Office machines, n.e.s. 136.6 8.6
7151 Machine tools for metal 13.7 1.07173 Sewing machines 28.9 6.6
7191 Heating, cooling equipment 22.2 2.0
7192 Pumps, centrifuges 36.3 2.1
7193 Mechanical handling equipment 14.7 1.0
7194 Domestic appliances, nonelectric 3.3 3.8
7197 Ball, roller, etc., bearings 12.2 1.8
7198 Other machines, nonelectric 18.8 1.4
7199 Machine parts, accessories, n.e.s. 36.3 2.1
72. Electrical Machinery7221 Electric power machinery 123.8 10.1
7222 Switchgear, etc. 142.6 9.4
7231 Insulated wire, cable 84.1 18.7
7241 Television receivers 313.4 27.4
7242 Radio broadcast receivers 516.8 35.4
7249 Telecommunication equipment, n.e.s. 474.2 21.0725 Domestic electrical equipment, n.e.s. 82.2 5.7
7291 Batteries, accumulators 20.7 9.0
7292 Electric lamps, bulbs 37.3 13.4
7293 Transistors, valves, etc. 1,072.1 38.5
7294 Automotive electrical equipment 25.7 5.4
7295 Electrical measuring, control equipment 27.9 2.17299 Other electrical machinery 267.8 20.5
73. Transport Equipment7321 Passenger motor vehicle, excluding buses 43.3 0.3
7328 Motor vehicle parts, n.e.s. 118.7 1.6
7329 Motor cycles, etc., parts 13.0 1.0
7331 Bicycles, nonmotor, parts 56.3 11.3
7333 Vehicles, n.e.s.., nonmotor, trailers 15.1 4.6
7349 Aircraft parts, etc. 51.0 3.6
7353 Ships and boats, nonwar 45.5 4.1
7358 Vessels for breaking up 1.7 19.37359 Ships and boats, n.e.s. 2.4 5.0
Source: Kawaguchi, Y.: Major Developed Countries' Import Pattern of
Machinery from the LDCs, IBRD, Draft, 1977, Table 7, page 7.
- 26 -
Table 1.14
SHARES OF DE'ELOPING COUNTRIES IN TOTAL EXPORTS OF ENGINEERINGPRODUCTS FROM BRAZIL, INDIA, SINGAPORE AND KOREA, 1975
(In percent)
SITC Products Brazil India SingaporE Korea
7 Total engineering products 66.8 76.4 44.8 24.071 Total machinery, nonelectric 60.9 77.2 51.6 20.072 Total electrical machinery 47.9 66.4 35.3 12.573 Total transport equipment 86.3 82.7 59.2 55.0711 Power generating machinery 27.9 69..1 39.4 -711.4 Aircraft engines 28.0 - 3.6 -
711.5 Other internal combustion engines 23.9 54.9 84.0 -712 Agricultural machinery 97.3 - - -
712.1,2 Agricultural machinery for cultivating soil 96.8 - - -712.5 Tractors 98.5 - - -715 Metal working machinery 96.1 38.1 - -
715.1 Machine tools 95.9 36.0 - -717 Textile and leather machinery 70.9 94.9 - 28.6717.1 Textile machinery - 95.1 - -717.3 Sewing machinery 73.7 - - 21.6718 Special industrial machinery 90.0 98.0 64.5 -718.4 Construction, mining machinery 91.4 - 62.2 -719 Other special machinery 85.3 77.8 69.1 24.7719.2 Pumps, centrifuges 78.8 79.4 47.7 -719.3 Mechanical handling equipment 93.2 - 91.9 -719.7 Ball, roller bearings - - 57.7 -719.8,9 Appliances, parts and accessories 78.4 77.6 84.8 14.3731 Railway vehicles - 55.3 - 13.2732 Road motor vehicles 86.7 88.2 94.4 -732.1 Passenger motor cars 96.7 - 93.2 _732.2,3,4 Buses, lorries, trucks 92.6 97.8 - -733 Road vehicles other than motor - 93.9 - 6.5733.1 Cycles - 93.9 - 5.3734 Aircraft 75.7 - 76.6 0.0735 Ships and boats - - 36.2 69.9
Source: UN (Economic Commission for Europe): Bulletin of Statistics on World Trade inEngineering Products, 1975, New York, 1977.
- 27 -
II. ECONOMIC TARGETS AND THEIR IMPLICATIONS
Introduction
2.01 The objectives of this chapter are to present the economic targets
that have been established for the machinery industries with reference to thelevels of growth of output, exports, and various other measures that theseindustries are expected to achieve in the coming years. The chapter also
comments on the planning procedures used to derive some of the targets anddiscusses the implications of the macro-economic or sector figures for specificgroups of products. By presenting the economic plans and targets for theseindustries and the performance that is expected from them, this chapter formsa counterpart to the previous chapter that outlined the market opportunities.Both are parts of the description of the strategy of development for themachinery industries.
2.02 The targets for the machinery industries have been established asa part of the Fourth Five Year Economic Development Plan, 1977-1981, and ina planning exercise carried out by the Korea Development Insti-tute (KDI) insupport of the Fourth Plan but covering an extended period from 1977 through1991. The results of the KDI planning exercise have not yet been officiallyadopted by the Government, but it starts with projections of the nationalincome accounts including the GNP, the industrial origins of the GNP, andexpenditures on the GNP (i.e. consumption, investment., exports and imports).Of particular importance to this report on the machinery industries are theestimates made of the export targets; aggregate exports are broken down intoa number of industry groupings, including five sub-sectors or product groupswithin machinery. These are: general industry machinery; electrical indus-trial machinery; electronic products; transport equipment; and precisioninstruments. Projections are made for the years 1981, 1986, and 1991, andcan be compared to the actual figures for 1976. Furthermore, the averageannual growth rates for the intervening periods and the composition of theaggregates are shown in the planning documents of KDI. I/
2.03 The macro-economic variables showing the final demand for prod-
ucts are used in conjunction with an input-output model to derive the levelsof growth of output that must be achieved by each industry if the deliv-eries to final demand (including exports) are to be satisfied. The projec-tions of the macro-economic variables and the levels of growth of outputderived from the input-output model, plus subsidiary measures, provide theeconomic targets that have been established for all of the sectors in theeconomy and particularly for the machinery industries for the period 1977-1991.
2.04 In commenting on the economic projections, attention is focusedsolely on the machinery industries. The framework of the Plan and the main
1/ KDI, Long Term Macro Projections, 1977-91, December 1977.
- 28 -
targets such as those of the GNP growth, total investmeiit, savings, etc. aretaken as given. For example, no questions are raised nor comments offeredabout the projected rate of growth of the GNP nor about the rate of growthfor all manufacturing industries, nor are the required linkages between themachinery industries and other industries (such as the steel industry whichis a large supplier of inputs to the machinery industries) examined in anydetail. Our concern is solely with the targets set for the machinery indus-tries (as shown in the Annex Table II.1) and with the implications for per-formance that will be required in terms of specific product lines or groups.
2.05 There are three major topics to be covered. First, what is ex-pected of the machinery industries in contributing to the Fourth Plan? Whatare the measures of their importance to development of the economy and whatspecific targets have been set? Second, what are the plans for expandingthe capabilities of these industries to meet the targets, since currentcapacities and levels of output are far below those that are projected.This requires examination of the amount of new investment that is expectedto take place in these industries. Third, if the targets for output orexports are disaggregated to types of product lines, what are the implica-tions, particularly for exports, in the light of recent experience and thecapabilities of the industries now? These are the topics to be covered, andthat form the remainder of this chapter.
The Economic Targets
2.06 The Fourth Five Year Plan gives a high priority to the growth ofthe mining and manufacturing sector and within that sector the highest prior-ity is given to development of the machinery industries. According to theFourth Plan the GNP (in constant 1975 prices) is projected to grow at 9.2%between 1977-81, but in the KDI long-term planning exercise the rate of growthof GNP is expected to increase at about 10% for the whole period 1977-91 withvirtually no variations from that figure for sub-periods, including the years1977-81. By comparison, manufacturing industries are projected to grow byabout 14.5% annually during the period of the Fourth Plan and to averageabout 13% growth rate during the period 1977-91. In 1976 manufacturing in-dustries accounted for about 30% of GNP and this figure is expected to riseto about 36% by 1981 and to 44% by 1991. The projections of the growth ratefor GNP and manufacturing industries for the Fourth Plan are lower than forthe Third Plan.
2.07 The machinery industries (excluding electronics) are expected toprovide much of the impetus for growth in the manufacturing industries. Thisis indicated in Table 2.1 which shows the projected growth rates of grossoutput. For shipbuilding and railroad equipment the growth rates are aboutthe same as for all manufacturing, but for the other categories (i.e. generalindustrial machinery, industrial electrical machinery, motor vehicles, pre-cision equipment) the projected growth rates are consistently much higherand during the period of the Fourth Plan the rates typically run above 22%annually. It is also significant that the highest growth rates are in the
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Table 2.1
Growth Rate of Gross Output (%)
1976-81 1982-86 1987-91 1976-91
1. Manufacturing 16.3 12.7 11.4 13.6
2. Heavy & Chemical Industries 19.4 14.7 13.0 15.9
3. Machinery 1/
a. General machinery 22.3 16.3 13.9 17.8b. Electrical machinery 23.3 17.1 14.6 18.6c. Shipbuilding 16.3 11.7 9.8 12.8d. Railroad equipment 16.5 11.9 10.0 13.0e. Motor vehicles 27.8 20.6 17.8 22.4f. Precision equipment 26.2 19.3 16.6 21.0
4. All Sectors 12.9 11.2 10.7 11.7
1/ Excluding electronics and household electrical appliances.
Source: KDI, Long Term Macro Projections, 1977-91, December 1977.
early period and uniformly decline up to 1991. These industries are typi-cally starting from a very low level of output and the growth rates duringthe Fourth Plan clearly imply that a major effort will be required in theimmediate years up to 1981 to initiate a major process of growth. Yet, asis indicated in Chapter III that follows, the current capabilities of themachinery industries are very low and production methods and quality of prod-ucts need to be sharply improved in order to be competitive with imports orin export markets. Once a growth process is started, it may be easier tomaintain, so that the growth rates projected for 1982 and onward may not beso difficult to achieve but the growth rates projected up to 1981 may be toooptimistic. -
2.08 The Fourth Plan states that: "Highest industrial investment prior-ity in the Plan will be given to the machinery industry." Other policyprescriptions in the Plan include: (a) the development of the machinery in-dustries will be concentrated in the following categories: basic materials,machine parts, machine tools, and industrial machinery. The designation ofthe latter two product groups (i.e. machine tools and industrial machinery)may be among the most difficult to develop as is shown later; (b) the exportcapacities of the machinery industries will be expanded; (c) 500 small andmedium scale machinery planes will be selected and supported intensively inorder to get the advantages of specialization and to provide linkages tolarger industries; and (d) the importation of advanced technology and ofinputs of materials and equipment required for the machinery industries will
- 30 -
be encouraged and liberalized. The specific programs and costs to implementthese policy directives are still to be prepared.
2.09 If the growth goes according to expectations, the heavy and chemi-cal industries will account for almost two-thirds of manufacturing valueadded by 1991 and over 50% by the end of the Fourth Plan period in 1981.Within the heavy and chemicals industry group, the machinery industries willgrow the most rapidly and account for one-third of manufacturing value addedby 1981; the greatest growth is expected in the sub-groups of general indus-trial machinery and motor vehicles.
2.10 In accordance with the previous emphasis on export-led growth, theFourth Plan projects a continued increase in exports but the rate of growthof 16% annually is only half the rate established in the Third Plan. Never-theless, Korea expects that its share of the exports from iess developedcountries, which was 11% in 1975, will rise to about 21% in 1980 and 23% by1990. What is more important is the shift in the composition of exportsthat is expected to take place. The traditional exports of textiles andgarments, electrical equipment, plywood, etc., are expected to grow moreslowly and the major hopes are for exports of machinery (including elec-tronics) (see annex Table II.4). Although electronic products accountedfor about half of the total machinery exports in 1976 and are expected togrow, the exports of the other machinery groups are projected to grow muchmore rapidly and by 1981 are expected to be twice as large as exports ofelectronic products and three times as large by 1986. The greatest growthof exports is expected in general industrial machinery and in motor vehi-cles (primarily automobiles). The rates of growth of exports as derivedfrom the input-output model are shown in Table 2.2 which clearly indicatesthe very high rates of growth for exports of the machinery industries com-pared to exports from manufacturing industry in general. The highest ratesof growth are uniformly expected during the period of the Fourth Plan, withlower growth rates projected for the period 1982-1991. In 1976 the machineryindustries (excluding electronics) exported less than $700 million (1975prices). Ships, household appliances and office machines accounted for abouthalf of the total. By the end of the Fourth Plan they are expected to exportabout $3.2 billion, almost a five-fold increase. By 1986 the projected figureis $9 billion and this rises to $19 billion in 1991. This represents a uni-form growth rate of 25% annually from 1977 to 1991 but about a 37% annualgrowth rate during the period of the Fourth Plan. But the three sub-groupsthat make up the bulk of machinery exports (i.e. general industrial machinery,electrical equipment, motor vehicles) are expected to increase their exportsat an even more rapid rate.
2.11 In 1975 the three major sub-groups of general industrial machinery,electrical equipment, and motor vehicles exported only a small proportion oftheir total production, about 15% for the first two sub-groups and less than3% for motor vehicles. By the end of the Fourth Plan in 1981 all three areexpected to export just under 30% of their production and by 1991 55% of gen-eral industrial machinery, 64% of electrical equipment and 49% of motor vehi-cles are projected as exports. In contrast, for manufactured goods as a whole,
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Table 2.2
Rate of Growth of Machinery Exports from Input-Output Model(Percent)
1976-81 1982-91 1976-91
1. Manufacturing 23.2 13.2 16.8
2. Heavy & Chemical Industries 32.3 17.6 23.0
3. Machinery 1/
a. General machinery 36.4 22.9 27.8b. Electrical machinery 37.0 25.4 29.6
c. Shipbuilding 29.0 8.3 15.7d. Railroad equipment 17.5 11.5 13.7e. Motor vehicles 94.8 25.7 48.2f. Precision equipment 36.4 9.6 19.0
4. All Sectors 24.1 12.2 16.6
1/ Excluding electronics and household electrical appliances.
Source: KDI,
only 21% of output was exported in 1975 and the figure is expected to be about33% by 1991. However one arrays the numbers, whether absolute figures, growth
rates, or comparisons to the rest of manufacturing, the economic targets set
for the machinery industries in terms of production levels and exports are
impressive. Clearly, during the Fourth Plan the heavy and chemical indus-
tries, and particularly the machinery industries, are expected to providethe leadership in industrial growth, just as the textiles, light electrical,and similar industries provided the leadership during earlier planned periods.
This is particularly true in the case of the growth of exports, for although
machinery exports (excluding electronics) accounted for less than 10% oftotal exports in 1976, they are expected to account for 20% by 1981 and 35%
by 1991. It was almost inevitable that Korea would turn in this direction
since with quotas and rising competition in other countries the prospectsfor large increases in exports of textiles, wood products, and other light
industries do not appear favorable. If the growth of GNP is to be maintained
at 9-10%, exports must continue to grow at a higher rate even though thedomestic market may be becoming more important, and the machinery industries
(now including electronics) are a natural choice to lead the way. In a cer-
tain sense, therefore, the projections for the machinery industries are set
at levels necessary to achieve the aggregate targets of growth of GNP and
total exports. What remains to be determined is whether the targets are
realistic and feasible based on current capabilities in the machinery indus-
tries and the proposed expansions in capacity that involve new investment.
- 32 -
Resources for Expansion
2.12 In order to achieve the targets set in the Fourth Plan, investmentwill have to be increased both for modernization and for new facilities.According to the Fourth Plan, total investment in the economy must be main-tained at about 26% of the GNP which represents about a 60% increase overthe planned investment during the Third Plan (1975 prices). A shift inthe pattern of investment is also expected to occur with greater resourcesdevoted to the heavy and chemical industries and representing a 90% increaseover the Third Plan level for these industries. Of the total investmentprojected for the heavy and chemical industries the machinery industries(excluding electronics) are expected to attract about 27% of the total; theshare of machinery industries is larger than for any of the other groupsincluded under heavy and chemical industries (i.e. iron and steel, non-ferrous metals, electronics, shipbuilding, and petrochemicals). Virtuallyall of this is expected to come from the private sector, with less than 1%represented by government investment. Slightly over 30% of the investmentin the machinery industries during the Fourth Plan period is expected tocome from foreign sources.
2.13 No information is available in the Fourth Plan document to deter-mine whether the estimated investment figures for the machinery industrieswill be sufficient to create the new capacity and to rehabilitate the oldcapacity so that there will be sufficient to generate the increased levelsof output and exports that are projected in the plan. In the Fourth Planitself there is no indication as to how the investment estimates were recon-ciled or made consistent with the projected increases in output, but presum-ably calculations were made, not only for the machinery industries but forall of the sectors, to be reasonably sure that the investment would in factbe sufficient to create the capacity to produce the output projected. Inother words, presumably some use was made of incremental capital-outputratios (ICOR) based on actual experience or reasonable estimates to relatethe increase in output to the necessary investment levels. This has beenthe practice in past plan documents.
2.14 In the KDI planning exercise, total investment and fixed capitalformation are estimated based upon an aggregate ICOR; for the period of theFourth Plan the ICOR is estimated to be 3.1 and to rise to 3.3 up to 1986and to 3.5 up to 1991. This indicates that industry will be getting morecapital intensive during this period. During the period of the Fourth Plan,total fixed capital formation is expected to grow at about 12% but the rateof growth is expected to decrease to slightly over 11% during the period1982-91. On the other hand, investment in the machinery industries (exclud-ing electronics) is projected to increase rapidly and to account for 14% offixed capital formation in manufacturing industries during the Fourth Plan,rising to 19% in 1982-86 and to 24% in 1987-91. The average rate of growthfor the machinery industries fixed capital formation over the whole periodis slightly above 18% but the average rate of growth of output is higher thanthat.
- 33 -
2.15 From the results of the input-output model calculations it ispossible to derive the implied capital output ratios for individual indus-tries by taking the estimated amount of fixed capital formation that will
occur in the industry and comparing it to the projected increase in valueadded. These calculations indicate that the capital output ratios for themachinery industries are estimated to be substantially below the aggregate
capital output ratio described above. Calculations were made for the periods1982-86 and 1987-91; exactly comparable data for the period of tlle FourthPlan were not available from KDI's printed output. For the earlier periodthe ICORs are as follows: general industrial machinery 2.2; electrical equip-ment 2.7; shipbuilding 1.2; railroad equipment 1.8; motor vehicles 1.6; and
precision equipment 2.4. For the later period the ICORs for each of the in-
dustries are higher but, except for precision equipment where the ICOR changesfrom 2.4 to 4.2, the increases are not large. The increase in the ICORs im-plies that a more capital-intensive type of technology will be involved in
the later period, but in the earlier period the individual ICORs are signi-ficantly below the aggregate ICOR of 3.3. Generally speaking machinery in-
dustries are not notably capital intensive by comparison, say, to industriessuch as iron and steel or petrochemicals; nevertheless, some of the individ-
ual ICORs do appear somewhat low, particularly in view of the fact that, inthe development plans for the machinery industries, a relatively greateremphasis is placed on more complex types of products in such product linesas machine tools and industrial machinery, and the acquisition and utiliza-tion of more advanced technologies throughout the machinery industries.
2.16 It may be worthwhile to investigate more carefully the kinds ofproducts to be produced and the amounts of investment that will be requiredso as to be sure that the ICORs are truly representative. Otherwise, either
the estimated levels of investment will not be sufficient to generate theincreases in output that are projected or additional investment will have
to be found to achieve the desired levels of output. Since, as is shown in
the following chapter, the existing industry is greatly in need of rehabil-itation and modernization and new investment is required to create addi-
tional capacities, there may be an underestimate in the input-output modelof the amount of investment that will be required. Also, since virtuallyall of the investment is expected to be made by the private sector, both
domestic and foreign, a change in investments may cause a change in incen-tive systems and other programs that the government is designing to stimu-late the development of these industries.
2.17 For each of the machinery industries the pattern of investmentis the same, with increases projected for each of the successive five-year
periods. For precision equipment, however, the pattern is very peculiar,with only about one billion won in investment projected during the FourthPlan but jumping to 189 billion won in 1982-86 and to almost 700 billion won
in the five years thereafter. It seems quite unlikely that investment inprecision instruments will be as low as the equivalent of $2.5 million upto 1981; the growth of such industries will be stimulated by the growth in
electronics as well as in machinery industries.
- 34 -
A Disaggregated View of Exports
2.18 The projected levels of output and exports from the input-outputmodel provide details for six sub-groups within the machinery industries(excluding electronics). Although some of the differences in projected per-formance can be perceived with that classification, a greater level of dis-aggregation down to product levels is required in order to understand thenature of the specific problems and to judge whether the projections appearfeasible based on current capabilities and past performance. This sectionof the report should, in fact, be read in conjunction with Chapters III andIV that evaluate the current capabilities in the machinery industries at thepresent time and make suggestions for development of product lines for whichcircumstances are relatively favorable.
2.19 The range of products currently being produced is somewhat limitedand it will take time and investment to create a capacity to increase therange of products and to raise the level of output of those that are produced.Also, in much of current production both the quality of products and theirproduction costs are judged not to be competitive in many export markets,at least by comparison to products that are available from developed coun-tries. The industrial production index for the machinery industries was 404in 1976 (1970 equals 100); however, a relatively few product lines accountedfor much of the growth between 1970 and 1976. For example, six product groupswith a total weight of over 53% in the index, accounted for much of the in-crease. These product lines are: bearings, valves, silk looms, motor pumps,power tillers and sewing machines.
2.20 Much of the projected new increases in output are expected to beabsorbed by the domestic market over the next 10 to 15 years but even inthese cases it will take time to obtain licenses, to set up plants, and toachieve volume production. Moreover, the domestic machine-using industrieswill almost certainly be demanding a higher quality of product than is cur-rently being produced for the market. It will be even more difficult tobuild up the export markets, certainly much more difficult than has beentrue in the past where light consumer goods industries, with largely non-durable products, have been buoyant due to rising consumer demands. Machinesare purchased on specification and their prices and performance are carefullycompared to those of competitors; successful selling depends upon "breaking"into the market, developing a name that is recognized and identified witha certain quality, and service organizations must be set up to provide thespare parts and related services with a rapid response so that the user doesnot have his machines out of production for lack of parts.
2.21 Exports of products in the machinery industries have been running
at a very low level in recent years, except for shipbuilding which accountedfor 37% of total exports from this group in 1976. By 1981 machinery exportsare expected to be almost five times as high as they were in 1976 and mostof the growth is expected to occur in industries other than shipbuilding.General industrial equipment, which is one of the groups expected to grow
most rapidly, had about $110 million in exports in 1976 but is expected to
- 35 -
triple that to about $340 million in 1981 and to over $5 billion by 1991.Because of the heterogeneous character of equipment in this group, the lowlevels of output and even lower levels of current exports and the often poorquality of product, there is reason to question whether these projectionscan be achieved. For example, in 1976 only 15 lathes were exported, only342 cotton looms, 137 knitting machines and 4 screw-cutting machines. Figuresfor other specific products.were equally low. Only sewing machines and theirparts were exported in volume. Except for the last group, none of the prod-uct lines have accounted for more than a few million dollars in exports. Forone of the product sub-groups that constitutes normally one of the largestsingle shares in the classification of general industrial equipment (i.e.metalworking machine tools) it is judged that the development of exportswill be extremely difficult indeed except for certain "windows" in the mar-ket where there are gaps in the range of products produced by developedcountries, or unless a basis can be rapidly established for producing themachines on a joint-venture or licensing basis. The present pattern of exportdevelopment in these product lines, as determined from a series of plantvisits, is spotty and unsystematic and a firm basis for a program of exportdevelopment does not appear to exist.
2.22 Exports of industrial electrical machinery are dependent upondeveloping markets for equipment for the transmission and distribution ofelectrical energy and related types of electrical apparatus. In 1976 exportswere about $130 million but are expected to reach $700 million by 1981 and$5 billion by 1991. The estimates for this sub-group appear to have beenraised as a result of recent work based at least partly on the assumptionthat the large volume of construction contracts abroad that have been obtainedby the Korean construction industry will involve incorporation of electricitytransmission systems as well as plant equipment such as boilers, etc. Whetherthis will prove to be true or not remains to be seen but it appears some-what precarious to base an export projection on the assumption that a suf-ficient volume of construction contracts will be obtained.
2.23 The projections for the exports of the shipbuilding industry aremore modest than for the other groups. Even so, such exports are expectedto more than double by 1981 and to increase by almost ten times up to 1991.As was pointed out in a report made in mid-1976, 1/ although the shipbuildingindustry has made remarkable strides, for the immediate future there is ex-cess capacity in the world in large tankers and excess yard capacity toproduce such ships. For at least the next few years, expansion in saleswill depend upon finding gaps or "windows" in the market for production ofvarious kinds of bulk carriers. The short-term targets for the shipbuildingindustry may be achieved if this can be done.
2.24 The greatest growth in exports is projected for the motor vehiclesgroup. By 1981 exports of these products are expected to be about ten times
1/ Problems of the Korean Shipbuilding Industry (June 1976), producedunder auspices of UNDP by Michael Latham, under direction of the WorldBank.
- 36 -
the level of 1976, or a growth rate of almost 100% per year during the Fourth
Plan. The average growth rate up to 1991 is 48% annually and in that year
almost half of total output is projected as exports. The major items are
automobiles, trucks and buses, and components or spare parts. A detailed
break-down of the export projections could not be made, but on the assump-
tion that half of the total will be accounted for by components and spare
parts, the projections seem to indicate that on the order of 150,000 vehicles
will be exported by 1981 and possibly as much as a million by 1991. More
careful analysis will have to be done to establish a plausible composition
of motor vehicle exports but if the assumed figures are to be achieved, the
problems of building up a market organization, service facilities, and public
acceptance will be immense.
2.25 Even a partial disaggregation of the export projections to reveal
a few of the specific product details indicates quite clearly some of thedifficulties that will be encountered in achieving the economic targets that
have been set for the machinery industries. The general impression, is that
the export targets for the machinery industries are high compared to presentcapabilities and there is reason for serious doubt that they can be fullyachieved. In these circumstances it is of the utmost importance to prepare
action programs that will cause the private sector to respond, to improvetheir capabilities to export or to supply the domestic market. If this is
done, the high targets established for output and exports may be achieved.
- 37 -
Table II.1
Classification of Machinery Industries in Input-Output Models
KDI Classification BOK 1970 Classification
Sector SectorNo. Sector No. Sector
32. Non-Electrical Machinery 106. Prime movers and boilers107. Metalworking machinery108. Special industry machinery109. Office & service industry machines110. General industrial machinery &
equipment111. Household appliances112. General machinery parts
33. Industrial Electrical Machinery 113. Electric transmission & distribu-tion equipment & electricalindustrial apparatus
34. Electronics 114. Radio, television & communicationequipment & electronic com-ponents
35. Household Electrical Machinery 115. Household electrical appliances116. Miscellaneous electrical equipment
and supplies
36. Shipbuilding & Repairing 117. Shipbuilding & repairing
37. Railroad Transport 118. Railroad transportation equipment
38. Motor Vehicles 119. Motor vehicles & parts120. Automobile repair121. Other transportation equipment
39. Precision & Optical Products 122. Measuring, medical & optical instru-ments
- 38 -
Table II.2
Composition of Value Added by Industry (%)
1975 1981 1986 1991
1. Manufacturing-/ 26.9 35.5 40.2 43.0
2. Heavy & Chemical Industries2/ 42.5 52.0 58.3 63.8
3. Machinery-/ 9.9 13.8 17.0 20.2
a. General Machinery 4.0 5.4 6.3 7.1b. Machinery 0.6 0.8 1.0 1.1c. Shipbuilding 1.8 1.8 1.7 1.6d. Railroad equipment 0.3 0.3 0.3 0.3e. Motor vehicle 2.7 4.7 6.6 8.7f. Precision equipment 0.5 0.8 1.1 1.4
4. All Sectors 100.0 100.0 100.0 100.0
-/ Percent of value added in all sectors
-/ Percent of value added in manufacturing
-/ Excluding electronics and household electrical appliances.
Source: KDI, Long Term Macro Projections 1977-91, December 1977.
- 39 -
Table II.3
Projection of World Manufactured ExportsAverage Annual Growth Rate (%)
1971-75 1976-80 1981-90
1. World 7.2 9.1 8.3
2. Developed Countries 7.1 9.1 7.9
3. Developing Countries 7.9 12.2 12.6
4. Korea 30.9 24.3 13.8
5. Korea's Exportsl/ 4.0 13.0 48.0
6. Korea's Share of LDC Exports-/ 11.3 20.7 23.3
Exports in 1975, 1980, 1990 in billion US dollars, 1975 prices.
2/ Share in 1975, 1980, 1990.
Source: KDI, Long Term Macro Projections 1977-91, December 1977.
Table II.4
Composition of Comodity Exports(at 1975 constant prices)
In million U.S. dollars
1976 1981 1986 1991 Average Annual Increase Rate (X)
Amount % Amount % Amount I Amount % 1977-81 1982-86 1987-91 1982-91 1977-91
Total Commodity Exports 6,996 100.0 16,005 100.0 30,810 100.0 54,300 100.0 18.0 14.0 12.0 13,0 14.6
Manufactured Products 6,671 95.4 15,545 97.1 30,210 98.1 53,600 98.7 18,4 14,2 12,1 13,2 14.9
Heavy & Chemical Industry 2,376 34.0 7,760 48.5 19,250 62.5 39,400 72.5 26.7 19.9 15,4 17,6 20.6
Machinery - 672 9.6 3,200 20.0 9,000 29.2 19,000 35,0 36,6 23,0 16,2 19,5 25.0
(General Machinery) ( 111) ( 1.6) ( 800) ( 5.0) (3,000) ( 9.7) (5,500) ( 10.1) 48.4 30.3 12,9 21,3 29,7(Electrical Machinery) ( 131) ( 1.9) ( 700) ( 4.4) (2,000) ( .6.5) (5,000) ( 9.2) 38.9 23.4 20.1 21.7 27,5(Transport Equipment) ( 310) ( 4.4) (1,300) ( 8,1).(3,300) ( 10,7) (7,500) ( 13,8) 33,2 20.5 17.8 19,2 23.7(Ships) -- ( 249) ( 3.6) ( 560) ( 3.5) (1,150) ( 3,7) (2,300) ( 4,2) 17,6 15,5 14,9 15,2 16.0(Precision Instruments) ( 120) ( 1.7) ( 400) ( 2.5) ( 700) 2.3 (1,000) ( 1.8) 27.2 11.8 7,4 9,6 15.2
1/ Less electronic products
Source: KDI, Long Term Macro Projections, 1977-91, December 1977.
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Table II.5
Exports as Percent of Gross Output (%)
1975 1981 1986 1991
1. Manufacturing 21.1 29.9 32.0 33.1
2. Heavy & Chemical Industries 15.1 27.6 34.0 37.4
3. Machinery-/
a. General machinery 15.0 28.8 48.4 55.5
b. Electrical 15.4 28.9 43.5 63.9
c. Shipbuilding 42.1 78.2 72.6 62.8
d. Railroad equipment 33.4 35.3 36.2 37.0
e. Motor vehicle 2.9 28.6 40.4 48.8
f. Precision equipment 51.9 82.8 59.9 39.7
4. All Sectors 13.4 23.7 26.6 26.6
- Excluding electronics and.household electrical equipment.
Source: KDI, Long Term Macro Projections, 1977-91, December 1977.
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III. EVALUATION OF CURRENT CAPABILITIES OF THE MACHINERY INDUSTRIES
Introduction
3.01 The objective of this chapter is to present a diagnosis of the con-ditions presently existing in the machinery industries with a view to evalua-ting their capabilities and degree of competitiveness as measured by comparingKorean enterprises to the capabilities existing in machinery enterprises inother countries, particularly those in the United States, Western Europe, andJapan. In the Fourth Five-Year Plan document, great importance is attached tothe expansion of exports of machinery, as has been indicated in the previouschapter, and in that sense competitiveness means the ability to enter theexport market, whether in less-developed countries or in the developed coun-tries and to reduce substantially the import dependence of Korea on capitalgoods. Given this emphasis on export performance, the evaluations necessarilyemphasize comparisons to the best practices that are to be found in developedcountries. Less-than-best practices may very well be sufficient to be compe-titive in a protected domestic market or in markets of less developed coun-tries, but the standards of comparison adopted were those of best or efficientpractice as found in developed countries.
3.02 The evaluation was based on visits to between 40-50 plants coveringa variety of product lines. An attempt was made to get a representativesample to include all of the major and some of the minor types of productionin the machinery industries, such as: industrial machinery (machinery or com-ponents for power plants, cement mills, foundry and steel mills, chemicalplants); machine tools; motors and engines; railroad rolling stock; automotiveand automotive components; pumps; agricultural machinery; industrial electric-al equipment (but not including electronics); and manufacturers of componentsfor these types of equipment. Most of the plants were located in the Seoul-Inchon area but plants were also visited at several other locations in thecountry including the Changwon complex.
3.03 Efforts were made to make the sample a representative one, thoughthere would be additional benefits from having a wider coverage. The samplesize was essentially determined by the amount of time available and theresources of the mission personnel. It should be pointed out, however, thatthe sample is actually larger than may appear at first glance. Although theevaluations have been prepared for individual enterprises, the observationsof the engineers were made also on individual processes within the plant.For example, even though the plants produce diverse products they frequentlyinvolve somewhat similar processes such as foundry and forge operations, thefabrication of components, machine shop operations to cut, grind, bore andplane metal and other kinds of materials, and assembly of the final product.There are usually ancillary and support operations including the transfer ortransportation of work in process, inventory and storage of materials, andinspection and testing. Since all of the plants include one or more of theseprocesses, the coverage of the sample by major processing area is fairlybroad.
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3.04 The engineers making the evaluations were asked to consider sixmajor factors and to provide a "score" on each of them. The six factorswere:
(a) Plant layout and flow of work: this includes the waymachinery and equipment are arranged in the plant orthe process area to facilitate a normal and efficientflow of the work in process. It also includes theprovisions for moving the work from one working bayor stage to another.
(b) Operating practices: this covers the production techn-niques and use of machinery including such things asthe use of cutting tools, the allocation of differentkinds of jobs to the available machinery, the stepsused in the processing of materials and similar aspectsof technical efficiency.
(c) Condition of machines and maintenance: this covers thethe age of the machines in the plant, compared to themost up-to-date models, as this may affect operatingperformance, plus the maintenance practices to keepthe operating machinery in good condition.
(d) Labor use and productivity; this factor covers the wayin which management uses its labor force which in largepart may dictate how effective or productive the laborforce is in its operations.
(e) Product quality: this factor refers primarily to theacceptability of the product in international marketsand its technical qualities.
(f) Engineering design, testing, and engineering: thisfactor is meant to reflect the existence of capabilitieswithin the plant to redesign, retool, or otherwise adaptexisting products to meet changing demands or conditionsin the plant.
3.05 For each of these six factors a "score" was given on a scale rangingfrom 60 to 100, with a minimum difference of 5 points between each evaluation(i.e., 60,65, 70,.75, etc.) so as not to enforce too precise a measurementon the engineer. A rating of 90 or above was taken as an example of effi-cient practice or conditions in the factor being evaluated. A rating of 80
or 85 indicates a condition in which the plant may be able to export to lessdeveloped countries but would normally have difficulty or would find itimpossible to compete in developed countries' markets. A rating of 70 or 75indicates marginally acceptable conditions or practices but ones that wouldnormally not permit export. A rating of 60 indicates unsatisfactory and ingeneral means that the plant may not be able to survive over a long periodwithout improving conditions and practices. This scale was used in making
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the evaluations but if the engineers felt that they did not have sufficient
time or information on which to make such a judgment, no score was given
although remarks may be made about some of the characteristics observed.
3.06 Evaluation reports exist for most of the plants visited but they
will not be cited here in any way to identify the particular company. The
reports potentially could be used if at some point it is desired to initiate
a program of assistance to help these companies upgrade or improve their
capabilities. The objective of this chapter is simply to present an overall
evaluation of the capabilities of the machinery industries without reference
to specific enterprises. The scores varied widely, from those that were
judged to be largely unsatisfactory in most or all of the areas indicated
above to those that scored 90 or above on most or all of the elements.
Qualifications to the Evaluations
3.07 There are a number of qualifications that must be noted in order
not to misunderstand what is being said in the remainder of this chapter.
There is, first of all, some injustice done when one tries to portray the
overall capabilities of a group of industries that is made up of a large
number of individual firms. Some may be very good and others very poor,
and it is difficult to give full coverage to the variations that do occur.
Second, in Korea there is a dual structure of firms in the machinery industries
(excluding automotive and ships). There is the "new generation" of plants at
Changwon which were essentially built after 1975. 'There are also the pre-
1975 plants that were established in earlier years. There are significant
differences between the two groups, and although the evaluations primarily
apply to the pre-1975 plants, simply because there are a larger number of
them in total, the Changwon plants are not free from deficiencies. We have
not tried to segregate the comments or evaluations on each of these groups,
but it is clear that they differ in a number of respects and that the Changwon
plants are generally in better condition and have greater capabilities because
they are more modern and have newer equipment overall. The Changwon plants
are typically larger (over 1,000 workers per plant at full production) and
have a higher capital-labor ratio (almost $19,000). The pre-1975 plants
are smaller (average workers under 300) and have a capital-labor ratio of
under $12,000. The Changwon plants not only have newer equipment but
typically they have the more complex machinery capable of high-precision
work so that there is potentially a greater degree of high quality diversi-
fication in these plants as contrasted to the older plants that often must
use general purpose machinery. The range of products produced by the Changwon
plants, or capable of being produced, and the quality of the end products
are potentially greater and they also seem to have greater ease of access
to labor and capital and, most importantly, to technological information.
For all of these reasons, the Changwon plants probably should be considered
separately. They offer the major hope for expansion in a number of product
lines but, at the same time, Korea probably cannot rely solely on these
plants for future development. Korea will have to rely also on the large
numbers of older plants whose capabilities will have to be upgraded and
improved in order to obtain international competitiveness.
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3.08 Third, the evaluation has been made at one point in time (i.e.,end 1977). Changes are occurring in the industries and improvements arebeing made so that the comments and evaluations may become invalid insome cases, although it is unlikely that sudden changes will occur acrossthe whole of the industries.
3.09 Fourth, the comparisons made are to good practice or practices thatare comparable to those firms engaged in export trade in developed countries.It is recognized that even in developed countries there are large segments ofthe machinery industries and a large number of firms that are sub-standardbut that continue to survive. Since our test is not that of surviving butrather of the capability to expand into international markets, it is appropri-ate to use the standard of good or efficient practice.
3.10 Finally, these evaluations have been undertaken with a view todetermining those kinds of programs or policies that may be required toachieve efficient operatins in these key industries. As to the corrections ofdeficiencies and improvement of competitiveness, it will be clear from thekinds of judgments and evaluations made that the cures are not primarily onesthat the Government has responsibility for, nor ones that they could legislateor impose in any direct fashion. At best (and possibly as a minimum) however,there are policies and incentives that the Government can offer in supportof the enterprises, to cause them to undertake the needed changes and to makeit easier for them to do so. But the main effort must come from the enter-prises themselves. Suggesoions to help stimulate the necessary actions aremade in the final section of this chapter.
Summary Evaluation
3.11 It is difficult to make a summary evaluation in any simple fashionof all the machinery industries, particularly when the summary is in the formof a set of six numerical scores for the six factors. The variations amongenterprises are so great that any "average" figure is bound to be somewhatmisleading. Nevertheless, it may help to fix an image of overall conditionsas judged by the engineers who made the plants visits. The following tabula-tion presents these average figures.
(a) Plant layout and flow of work 70-75
(b) Operating practices 70
(c) Condition of machines and maintenance 75
(d) Labor use 75
(e) Quality of product 80-85
(f) Engineering design and testing 75-80
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These scores indicate that the weakest areas are in the plant layout, flow of
work, and the resulting operating practices. None of the areas, however, are
regarded, on average, as being up to the standards of good Western conditionsor practice. The engineers felt that in some cases the ingenuity and inherent
skills and persistence in the labor force may have tended to partially offset
adverse conditions in other respects. The scores for the quality of product
reflect the fact that many of the products now being produced by the machinery
industries are typically low-precision, fairly standardized types of items
and when we move to products that are more complex and where precision is
required the grading on the quality of product moves sharply downward into
the range between 60-70. For all six factors the indications are that, on
average, the capabilities and practices of the Korean machinery industries
are not high enough at present to permit them to compete successfully in
international markets in developed countries. Obviously, there may be any
number of individual cases where these conclusions do not hold.
3.12 There are differences in the average scores among different types of
industries. Highly mechanized industry where the mechanical processes pace
the work generally scored higher on all of the factors and often approximated
efficient practice, but these were often the plants at Changwon that were
producing special products under close control. Repetitive operations or-
ganized in lines and defined areas (for example, assembly operations of
components or final products) scored lower on all factors and marginally
acceptable on the factors of condition of machines and maintenance, labor use,
and quality of product. They are generally judged to be unsatisfactory in
the area of engineering design and testing. General hand work and jobbing,
though involving the use of equipment (for example, foundries, forging,
assembly of individual items not on line) scored lowest of all and on average
were judged unsatisfactory in the areas of plant layout and flow of work,
operating practices, condition of machines and maintenance, and engineering
design and testing.
3.13 While the summary evaluations may be of some use, they do not convey
a true picture of the variations in experience. It is necessary to look at
each of the six factors in turn and to present the examples and illustrations
drawn from specific individual observations on which the judgments have been
based.
Plant Layout and Flow of Work
3.14 The overriding impression derived from the plant visits is that in
the majority of Korean plants very little attention seems to have been paid
to the great savings in cost and improvement in output that can be achieved
by insuring that the plant is correctly laid out, so that work flows from one
operation to the next, that areas are not congested, and that there is free
movement for work and personnel when moving from station to station.
3.15 In plant after plant the buildings seem to be a collection of
relatively small workshops which have been joined together, often with the
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main flow of one shop at a different orientation to the main flow in theadjacent shop. Typically, if there is one large shop there are also anumber of annexes attached to it where auxiliary operations are taking placebut quite frequently the operations in these annexes are not being smoothlyfed into the main flow of work in the large shop. The best and most praticalarrangement is to have a linear flow of work so that raw materials come in atone end of the plant and are processed through several stations or workingbays and flow in a steady procession to a final assembly operation withcomponent fabrication and other parts occupying lateral areas but feeding inat the appropriate time into the main flow of work. This type of arrangementwas the exception in the plants that were visited. The common pattern wasone of machine placement that is haphazard rather than allowing for an orderlyflow of work. Floor space is very crowded and the operations of machining,fabrication of components, assembly of parts, are scattered in any placethat there happens to be available room. The almost universal characteristicis one of congestion and a mixing of operations that frequently leads todeterioration of operations because of improper floor planning. There is noadequate provision for working space around the main machines and the aisle-ways that are normally used to carry the flow of work are completely congestedwith work in process.
3.16 As a rule of thumb, for a large machine tool there should be aminimum of 1.5 times the whole area of that machine tool available adjacentto it for work that is coming to be processed or that is being transferredto the next operation. A working space of 2 to 2.5 times the area themachine tool is even preferred in some cases; this does vary with the typeof machine tool, of course. In Korea there are typically about double thenumber of machines per square unit of floor space than there would be inan efficient layout. This is exacerbated by another condition. Whereverthere is some vacant space, because of temporary slowing down in the flowof work or semi-permanent vacancies because of poor operating practices, thetendency is for many small operations to settle in as "squatters" doingassembly of small components, or a welding or cutting operation, etc. Thisadds to the confusion and the congestion and often results in a further slow-ing down of the flow of work to the main operating stations. Some examplesdrawn from the engineers' observations will illustrate this point.
(a) Heavy electrical machinery shop: "the striking thingabout this works was the warren of work areas. Workshops ran into one another with little side areas andwork was performed in little pockets. Flow of workin one area was at a completely different orientationto flow in an adjacent area. ... the plant was grosslyovercrowded and the management were fully aware ofthis. ... the main transformer assembly area wasalso chaotic with work of all kinds seemingly per-formed at random, i.e., building of cores, assemblyof coils to core, the filling of transformers to tank,etc. ... this factory was full to bursting and it hadtherefore passe'd the point of optimum output sincenow it was overcongested."
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(b) Industrial machinery: "... you walk through a large
doorway into a separate building of lower heightwhere they have what they call their light machining
bay--lathes, centerless grinders, milling machines,
and so forth. They had those things crammed in there
like a New York subway. ... They have little aisle
space down there. But the machine rows are veryadverse. Turn your head the other way and see these
wide spaces, except you see two things that are most
disturbing. Where their heavy floor-type horizontalboring mills are, they allowed 2-1/2 times the size
of the machine adjacent to it but because their cut-
ting systems are so poor and that machine runs soslowly, once they get a piece of work up there that
should be done in four hours they may have it up
there four days. ... Now they're using (the space)for assembling sub-components. That's a pretty
place to work tucked in between our machines andour machining area ... we have what are like squat-
ters' rights for somebody to come in there and do
assembly of components or whole units."
(c) Heavy industrial machinery: "They really had no
right to put this row of machines down here. There
is a syndrome on small machines throughout Korea
that if they're not great big (machines) put them
just as dense as you can get them. Now this aisleshould be cleared. All the machines down the side
should go, then you would have work in process,
storage area where the machines are now sitting,
and you would have aisleways for heavy forklifttrucks ... and other efficient material-handlingdevices could be used, chips could be removed, the
machines could be serviced and you could walk down
this aisleway ... through these columns into theother bays ...
3.17 It should not be too readily assumed that this phenomenon of con-
gestion means that there is typically in total too small a floor space to
accommodate all of the operations required in the plant. It generally
appeared that with a rearrangement of the layout of the plant and of the
machines and equipment and a reorganization of the main functions being per-
formed (i.e., metalworking, machining, fabrication, assembly) the existing
floor space might be adequate for the purposes. This was not true in every
case, of course; in some instances the plant was simply trying to expand its
production with inadequate floor space and facilities.
3.18 Almost without exception in the metal fabricating and welding
shops, which produce odd shapes of metal and scrap, both the pieces of plate
and the scrap were allowed to accumulate in a random way on the factory floor
completely obstructing any gangways or walkways so that the only way one could
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walk through the shop is to clamber over the material. This is not only dan-gerous but means also that much time is wasted in trying to recover the mate-rial when it is needed for assembly. It was also particularly noticeablein foundries where, in many cases, as much as 50% of the total floor areawould be occupied with heaps of discarded sand which had been knocked awayfrom the previous castings. Piles of patterns were also present which notonly were taking up unnecessary space but also would be subject to damage.At a rough estimate in the worst cases the output of the foundry could beincreased by 30% without any additional space, equipment, or operators.
3.19 In some plants producing heavy industrial equipment, large expen-sive machine tools have been located in buildings that had insufficient heightto have the overhead traveling crane efficiently service the tool. There wasnot sufficient clearance between the top of the machine tool and the railsof the traveling crane to permit effective handling of large items of workin process nor to remove the larger parts of the tool itself when maintenancewas required. This condition was primarily observed in older plants; in thenewer plants the crane heights and arrangements were almost invariably accord-ing to standard practice. In fact, it was noted that there is some tendencyto have higher capacity (i.e., greater tonnage) cranes in operation thanwould normally be required or found in Western plants. This may be an advan-tage to the Korean plants in the handling of the occasional peak load.
3.20 There is also a noticeable lack of conveyor systems and transferequipment in the plants that were visited. A possible explanation is that,because of low labor costs, it is cheaper to substitute labor with a push-cart for an automatic conveyor. This may be true in some cases, but inmost of the plants visited it could also be seen that delays in the trans-fer of work from one station to another was slowing down the whole flow ofwork and this also had the effect of lowering the speed and utilization ofthe machinery and equipment. Conveyor systems and transfer equipment arenot necessarily high-cost items and their installation would, in many cases,lead to a marked improvement in the flow of work and the discipline of theproduction line. Other kinds of material-handling equipment, such as fork-lifts, were not as noticeable as in similar factories in Japan, the U.S. orWestern Europe.
3.21 The lack of adequate lighting is a very general characteristic ofa large number of the plants visited. In most of those cases the lightingis so poor that there is no possibility of working a second shift at night.This severely cuts down on the hours of machine use and thus has a directeffect on the recovery of capital investment costs and on potential profits.Unless this seemingly minor point can be corrected, no significant increasein output can be achieved regardless of whether all other factors are favor-able. In one plant producing heavy equipment the engineer observed: "Theyhave no lighting so they cannot use that plant for more efficient operation.As a matter of fact, on a cloudy or inclement day or in the winter time it'sso dark in there that the men must use a drop cord to see what they're doing."And in a similar vein: " ... They didn't make provision of lighting therewhere they can use (the facility) at night and on dark days but in this bay
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and the adjoining bays they had more machine tools by dollar volume, by num-
ber of machines, and by the output which could come from these machines than
the largest machine tool builder in all of Korea ... " These are conditions
that should not be allowed to exist, nor are they found, in efficient plants.
3.22 Dirt floors are very common in many of the machinery plants that
were v.sited, not only in storage or asoembly arezis but e:en in thozc areas
where machining and fabrication were being doLie. Thiis clearly Ihas z Lad
effecL on the precision of operations where the machine is mountea di iLiy
on the dirt floor, which was a condition observed in a number of the plants;
but possibly an even more serious consequence lies in the fact that cutting,
fabricating, and assembly operations are conducted on the floor rather than
on work benches. The dirt gets mixed up in the operations and seriously
degrades the quality and performance of the item. This practice of working
on the floors is quite common and was observed, for example, in the final
grinding of twist drills and other cutting tools in one major plant. In
another case, in a plant producing engines (non-automotive), the engineer
observed: "There are too many things assembled actually on the floor and
under conditions where conveyors and material flow items are not used.
... at the (blank) plant ... they have for years been assembling
their engines. There were men working on the floor with hand grinders.
There's a hole drilled in that crankshaft where oil comes up through the
hole, lubricates the connecting rod and so forth ... they do it on the floor
and not upon the bench and (they are) creating in the course of the year
enough grit from the grinding wheels to fill two large trays of dust and
that never belongs where your finished product is being put together."
Clearly this is one area in which corrections will have to be made if the
quality of products is to be improved and performance is to be upgraded..
3.23 Deficiencies in plant layout and flow of work such as have been
described above., seem to be generally known to the plant managers, or at
least to the better informed and in larger plants. Those enterprises that
have built or are building new plants in the Changwon complex are making the
necessary changes to improve the plant layout and flow of work, but very few,
if any, of them seem to have plans to improve the existing facilities. In
some cases the plant managers apparently are unaware of the deficiencies in
their own plant. For one large metalworking establishment the observation
was made: "Perhaps the most disturbing thing of all in the case of this
plant was the obvious pride the management had in showing the operation
which pointed to their obvious lack of appreciation of the shortcomings."
It appears that there is still some need to inform managements of the short-
comings in their own operations.
3.24 Ef.icient plant layout and logical flow of work are basic to effi-
cient operation of the machinery industries. Costs that the plant incurs
from down ti,-e of machines, slow and/or interrupted flow of work, poorer
quality of ottput, and lower volumes of output are severe, and their magni-
tude may not be fully appreciated because they are not necessarily trans-
lated immedittely into monetary terms. Of the plants visited it was judged
that in some cases the volume of production could be increased by as much
as 40% from #.xactly the same machine tools, the same employees and the same
products.
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Operating Practices
3.25 Operating practices is a term that includes all those activities
involved in the steps of production: the scheduling of work on particular
machines and the choice of machines for particular jobs; the operation and
usage of the machines themselves, whether the machines are being used prop-erly and up to design capacities in such critical areas as cutting, grinding,boring, planning, etc.; the performance of basic operations such as welding;the efficiency of fabrication and assembly of the products; and other mat-ters that affect the overall productive efficiency of the shop (such as
safety). Some of the sharpest criticisms of the engineers were directed to
this area of operating practices. In a summary statement on operating prac-tices, the observation was made that " ... the time has arrived in Korea where
the material (equipment) expansion is getting substantially ahead of the human
ability to utilize this (equipment) to the proper advantage. Now we're look-ing for solutions."
3.26 Cutting tools and usage: Some of the least satisfactory conditions
were observed in the choice and use of cutting tools, in the tool holding sys-tems and regrinding. There are in general two classes of cutting tools; one
is called 'single-point' which is typical of what would be used in a lathe
or a planer. It's a tool that has a single carbide tip. There are also
rotating tools like a crystal to drill a hole or cut a thread or a tap. InKorea it is almost universal practice to use brazed carbide tip cutting tools.
This is a tool on which the actual carbide cutting tip has been separately
brazed to the tool itself. This kind of system is obsolete in Western coun-tries and has been abandoned at least 10 years ago, in favor of the throw-away
or indexable carbide tools. The brazed carbide tip tools will not take a big
enough cut on the metal for the machines being used, do not leave a goodenough finish, and as a result lead to higher production costs, poorer qual-ity of product or greater time and effort in order to achieve the same qual-
ity, and for these reasons the use of brazed carbide tips is no longer stan-
dard practice.
3.27 As a result of poor cutting tools and poor tool holders, the machinesare not being used anywhere close to their potential capacity. In case aftercase, so frequently that it may almost be said to be in the majority of cases,
the depth of cut is far too shallow and the speed of operation of the machineis far less than is specified in the technical manuals of the machine tool
builder. The result is that far too little metal is being taken off oneach pass, hence the number of passes necessary is materially increased,
the cumulative wear on the cutting tool is greater, the time it takes to do
the job is several times what it should take, and as a result the costs seemto be substantially higher than should be necessary. One of the engineersreported on a demonstration he performed in one of the plants visited:
"At the (blank) plant I watched an operation going
on and saw the opportunity, stopped my group, asked them if
they wanted to be gamblers and take a real cut on that thing
and they agreed. We increased the depth of cut 400%, we made
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the machine run wide open as fast as it would go, which ismore than twice as fast as they were running it, and wedoubled the feeds and they stood back and so did the operatorand he threw that lever in and it made the most beautiful cut.That chip went right down where it belonged ... and you couldsee (the supervisors) telling (the operator) now that's howyou run it from now on. Then they got me by the arm and said'we have two new Gisholts over here, we've got a lot of moneyin them, could you come and do that same thing,' and I wentover and ... speeded up one of the Gisholts (to) crank itright out .... Sometimes it takes less horsepower to take offmore metal than to rub it off."
It would not be possible to maintain the cutting depth nor the speed of themachine shown by the demonstration in normal operating conditions becausethe cutting tool systems are inadequate, but with the right cutting toolsystem the higher speeds and deeper cuts can be maintained because themachines will take it. The result could be an increase in the output ofthe present machine tools by as much as 40% and an improvement in the qual-ity of work.
3.28 It is not suggested, however, that Korea try to upgrade its cut-ting tool systems across all industries in a short period of time. For onething it can be quite expensive. Many machine tools which are sold for$25,000 to $100,000 will consume more cutting tools during their workinglife than the cost of the machine itself; some surface grinders will use 2to 3 times. It may cost up to a thousand dollars a spindle to stock themagazine of a single machine with complex tool holders, so that for a 40-tool magazine the cost of retooling for the single machine could be on theorder of $40,000. The throw-away cutting tips are quite inexpensive, onthe other hand, and for that reason there is usually no attempt made, inWestern countries, to regrind them. Even in Korea, with lower labor rates,it would probably not pay to consider regrinding the cutting tools. Nor isit suggested that Korea consider the establishment of a plant to producecutting tools. The varieties required for different types of operationsrun into the thousands and many may be of special design or special purposedepending upon the work. It is judged to be far more economical for Koreato procure its cutting tools from one of the specialist firms (for example,Kennametal, Carbaloyd, Sandvig).
3.29 It is essential to make a start on an improvement in cutting toolsystems. Some of the larger, newer plants have the appropriate systems, buta program is needed to spread the system to other smaller enterprises.
3.30 Operational use of machinery: In the machine shops it was repeat-edly observed that machines were being used far below their potential output.For example, a large plano-milling machine which would probably quite ade-quately take a cutter of twelve to eighteen inches in diameter was seenusing a cutter of three or four inches in diameter and even this small cutterwould not be removing metal at more than 50% of its potential capacity. Insome cases, this was partially brought about by the fact that the tools were
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used without any coolant, which is a flow of water or water containing solubleoil, to keep the tool'cool, therefore enabling much heavier metal removal,reducing cutter wear through lubrication and helping keep the tool accurateand sharp.
3.31 It was also observed that machinery was sometimes used improDerlyor machines were being used to perform the wrong kind of operation, wHlen otnersuitable machines for that particular operation were in the factory. Forexample, in one instance, a large face cutter was being used backwards whichis the equivalent of trying to cut with the back of a knife. In another plant,a lathe was being used to cut longitudinal splines or teeth by using the saddleof the machine and the lead screw to drive the tool forward along the lengthof the job while the job was being held stationary in the lathe chuck. Thisoperation could and should have been performed on either a milling or slottingmachine and both of the machines were available in the shop. It would havebeen even better to use a broaching machine but such a machine is expensiveand was not available. It was also clear that the spacing of the splineswas being done by eye since there is no satisfactory way of indexing thechuck of a lathe. In still another case, a component had been left betweenthe centers of a grinding machine for apparently some time without auxiliarysupports to prevent it from sagging (a job of the kind observed would nor-mally sag by several thousandths of an inch); the operator did not recheckthe alignment of this job before restarting the grinding operation and sincegrinding by its very nature is a very precise operation, the component wasclearly not being machined to the accuracy required.
3.32 In Vhe machine shops there appeared to be little use of duplicateset-up in jigs and fixtures which can save a great deal of time. To producea component on a machine it is necessary first to position the component cor-rectly in the machine and then to perform the necessary cutting or formingoperation. The positioning of the work is called 'setting-up,' and in cer-tain work the set-up time may considerably exceed the operation time. Wherethe set-up time is long relative to the operation time, there can be greatsavings from the use of jigs, fixtures, and duplicate tools. If a largenumber of components are to be produced, a simple jig or fixture can bearranged to reduce the set-up time to a fraction of that which would betaken if each component were to be set up separately. This is a way to maxi-mize the actual time the machine is in operation and it likewise raises laborproductivity. As a typical example of a case where the use of jigs and fix-tures could significantly improve performance, in one plant gears were beingmachined on a hobbing machine. To do this operation, the operator had tomount each gear on a mandrel (spindle) and clamp it in place by applying anut to the end of the mandrel and tightening it. The total time needed totake the mandrel out of the machine, clamp it in a vise placed convenientlynearby, remove the nut, remove the gear, replace the new gear, screw on thenut and retighten, and reinsert in the machine took about 30 seconds. Duringthis time the machine was idle. If the operator had had a spare mandrel hecould have had the next gear already set up ready to insert in the machinewhen the previous gear was complete and the mandrel from that gear could thenbe used for the next gear and so on. By actual timing it was determined thatin this way the idle time on the machine could have been decreased by over50%. Many other similar examples could be cited.
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3.33 In the shops using punch presses for stampings, almost without
exception the machines were used singly with only one tool in the press. If
strip material was used, it was fed by hand and one stroke of the press pro-duced one operation. There were clear applications for automatic strip feed-
ers and multiple tools which produced several simultaneous operations and
progressive dies. In such an operation several machines operate on a long
string of component parts, each die performing a different operation on thecomponent in the strip, so that as the strip moves forward it progresses to
completion with each subsequent die until the final and finishing die crops
it off the strip. This method not only saves a great deal of operator andmachine time, but the very nature of the production method insures greater
accuracy, faster speed, and much greater operator safety. Also, in many ofthe operations observed the hole in the bed of the punch press, where the
blanks can drop down onto a conveyor or a bin, were closed up so that there
was nowhere for the blank to go. This meant that after blanking a few pieces
it was necessary to raise the die face and rake out the blanks and startover. This is completely contrary to the normal operation of a punch press
which derives its efficiency from the continuity of operations. Many of
these deficiencies in punch press operations are readily correctable, and
in the judgment of the engineers it would take only one knowledgeable man a
few days to improve the operating practices a significant degree.
3.34 Castings and forgings: Some of the conditions in the foundries
have previously been described in the section on plant layout and flow ofwork; failure to remove the used sand from the floors creates difficulties
in the management of operations. In addition, the treatment, cleaning and
further processing of the sand for the molds and the composition of the sanditself appeared to be ignored in some cases. There are, however, some rela-
tively efficient job-shop foundries turning out good grade castings for the
market.
3.35 In the forging operations a number of operating conditions were
observed that lead to inefficiencies and higher costs. Most noticeable ofall was the apparent disregard of the amount of metal used in the production
of a forged part of a particular weight. In good practice, for a forged part
that has a net weight of one pound, about a pound-and-a-half of metal will
be sheared off for the forging blank. In Korea it is common to find the
forging blank weighing two to two-and-a-half pounds per pound of the net
weight of the forged part. Thus the wastage of metal is double or more thewastage that occurs with good practice. This obviously leads to higher costs,
but the extra metal also causes troubles in further processing. For closed-
die forging, the operation of the forging hammer forms the part, and when
you get through this stage there is a little extra metal or 'flashing' aroundthe edges which is taken off with the trimming presses. In a large number
of cases it was observed that the 'flashing' was so thick that they couldn'tshear it anymore and had to cut it off with a torch. This is a slow process
and leaves the forged part in a very rough state'so that at the next opera-
tion in the machine shop a great deal of machine time is necessary in orderto put the part into finished shape. This is a long and costly process and
leads to increased costs because of the wastage of metal, the lack of preci-
sion in the forging, and the extra amount of trimming and machine finishing
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that has to be done. Since many of the parts that have to be forged are pre-cision components of machinery or automobiles (for example, connecting rods),this materially increases the cost of the finished item. The forging shopsin Korea are distinctly one area where significant improvements in operatingpractices could be achieved with improvements in cost and quality.
3.36 Fabrication and assembly: The difficulties in fabrication andassembly reflect the previously mentioned problems in the plant layout andflow of work. Work is often performed in seemingly random positions in theworkshop, wherever a suitable space is available. There is typically verylittle equipment or fixtures available in these areas; very little automaticor semi-automatic welding was used (most of it being stick welding by hand)and very few positioners to allow work to be turned into the best positionfor welding. There were generally also only a few assembly fixtures forquick and accurate assembly when repetitive work was being done. In theassembly areas, assembled components or precision machine parts or insulatedor delicate electrical components were frequently observed stacked or piledin such a fashion after assembly as to be in danger of being damaged by con-tact with other parts. This is undoubtedly related to the fact that fabrica-tion and assembly are frequently done in corners or elsewhere on the shopfloor wherever there appears to be space temporarily free. Several examplesmay serve to highlight the observations.
"The assembly in the pump area was surprisingly messy,dirty, and a cramped operation. The assembly of all smalland medium pumps was carried on in one small area only about30 feet square with little or no tooling, no flow line and adistinct lack of cleanliness. The fabricating shop was oneenormous clutter with material everywhere. No defined walk-ways and a collection of very poor equipment. Once again,there can be nothing but admiration for workmen who canproduce very passable quality of work in such very poorworking conditions. But it reflects upon management's useand control of labor operations."
"Finally, the visit included the welded assembly areaand here again the shortcomings of fabrication in Koreawere only too easy to see. Facilities were minimal, qual-ity was very poor, no automatic welding was being performedeven though long simple welds cried out to be automaticallywelded and cylinders that were very far from being roundwere being welded outside in the open. The circumferen-tial seams were being welded by the elementary processof the welder standing inside the cylinder, performingabout 12 inches of weld with a stick electrode and thenwalking inside the cylinder so that his weight caused itto roll forward so that he could bring the next 12 or 18inches of weld onto the bottom so that could then bewelded. The resulting quality was very poor."
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"In the fabricating area it was even more remarkable
that the company was able to perform the work it did since
equipment was practically non-existent. There was only one
old burning machine for cutting out plate and an old press
for forming. All welding was stick welding performed by
hand and assembly was carried out in the open air. Auto-
matic welding would double the output. However, ... new
equipment was being installed. A press brake was beinggrouted into position while the visit took place. A new
guillotine shear was standing waiting for installation.
A concrete raft had already been laid preparatory to the
extension of the new workshop."
3.37 It seems probable that if plant layouts can be improved together
with improvements in the basic cutting and machining processes, it will be
much easier to obtain the necessary improvements in the fabrication and
assembly operations.
3.38 Safety: Very few of the plants visited had any kind of safety
devices for protection of the operators. In plant after plant, men working
on machines for the removal of metals with chips or fine metallic dust flyingoff tLe piece, were without protective goggles; there is a lack of guards on
moving parts of machines; protective screens around welders or die-casting
machines or guard fences around electrical test areas were very seldom seen.These features combined with the typically poor lighting in the plants must
inevitably lead to a fairly high incidence of industrial accidents. This was
not an area that could be closely investigated by the mission, and informa-
tion was not obtained on days lost through industrial accidents; however,
in the manufacturing industries in 1975 about 4.2 billion Won (about $10 mil-
lion) were paid out in insurance claims and the majority of this was for
medical benefits. In the same year there were almost 80,000 cases for which
industrial accident benefits were paid, which represented about 7 percent of
the workers covered. Undoubtedly the improvement of safety features in the
plant could materially decrease the amount of production lost through indus-
trial accidents and raise the productivity and health of the individualworkers.
3.39 Availability of Technical Information: In the best-run Western
machinery and metalworking establishments, there is an abundance of technical
material available to the machine operator and the first-line supervisors.
These materials take the form of wall charts, tabular materials, condensed
handbooks of technical information, etc., all of which are designed to assist
the man in making proper measurements, making conversions from one type of
system to another (e.g., English measures into metric), to choose the right
feed and speed for the machine based on the type of material being worked
and the type of operation, and a variety of other technical information to
assist in day-to-day standard operations in the plant. This kind of material
was noticeably lacking in the plants visited. There is, of course, a good
deal of documentation available to the front office management, the plant
engineer, the production manager, etc., on the characteristics, design,
functions, speeds and feeds for the specific machines in the shop, etc.,
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but that kind of information is at a different level from the kind beingdescribed here, which is standardized technical information that is neces-sary on the shop floor so that the operators and first-line supervisors willnot have to do standard calculations, nor make guesses that can lead to mis-takes when there is a simple way to look it up. Documentation and the dis-tribution of technical information is a function that probably can be under-taken and afforded by the large companies but the need extends beyond them.The function of providing a technical information flow is one that can beusefully centralized to some extent, and it is suggested that this is anappropriate function for a reorganized KIST. At this point it should simplybe noted that the availability of technical information on the shop floor islacking and should be corrected so as to improve the efficiency and produc-tivity of the machines and the labor force.
Condition of Machines and Maintenance
3.40 There is a great diversity in the condition of machinery in thevarious plants in the industry. The plants at Changwon are almost entirelynew within the past few years, whereas those in other plants in the indus-try range from very new equipment to some that is very old. There is alsoa diversity in the attitude toward maintenance and the way it was under-taken.
3.41 In the plants that were visited, there were not too many that evenhad a separate maintenance shop, and in the few cases that were seen, themachinery that was used in the maintenance department was generally olderthan the machines that were being used in the production shop. This is nota good arrangement. Typically, the equipment in the maintenance departmentshould in-many ways be superior to that which is on the factory floor. Theequipment in maintenance must be general purpose machinery like center lathes,milling machines, a slotting or shaping machine, and drilling machines, andnot the sophisticated type of special machines that may be found on the pro-duction floor. But the machines that are there ought to be relatively new,modern.and precise, and the general observation was that the maintenancedepartment seemed to be equipped with the oldest equipment that was availableand that may have been handed down from production. This seems to reflectthe attitude toward maintenance, particularly when proper maintenance pro-cedures may involve fairly extensive operations leading to downtime on apiece of production machinery.
3.42 There was some evidence to support the conclusion that it is fairlynormal practice to run a machine as long as it will go, perhaps performingsimple first-order routine maintenance but leaving second- and third-levelmaintenance, which require more extensive operations, out of the normal orga-nization of maintenance work until the machine has a major breakdown.
3.43 There is a complete opposite kind of story in the treatment of cer-tain kinds of very high-precision, hydraulic jig borers and jig grindersthat are kept in separate glass enclosures with careful temperature control
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and air conditioning. These machines are pampered, which is appropriatebecause dirt, dust, and changes in temperature can affect their capabili-ties. Nevertheless, these machines appear to be somewhat underutilized andgiven their high initial cost and cost of maintenance and operation, itwould be desirable to try and raise their rate of utilization.
3.44 While the new plants and new equipment, such as at Changwon, arethe showpieces of the machinery industries, the bulk of investment and ca-pabilities are in the older equipment and the older plants, and for themproper maintenance is most important. Although some of the older machineswill be replaced by new machines, the investment cost is too large to imaginethat this can occur over a wide segment of the industry. Yet it is necessaryto upgrade the quality and performance of the existing machines, so that main-tenance essentially will mean rebuilding, which is a major and specializedkind of operation. In the developed countries there are large numbers offirms that specialize in the rebuilding of machine tools; every large cityhas several of them. In many cases rebuilding does not involve going backto the original design; there are often possibilities for changing the designsomewhat, improving the tooling, adding gauges or precision accessories, andin the process the quality of the machine will be upgraded and its performancecharacteristics will be significantly improved. This type of activity inrebuilding machine tools is labor-intensive but also requires a high levelof skill. Korea does not now have any firms engaged in the rebuilding ofmachine tools, so far as we could learn. Almost certainly there will be aneed to develop this kind of capability if the quality of products is to becompetitive in the export markets in the 1980s. Up to now the prevailingphilosophy has been to expand by buying new machines, and that philosophyis likely to continue in the prevailing emphasis on growth. But the needto upgrade and maintain the existing stock of machinery will become an in-creasingly serious problem and should command the attention of the indus-tries and of the Government. It is one essential part to improve the ca-pabilities of the machinery industries.
3.45 In the developed countries it is standard practice to keep detailedrecords on the number of hours that each machine has been running and the kindof jobs that have been assigned to it. Although the average useful life ofa machine varies depending upon the type of machine and the kinds of jobsassigned, a commonly used figure is 1.0,000 hours of use. Beyond that pointit is frequently found that the continued deterioration from wear and tearand the partial obsolescence of the machine itself begins to accelerate. Ona one-shift basis, 10,000 hours of use corresponds to about 5 years averageuseful life and at that point it is desirable to consider whether to replacethe machine or to give it a major overhaul (i.e., second- or third-level main-tenance) including rebuilding. Decisions on major maintenance or replacementof a machine tool are consequently based upon a detailed record of usage andare also tied directly to the financial accounting in the enterprise. Thisis done as normal practice because machine tools are typically expensive itemsrunning into the hundreds of thousands of dollars. This kind of organizationof information for making maintenance and/or replacement decisions was foundin only a few of the enterprises visited; yet it seems obvious that for con-trol of costs and quality of output it would be desirable to encourage the
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spread of this system throughout the machinery industries. It would be pos-sible to organize such a program through institutions such as KIST, the Federa-tion of Korean Industries, KOSAMI or some combination of these.
3.46 There is a final point worth noting about the kinds of equipmentobserved on the production lines. Most of the machinery has been obtainedfrom foreign sources, and the products and technology have similarly beenobtained on license from foreign sellers. Products are often not of thelatest design and the machinery and technology to produce them are also olderand usually have been well known throughout industry in the developed coun-tries for some time. Nevertheless, occasionally during the plant visitsit appeared that some key design element or process or piece of equipmenthad not been made known or available to the Korean enterprise or at leasthad not been incorporated in the production processes that were observed.The omissions may have occurred through inadvertence or because local con-ditions in Korea were not favorable or because there was a deliberate with-holding on the part of the foreign seller. In any case, the effect has beento lower the production capability or product quality of the Korean enter-prise. While these conditions do not in any way appear to be general through-out the machinery industries, examples were noted often enough to make thepoint worth mentioning. These are not matters that would be easily caughtduring Government review and approval of foreign licensing agreements, butit may be worthwhile to investigate whether it might be possible to makethe approval system more sensitive to the existence of such conditions orto forestall them.
Product Quality
3.47 Because of the very great diversity of products and the markets forwhich they are intended, it would be misleading to make general statementsabout the quality of products. Each conclusion needs to be qualified bystating the conditions to which it applies. The word "quality" itself hasa number of dimensions; it may refer to the precision or accuracy that amachine can achieve in performing a given set of operations but it may alsorefer to serviceability or the ability to perform in standard form over aperiod of time. It may refer to the degree of maintenance required or tothe simplicity of design; in some cases may be related to the hardness,weight, rigidity, flexibility or dozens of other technical characteristicsof the machine or part. In short, "quality" is multi-dimensional, and thereare always "trade-offs" among the characteristics; better performance interms of one characteristic can be achieved by giving up in part on anothercharacteristic. Above all, quality is judged in comparison to price. Evenin the field of machinery items a lower quality but lower priced item maybe more suitable or acceptable in some markets or some uses than a higherquality but higher priced item. It may be noted that in the majority ofengineering production the same dimensional accuracy is called for today aswas required 10 or even 20 years ago. Improved accuracy in the productionof certain machines and machine tools has enabled this same dimensionalaccuracy to be more easily achieved but the accuracy demanded may not have
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0
changed. For all of the above reasons, the observations on product qualitymust be carefully phrased.
3.48 The largest part of the output of the firms that were visited areintended for the domestic market. Although questions were asked about theextent of exports, the usual answer indicated that export sales were low ornon-existent; there were exceptions to this rule (e.g., railroad components,autos) but in the majority of cases it was clear that the domestic marketabsorbed all of the output and more could be sold if capacity were expanded.Also the rate of profit on domestic sales is substantially higher than onexport sales for these firms.
3.49 In the large majority of cases, those same products that enjoy a.brisk domestic market were judged to be of too low a quality to find a mar-ket in developed countries where they would have to compete at a disadvan-tage not only in terms of quality but also in terms of price. This was trueof simple products such as twist drills, which are manufactured by severalof the plants visited, and ranging up to complex items such as lathes.Bearings are being produced for export but they are of low quality and areintended to be sold in retail stores for simple uses and are not being soldto other firms for incorporation in machinery. Some of the agriculturalmachinery being produced probably has some export potential in developingcountries in Southeast Asia and possibly in similar countries in other partsof the world, and some types of textile machinery have been successfully soldin Southeast Asia. At present levels of quality and capability, none of theseproducts is judged to have the capability to compete successfully in marketsin developed countries, though the markets in lesser developed countries maycontinue to be substantial. Virtually all of the lathes and similar machinetools being produced are very basic in design and have only a low to moderateprecision capability. To be competitive in exports, lathes will have to in-corporate features that have been common in the technology for 10 or moreyears, such as hardened ways, servo drives, more sophisticated in-processgauging and vertical bed construction, etc. One large manufacturer of latheshad target export figures for sales which, based on an index of 100 for1976, increased to 750 in 1977 (which was not going to be achieved) whichthen rose to 2,100 in 1978 and over 7,600 by 1980. Based on the quality oflathes being produced in the plant visited, it was judged that the manufac-turer had almost no chance of coming close to these target figures. In gen-eral, products that would be classified under general industrial machineryand components seem to be of too low a quality to penetrate any wide rangeof export markets. Products in the area of transportation equipment compo-nents may be somewhat better situated, though even in this area quality defi-ciencies in existing products may limit market expansion.
3.50 There is no avoiding the conclusion that to expand export capabil-ities in great measure will require an upgrading in the quality of productsproduced, but lack of quality is not the only obstacle, and perhaps not eventhe primary one. Improvements in technology and in operating practices sothat quality can be improved, building up market organizations and systemsto provide services and spare parts, and other elements are all part of theproblem.
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Labor Use and Skills
3.51 The observations worth noting from the plant visits on labor use,
productivity, and skill requirements primarily have to do with the way man-
agement uses and directs the labor force in the plants and not to the in-
herent capabilities of the labor force itself. The labor force is known to
be industrious and extremely well-disciplined; the performance of labor has
been one of the keys to the rapid growth of industry in the past. However,
in many of the plant visits in the machinery sector the management use of
that labor is not good. The difficulties are of two kinds: men are left too
much to their own devices without adequate assignment of tasks to be done
in a specific sequence as part of a particular operation and with detailed
supervision of the work being performed. On the other hand, the men on the
production floor (i.e., machine operators, other production workers, etc.)
are apparently not encouraged to innovate, to find ways to overcome diffi-
culties, to make suggestions for changes in operating practice, etc., but
rather are expected to perform tasks in the accustomed way.
3.52 Too much time is spent finding work, or the next job, or the mate-
rial. In some cases the men may have to find their own area in which to
work, perhaps make up some form of jigging or fixtures of their own, or find
the means to get the levels or measurements to work from. This characteriza-
tion of poor management direction and use of labor is simply another aspect
of the poor organization of the flow of work through the plant, which is a
problem that has been commented upon earlier.
3.53 To some extent, poor organization of the flow of work can be com-
pensated for if labor is encouraged to innovate, to change existing prac-
tices to meet the needs, and to make suggestions to supervisors and up through
the chain of management. This can only be done if there is technical infor-
mation available on the shop floor and labor is encouraged to exploit it and
use it. As has been noted earlier, the amount of technical documentation
within the plants is noticeably lacking. In these circumstances, labor
will tend to do any task in an old accustomed way rather than to risk making
changes, and that includes the operation of new machinery. The following
example illustrates the point.
3.54 The plant being visited was installing a machine for induction
hardening along a drive shaft which was going to be used on construction
equipment; the work was being supervised by an engineer from the US company
that had manufactured it. The mission engineer commented that the labor crew
was operating the machine very slowly and the response was as follows:
"That (machine) will do that four times as fast and
it's going to. However ... they have been doing that
shaft by another hardening machine at a certain rate
and they refuse to do that any faster and they're afraid
that it won't work. All I have to do is when I feel
they've got the swing of things I go and get the superin-
tendent who is a wonderful fellow and then I run the
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machine showing them how fast it will go and they allwatch it and believe it, and when he gives them the
word, and only when he gives them the word, then thatthing will be up to four times the speed ... but if I
left them alone this new machine will be run at the
same speed and in the same mode (that) they are accus-
tomed to doing. And they are not permitted to take it
from a visiting engineer. It must come to them through
proper channels in that plant."
3.55 Other similar examples were observed and reported on. In various
ways the examples illustrate breakdowns in the supply of information, instruc-
tions, and supervision from management to the operators on the shop floor and
the inability or unwillingness of the operators to assume responsibility for
making changes or corrections in accustomed practices. It is possible that
the very discipline of the labor force may work against the exercise of such
initiative. In any case, management has the responsibility and the means
to correct such conditions and could improve the productivity and efficiency
of the plant by doing so.
Engineering Design. Testing and RD&E
3.56 Virtually all of the products in the machinery industries are being
produced on license from foreign firms; there was little evidence of original
Korean design for products and also very little adaptation made to existing
designs. Only a few of the larger and newer plants have separate engineering
departments and they are usually concerned with operation and maintenance of
the testing and measuring equipment and some kinds of day-to-day operations
in the plant. There is some product adaptation in pumps, pressure vessels,
heat exchangers, and tanks. For the most part, however, the amount of adap-
tive development and engineering of products and processes (to distinguish
from research per se) is almost negligible. This is further documented in
Chapter VI which evaluates the industrial RD&E effort in Korea, including
that part which is undertaken in industrial plants. Yet, if technology is to
be upgraded, as it most surely needs to be, the amount of RD&E work will also
have to be sharply increased. Even with the pressures from the market, it
is unlikely that industry, of its own accord, will initiate and maintain the
required level of effort. Without Government support and stimulation the
total effort will likely be inadequate; the direction, content, and conduct
of an appropriate RD&E effort is outlined in Chapter VI and a new role in the
area for KIST is further elaborated.
A Program for Improvement
3.57 A plan or program for the development of the machinery industries
should not only focus on the expansion through new plants and new investments
but should give equal attention to the conservation, rehabilitation and im-
provement of the considerable investment and capabilities in existing plants.
They will continue to constitute a very considerable part of the capacity
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and output in the production of machinery and components and, as has beenindicated in the prior discussions, there are deficiencies in many areas ofplant operations that need to be corrected in order to put them on a compe-titive basis in the future.
3.58 A program for improvement will involve close cooperation betweenthe Government and private industry because many of the actions required canonly be initiated and carried out successfully by the management of industry.The problems are primarily internal to the firm and, although the Governmentcan provide some leadership and stimulation through the appropriate provisionof incentives, availability of finance, regulations, etc., these are necessarybut not sufficient conditions for action. These are not necessarily restric-tive circumstances, since in the past Korea has amply demonstrated that theGovernment and private industry can cooperate effectively when the needarises.
3.59 As a part of the development program for the machinery industries,the Fourth Five Year Plan document says (page 43) that "500 small and mediumscale machinery plants will be selected and supported intensively...." Themechanics of the organization of this part of the program are still beingworked out and it is not the intention of this report to suggest specificdetails of how this might be done but rather to indicate the major elementsthat inter alia should be included in the program. In particular, it isassumed that the Government will work in close cooperation with private or-ganizations such as the Federation of Korean Industries and KOSAMI.
3.60 Undoubtedly some of the changes that will be required will necessi-tate undertaking investment in machinery or parts to break bottlenecks in theproduction line and to replace worn out or obsolete equipment. There do notappear to be any serious constraints on the ability of firms to obtain re-sources for these purposes, though complaints are heard that credit is tightand that the interest rates are "too high." Nevertheless, funds are avail-able through the National Investment Fund, and special programs that arechanneled through KDB, KDFC, and MIB. It seems unlikely that any deservingand profitable cases in the machinery industries will be seriously impairedin improving performance by a lack of access to funds, or at least it isalmost certain' that such a condition will not be permitted to become wide-spread in the machinery industries.
3.61 Assistance is going to be required to make it easier and more auto-matic for firms to get access to technical know-how about available tech-nologies and processes in the developed countries. Large firms have theresources to do this for themselves and can make appropriate licensing agree-ments, but the smaller and medium sized firms do not have these resources andcannot easily obtain the information. There are several steps to considerin the program for the acquisition of technology. First, the Government isalready considering liberalizing the procedures and requirements for theapproval of licenses and changed procedures on May 1, 1978. This is a stepin the right direction but it is not sufficient; some further incentivesthrough tax exemptions or in some other way should be seriously considered.Also, liberalization of licensing should not be undertaken without some
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safeguards to insure that the Korean enterprise is obtaining all of therelevant information about an existing technology and to protect in other
ways against exploitation of the local firm. Second, in the US, Western
Europe and Japan machinery industry trade fairs are held regularly andfrequently. These are a means to bring buyers and sellers together so that
the buyers can learn what machinery and processes are available, what the
latest improvements are, and consequently they can do effective comparativeshopping. The sellers on their part learn what the market demands are. In
the US, for example, there is a trade fair on machine tools in Chicago every
two years and there are regional shows in half a dozen or more other cities.
The same is true in Western Europe and even Iran and Israel have made arrange-
ments for such kinds of interchange of information at trade fairs. Korea has
no means to spread this kind of information about its needs nor its capabili-
ties. During the visit of the mission a trade fair was being conducted by
KOTRA and some machinery was being exhibited, but the machinery exhibits were
in no way representative of the machinery industries and Korea did not put
its "best foot forward" in the exhibits. It is suggested that a joint effort
by the Government together with agencies such as KOTRA, KOSAMI, and FKI con-
sider the establishment, on a regular basis, of a trade fair for the machineryindustries. This will also require a determined effort to bring in exhibitors
from the developed countries, since it is clear that there is still a great
deal of ignorance on the part of foreign firms about both the needs and thecapabilities of the machine industries in Korea. The dissemination of this
kind of information is essential not only for Korean firms to be aware of the
technical equipment and processes available, but also is a means to make
foreign buyers aware of Korean products and capabilities for subcontracting.
3.62 At the present time if a Korean firm proposes to import machinery
or components, a determination must be made whether there is a domestic prod-
uct that is "similar" in performance and can do the same job as the imported
item. If this appears to be the case, the importation may be disapproved.
The comparison of products and the determination of "similarity" is now per-
formed by KOSAMI which receives the application for import and undertakes
the review. Apparently, both domestic producers and the importer are per-
mitted to submit material and to argue their case to KOSAMI, but, sinceit is likely that both the importer and the domestic producers are also
members of KOSAMI, that organization and its staff are not really indepen-
dent, in the judicial sense, and it is possible that various kinds of pres-
sures are brought to bear during the course of the determination. Moreover,
it is important to note that this way of proceeding is essentially imposing
a quantitative and non-market determined restriction that may impair the
efficient growth of the Korea machinery industries in the name of protecting
domestic producers. It is suggested that the Government consider whether
these procedures are in the best interest of the country or whether liberal-
ization of imports can be permitted without serious disruption to newer and
smaller enterprises. Some increase in market discipline may be beneficial
overall.
3.63 Many of the examples cited earlier in this chapter point clearlyto the fact that significant improvements can be achieved in plant layout,
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flow of work, and operating practices if the skilled labor on the produc-tion floor are better trained and if technical expertise on productionpractices and machine use are available to management. Programs for labortraining and technical assistance to management are regarded by the missionas among the most productive and critical activities that can be undertaken.Some of the larger firms have plans for extensive training of productionengineers and skilled operators in foreign countries or at the plants oftheir licensors, but smaller firms do not have the resources. It is sug-gested, first of all, that the Government consider the initiation and sub-sidization, in whole or in part, of a program for in-plant training of labor,providing that the training can be shown to be directly related to the oper-ating job. This should not be a substitute for more general vocationaltraining where the Government already has programs. Such a program mightbe aimed initially at a sample drawn from the so called five hundred smallmachinery firms that will be given intensive help. The training should beconducted in-plant and preferably on the job with the primary objective ofincreasing the proficiency of the labor in the machine operations and relatedtasks in the plant where the labor is employed. The employee obtaining suchbenefits probably should have some fixed obligation to remain with the plant.Second, technical assistance in the form of engineers and production peoplethat are experienced in the "best practices" in operations, use of machines,flow of work, could have an almost immediate pay-off in improved operations.Examples cited earlier of visits by the mission engineers have indicatedseveral types of "quick fixes" that an engineer on the production floor canaccomplish. Many of the changes in operating practices or flow of work aresmall and can be done in the plant with very little expenditure of money.In the judgment of the mission engineers, as little as a week or two spenton the shop floor could effect significant improvements in plant operations.
3.64 It is suggested that a tentative plan for a pilot program be drawnup; for example, a pilot program to bring in six engineers for a period rang-ing up to six months would be modest but could provide a basis for assessingat the end of the time whether the program has succeeded and should beexpanded.
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IV. ELEMENTS OF A DEVELOPMENT PLAN FOR THE MACHINERY INDUSTRIES
Introduction
4.01 The objectives of this chapter are to present a number of elementsthat appear to be logical parts of a development plan for the machinery indus-tries. This includes a discussion of guidelines for organizing a program soas to "orchestrate" the assignment of responsibilities for undertaking dif-ferent parts of the program, and to present suggestions for types of specificopportunities or product lines that, at first glance, appear reasonable forinclusion in the plan but where additional analysis is necessary to establishthe case for comparative advantage. The sum total of this material does notadd up to a detailed and fully articulated development plan. It is meant,however, to provide essential ideas, suggestions and related information thatwill significantly assist the government in the preparation and implementationof the detailed plan itself.
4.02 It should be noted at the outset that the specification of a devel-opment plan is occurring during a time when, for a significant segment of theindustries, technological change has been occurring at a very rapid pace.Largely due to advances made in the aerospace industries, a virtual tech-nological explosion has taken place primarily because of the application ofcontrol theory, computers and electronic techniques to what before had beenmechanically-guided operations. Tremendous increases in speed, in precision,and in the ability to handle very complex production operations have occurredin metalworking and the handling of other materials; to cite one example, inmetalworking, some machines are now designed to coordinate work on five axeswhereas only a few years ago this was impossible, and a maximum of two axescould be accommodated. During discussions of a development path and placefor the Korean machinery industries a mission engineer commented: "It istruly a technological explosion. It seems to know no bounds. (It) beganto mature in 1965 and is going so fast now that more has happened in the artof metalworking in the last fifteen years than has happened in the priorhistory or man. ... Can we say that's the end of the road ... or are wejust starting? Apparently, we are just starting."
4.03 1t is not proposed that Korea try to place itself in this fore-front of tezhnological change, in its current development plan, at leastso far as fill scale production of complicated products such as numericallycontrclled nachine tools is concerned. There is too much "catching up" todo anti the h1 lk of machinery products that are traded and used, althoughthey iiay be fairly sophisticated, nevertheless involve technologies thathave been k,own for ten years or more. There is ample room for developmentin Korea of a range of machinery products that will permit Korea to achievea reasonably competitive position both for domestic use and for export mar-kets. so that the economic targets described in the previous chapter can berealized. The present chapter tries to indicate essential elements in sucha plan.
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4.04 The discussion focuses on three topics. First, there are someguiding principles or objectives for establishing the specific character ofthe plan and for undertaking an analysis of the choices of products and mar-kets on which to concentrate. Second, there appear to be opportunities toexploit certain specific situations--to find "windows" in the market wheregaps may exist for "breaking into the market" on an individual basis or withjoint ventures in a further range of products. Third, in preliminary andtentative terms, there is a discussion of specific product lines and/or proj-ects for which circumstances appear favorable but where, for lack of time andresources, the mission cannot make final judgments. It is in these areasthat the government may find it productive to devote a significant part ofits detailed effort.
Guidelines for the Plan
4.05 There are several practical guidelines that should be discussedwith reference to the establishment and implementation of the plan. Marketsare differentiated by type and quality of product that is demanded and thischaracteristic should be exploited to the extent possible. It is desirableto design the program so as to treat each market segment separately and notto treat export markets on a uniform basis. The special place of the Changwonindustrial estate and the role that it is expected to play in the future devel-opment of the industry deserves separate consideration and can be more sharplydelineated than has been done. Also, it is becoming very obvious that acapability to do project evaluations, particularly of large multi-productprojects is greatly needed, not only to evaluate the economic efficiencyand feasibility of large projects proposed by private sponsors but also toinvestigate the kinds and characteristics of projects and product lines thathave not yet been proposed but in which Korea may have some comparative advan-tage. Finally, there are certain kinds of ancillary supply facilities thatare commonly found in developed countries to increase the efficiency of dis-tribution of components, parts, and common items to machine users but thatare not found at present in Korea.
4.06 Market Differentiation: It has been noted earlier that Korea hasa somewhat "dual" structure of the machinery industries. There are thenewer, essentially post-1975 plants, as represented by those at Changwon,that have very modern equipment and that may very well be able to produceto international standards, though even in this case fairly frequently thereare deficiencies noted in parts of the operations. The other part of theindustry is represented by the much larger number of older plants that areproducing with equipment and technologies that have since been supersededin developed countries. These plants often produce a type of product thatmay be characterized as "low quality--low price." It might be better, ormore accurate, to call these "standard" types of items, if by this we under-stand that it is a standard that has since been superseded. Nevertheless,in the markets in many developing countries these products are acceptablebecause their price and performance are economical and profitable to use interms of the factor prices and endowments existing in those countries and
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the character of market demand for the end products. A good example in thetextile machinery field is the semi-automatic loom which is produced by sev-eral firms in Korea; other examples can be found in construction machinery,agricultural equipment, and possibly even in certain grades of machine tools.These products cannot be marketed in the developed countries, with rare ex-ception, but there is a potential market for them in some of the developingcountries. One firm has been successful in selling a number of semi-automaticlooms to Indonesia, and markets in Southeast Asia and the Middle East haverecently attracted greater attention by all Korean exporters; however, theAfrican markets are almost totally unknown to Korean producers, to judge bythe responses received during the plant visits by the mission. To cite thesecond example: there may be a limited market for the lower quality lathesthat are currently being produced in Korea. A few companies appear to havea limited number of orders. They are certainly acceptable for training workand for a limited range of industrial applications in smaller workshops.They do not have the characteristics or qualities that would make them widelyacceptable in most markets, such as hardened ways, ball screws, servo mecha-nisms, and other ancillary equipment that mark a modern industrial lathebut which are still short of the capabilities of numerically-controlledmachines.
4.07 These examples are cited to illustrate the fact that markets aredifferentiated and that one part of the development plan should be a moresystematic investigation of markets where the current quality of machineryproducts is acceptable. This does not appear to be pursued now in a systema-tic fashion. Perhaps this is because the domestic market seems capable ofabsorbing most if not all of the output of such products and at higher profitlevels than can be achieved in export sales.
4.08 It should be pointed out, however, that these kinds of markets areprobably limited both in scope and in time. It is useful to make a greatereffort than is now being done, through the efforts of agencies such as KOTRA,KOSAMI, and the Korea Traders' Association to develop greater information onsuch markets, but this is no substitute, in the longer term, for upgradingthe capabilities of the existing industry and the quality of their products,as has been suggested in the previous chapter. Over time, machine users orpurchasers in other countries will be demanding higher quality products. Butthese markets are worth exploring over the next five years.
4.09 A role for Changwon: The Changwon industrial estate, near Masan,was created to be the focal point for new plants in the mechanical engineer-ing industries. In its relatively brief history it has developed rapidlyparticularly in the past two years. According to the Fourth Plan document,there will be over a hundred plants in the complex by 1981; however, unoffi-cial estimates forecast that there may be as many as 200 plants by the endof the Fourth Plan. At the end of 1977 there were 67 enterprises located inChangwon, of which 32 were in operation and others in various stages of con-struction. Sixteen of the plants had just come onstream during 1977. Theseare large plants by comparison to the average in the machinery industries.The 67 plants will have an average of over 1,000 employees when full produc-tion is reached compared to an average of about 260 employees for all machinery
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enterprises, and about 100 for those classified as medium size. The employ-
ment figures range upwards of 3,500 for some plants producing electricalmachinery. Figures on capital investment per employee also indicate that
these are relatively capital intensive enterprises.
4.10 It is expected that the plants in the Changwon complex will pro-vide much of the leadership and the growth in the machinery industries during
the Fourth Plan. According to one estimate, by 1981 the plants in Changwon
will account for half of the total production of all plants in the machinery
industries. There is no way to check such an estimate and it probably is not
even intended to be a quantitatively precise target, but rather an indication
of the prominent role that the Changwon complex is expected to play in thefuture development of these industries. There may be many advantages in
looking to the Changwon complex as the leaders in development, but there are
also several points that it would be well to keep in mind in carrying out
these plans.
4.11 First, as has been indicated in Chapter III, a large and significant
part of capacity in the machinery industries exists in the older and smallerplants that are located in other parts of Korea. They are in need of invest-
ment to rehabilitate and modernize their equipment and to improve the effi-ciency of their operations. While advancing the fortunes of the Changwon
complex, the Government should also pay attention to the needs of these other
firms and help provide the resources, incentives, and stimulation to them to
make the necessary improvements.
4.12 Second, when Changwon was first started, one of its goals was to
provide an environment and circumstances for an integrated development ofthe machinery industries, so that producers of components and parts would
exist together with producers of end items. This could lead to a conserva-
tion in the amount of investment funds required and confer the benefits both
of scale and of specialization. For example, it was once proposed that a
"core" of foundries be created in Changwon as a specialized facility to pro-
vide castings on order to a number of other firms, rather than having eachfirm have its own "itn-house" captive foundry. That idea did not catch onand the concept of encouraging integrated operations seems to have dete-riorated, if not abandoned. There appears to be a greater tendency for
each enterprise to go it alone. It is suggested that the original conceptwas a good one and that in approving the applications for new enterprises,
some weight should be given to the extent that they would draw on other
firms, either within Changwon or outside, for some of their inputs.
4.13 Third, there are already some indications that Changwon will tend
to cater more to large firms or even what might be called the "giants" inthe industry. These firms are not only large in terms of capital investedor employment offered but they are also multi-product. Yet, as is discussed
in Chapter V, there are some indications that the most efficient firms in themachinery industries are those in the range of 200 to 400 employees. Themission engineers judged that an efficient scale of plant may have no morethan 500-1,000 employees; beyond that point it is more efficient to go to
multiple units. Consequently, it is suggested that, in future operations,
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medium and smaller scale plants also be encouraged to locate in the complex.A policy of encouraging only very large multi-product enterprises may also,potentially, create a problem if it leads to the establishment of monopolis-tic positions in a number of product lines. For infant industry protectionit may be necessary and desirable to create temporary monopolistic positionsbut these need not be made permanent, and it is probably not in Korea's bestinterest to do so.
4.14 Project evaluation: Although virtually all investment will beundertaken by the private sector, it is imperative that the Government havethe capability to evaluate the real economic profitability of actual or poten-tial projects. Some of the projects will undoubtedly require Government par-ticipation, or provision for guarantees and special incentives. There is amore general problem, however; among all the many types of product lines andprojects that could be considered Korea would have a greater comparativeadvantage in some than in others. It would be logical to give greater sup-port and encouragement to investments in those product lines where Korea hasthe greatest comparative advantage and can produce efficiently as judged byworld standards. Thus as one tool for planning purposes, a capability to doproject evaluations is essential. A unit has been established in the Eco-nomic Planning Board and the activities of that unit could be directed toemphasize, for example, proposed or potential projects in the heavy andchemical industries with special reference to the machinery industries.
4.15 During the mission it was hoped that calculations could be madeof relative comparative advantages in the production of machinery products,as measured by the domestic resource cost (DRC) of the activity. The DRCmeasures the real domestic resource cost (i.e. valued at world prices forinputs) of earning or saving a unit of foreign exchange (valued at its shadowprice). If the DRC is less than the shadow price of foreign exchange (i.e.if the ratio of the former to the latter is less than 1) the productionactivity is profitable to the economy as a whole. If the ratio is greaterthan 1, the production activity is economically unprofitable, since the realresource cost exceeds the foreign exchange that is earned or saved.
4.16 The hope that such calculations could be made for a variety ofmachinery products rested on the fact that during the spring and summer of1977 both the Federation of Korean Industries (FKI) and the Korean Develop-ment Bank (KDB) conducted surveys of the machinery industries using almostidentical detailed questionnaires. A careful review of the questionnairesrevealed that if all the questions were completely and carefully completed,with a little additional work, a DRC calculation could be made by using afew short-cuts.
4.17 The results of the survey by the FKI were not available to themission, but the KDB graciously undertook to make some compilations and tomake the data available (without revealing the names of any particular com-panies associated with a set of data). Responses to the KDB questionnairehad been received from 58 firms from which a sample of 30 were chosen cover-ing the following industry groups: machine tools; agricultural machinery;industrial machinery; electrical machinery; and automotive equipment.
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4.18 Unfortunately, except for a few cases, the questionnaires had eithernot been completed fully or an investigation showed that the results reportedwere internally inconsistent. As a result, it has not been possible to makethe calculations for a representative sample of firms in these sub-groups.The few cases for which calculations could be made showed DRC ratios of about1.2 to 2.0, which indicates that these activities are not economically effi-cient for the country. The cases are too few to be an acceptable sample andfor that reason the products for which the calculations were made will notbe named.
4.19 It is suggested that the project evaluation unit in the EPB shouldhave the capability to undertake studies of this kind both on existing pro-duction activities and, perhaps more importantly, for proposed or potentialprojects so that the economic profitability of the activity to the countrycan be reasonably well established and some sense of priority can be intro-duced into the planning and encouragement of investment. Surveys such asthe ones conducted by FKI and KDB provide one means for acquiring informa-tion and it may even be possible to undertake some additional work to putthe statistical results in more usable and analytical form. The strength-ening of a project evaluation system by EPB would appear to. merit a highpriority during the Fourth Plan.
4.20 Central supply services: In developed countries a congregation ofmachinery and metalworking enterprises located in one area relies on a spe-cialized supply facility that maintains inventories of the thousands of kindsof expendable items that are used in production plus maintaining a stock ofspecialized tools, for rental, that may be used only once or twice a year byany plant. No plant can afford to maintain a full inventory of spares ofexpendable items that it will use. Yet without ready access to a source ofsupply, the plant may find that machines are down for lack of some small itemor a critical operation may be interrupted for lack of some expendable. Forexample, in the case of the Changwon complex during the course of a year theplants there will probably use well over a thousand different sizes, shapesand lengths of cutting drills and it is too expensive for any individualplant to maintain a full inventory. There are quite literally thousandsof different types of expendable items that a centralized supply facilitywould normally maintain for sale to the plants in its area. To mention justa small sample of such types of items that are important to the metalworkingindustries: twist drills, caps, reamers, abrasives, wire wheels, wrenches,valves, switches, measuring equipment, fuses, fasteners, wire, etc.
4.21 The operations of the machinery industries in the future could bematerially assisted by the establishment of at least two central supply facil-ities such as have been described. One of these should be located in theChangwon area and a second in the Seoul-Incheon area to serve the concentra-tion of firms in the immediate region. It is possible that another might beneeded in the Ulsan-Pusan area. Investment in such facilities could be under-taken by the private sector, but probably at least in the initial phases somedegree of Government participation or stimulation might be effective, sothat a facility of appropriate scope and coverage of items would be estab-lished.
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Exploitation of Specific Opportunities
4.22 One part of the strategy of expanding the machinery industries
should occur by appropriate exploitation of specific opportunities to pene-trate new markets with product lines for which there is a demand. The prob-
lem may be called one of finding "windows" in the market which is to findor identify gaps in the supply of machinery that, for one reason or another,
have come to exist but for which there is still a demand. This may occur
because certain types of products have been supplied by developed countriesbut their production has been terminated because of rising costs or becausesome other product line is more profitable. These are targets of opportunity
that can be ferreted out by someone who knows the markets and the products.
Korean entrepreneurs and exporters have shown in the past an ability to do
just that. The mission engineers have drawn on their collective experience
in Asia, the United States, Western and Eastern Europe to identify, in a
preliminary way, a selected list of products for which there may be sucha "window" in the market, both in developed and developing countries. Since
the selection has been based upon judgment and experience and not detailed
market analysis, the items listed below may, in some cases, not offer a
sufficient opportunity to justify an investment project devoted solely to
the production of that item, but it is possible that several such products
might be grouped to provide such a justification. The expansion and exploita-
tion of these market opportunities will frequently require the formation of
joint ventures with established companies in developed countries that have
been producing a similar line. The following discussion covers actions
that could be taken to promote joint ventures in the machinery industries.
4.23 Windows in the markets: The selected list of products are pri-
marily in metalworking machine tools and other related kinds of tools; other
examples probably could be found in different sub-groups of the machinery
industries. The list is illustrative of what might be turned up by a sys-
tematic effort to explore the various needs of the markets. The discussion
briefly mentions those conditions that lead one to conclude that there maybe an unfulfilled need that could be exploited.
(a) Vertical turret lathes and vertical boring mills:
These machines come in a variety of sizes typicallyranging between 36 inch diameter to 72 inch diameter.
Popular sizes have been the 42 inch and 46 inchdiameters. In the US there were a number of con-
cerns making such machines, but there now isapparently only one (i.e. Bullard Company, Bridge-
port, Connecticut). Production has dwindled orbeen discontinued because of very rapidly rising
costs (e.g. up to $22 per professional man hour)such that prices of the machines now in the US
would be on the order of $180,000. At that pricethe machine is non-competitive, but it is judgedthat if the price could be lowered to about
$100,000 for a 46 inch diameter machine, the
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market in the US might be on the order of $20 mil-lion annually. It is further estimated that Koreacould make up to 90 percent of the machine by weightand up to 80 percent by value if Korea also makesball screws and hardened ways as part of the machine.The remaining 20 percent is in electrical controlequipment and related items. With lower labor costsand fabrication and assembly costs in Korea, themarket price might be lowered to a level where itis competitive. The most effective arrangement isfor the Korean firm to produce in joint venture witha company that has the name and established reputa-tion for service for these machines. It would appearthat there are reasonable expectations that sucharrangements could readily be made.
(b) Sliding gap bed lathes: These are machines in whichthe bed can be arranged to have a gap in it so that,for example, if a machining operation is to be doneon a pipe that is 20 inches in diameter but has aflange on it of 36 inches in diameter, the flangecan be swung down in the gap so that the machiningoperation can be completed. The number of supplyingfirms has been decreasing, perhaps in part due tothe fact that numerical controls are not easilyadaptable to this kind of machine. Very roughly,the relevant price range would be on the order of$35,000 per unit at the low end of the spectrum upto perhaps $125,000 per unit. It is judged thatthere would be a market both in the US and in WesternEurope.
(c) Large radial drills: The relevant types are theheavy duty, high horsepower drills; there are anumber of producers of the lighter low horsepowertype. By comparisons to others, it is not an ex-tremely complicated machine to build. There are atpresent only two producers in the US (Carlton; Giddingsand Lewis) and one quality producer in Europe (CEPEL,Hungary).
(d) Large bed type milling machines: These would be moresophisticated and more complicated than anything thathas been made in machine tools in Korea. Apparently,two companies in Korea are planning to make bed-typemilling machines but these are smaller ones where thetable will travel two or three feet and is perhaps 12or 14 inches wide. A market exists where the tablewill travel six to ten feet and are about 28 incheswide. Competence to do original design of such amachine probably does not yet exist in Korea, but asin turret lathes, joint ventures should be practical.
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(e) Components for metalworking equipment: For alltypes of metal-working equipment there would bea ready market in developed countries for thesupply of components that go into the machine, par-ticularly those parts that are heavy, not highlyfinished, and not requiring high precision. Suchparts constitute the bulk of the weight of mostmachines and frequently account for a significantshare of the value. They are also frequently labor-intensive in production so that labor cost differen-tials are a significant part of the difference inprice. The electronics industry in Korea hasgrown significantly through its work on componentsand the same can be done in the metal-working in-dustries.
(f) Small tools: There appears to be a ready marketfor a variety of small tools for the basement orbackyard shop. These would include small simplelathes, milling machines, drilling machines, etc.The market for these items is price elastic becauseof the limited resources available to the singleentrepreneur or home owner. Taiwan has made someprogress in this market but it is estimated thatthe market is very large and growing and can readilyabsorb additional suppliers.
4.24 These are but a small sample of products drawn primarily from themetalworking machinery products that appear to have windows in the market.Further investigation would probably reveal a number of other specific kindsof products where windows in the market could be exploited.
4.25 Promotion of joint ventures: The development of the machineryindustries will almost certainly require a greater effort to promote jointventures in the production of items. There are not only opportunities toundertake the production of a complete item under license but also to doa good deal of sub-contracting of parts and components. In the machineryindustries Korea does not seem to have cast its net widely enough in ex-ploring the possibilities for joint ventures. Upon return of the mission,the mission engineers made brief, rough and informal surveys among firmsin the US and Great Britain to find out how extensive the knowledge wasof the possible capabilities of Korean firms in the machinery industries.Even though these were rough and fragmented they revealed an amazing lackof information and knowledge about what kinds of plants Korea has, whatproducts they produce, what kinds of components or parts they could makeor what kinds of joint venture arrangements to match up mutual needs mightbe possible. The largest enterprises in Korea do apparently hunt sys-tematically through the industries in the US and Western Europe, but themedium and smaller firms do not have the resources to do so. A part ofthe development plan for the machinery industries should involve a greatereffort to spread the information and to bring potential partners together.This point was mentioned earlier in Chapter III in the brief discussion of
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the need for a greater number of trade fairs specifically for the machineryindustries. A joint program, organized with Government support, but probablycarried out through such institutions as FKI and KOSAMI deserves priorityconsideration in the immediate future.
Selected Product Lines
4.26 The rationale behind Korea's strategy of emphasis on the machineryindustries has support from international trade statistics. The leadingexport of almost all advanced countries is machinery, and motor vehiclesgenerally rank second. Conversely, the leading import of most developingcountries is also machinery. For a dozen or so developing countries withmanufacturing potentials in terms of capacities and skills to undertakeproduction of relatively sophisticated engineering goods, the machinerysector can be seen as providing substantial opportunities for import sub-stitution as well as export.
4.27 In the following sections, plant equipment, machine tool, electricalequipment, and motor vehicle industries will be examined as to characteristicsof supply and demand and their development prospects, and suggestions made asto actions that the government and the industry might consider taking. Plantequipment and machine tools are major elements of "general machinery" category,for which export has been targeted at $5.5 billion in 1991. Also, largeinvestments in new capacities, all in Changwon, have been made in these twoindustries. Export of electrical equipment is projected to grow faster thanthat of electronics to reach $5 billion in 1991. Whereas a significant por-tion of the projected export of electrical equipment will likely originate inconsumer (household) products, the examination of the industry in the followingpages will be limited to industrial and power generation and transmissionproducts. The motor vehicle industry has long presented a dilemma as to anappropriate development strategy, despite the fact that it is probably theleading engineering industry in the country. In view of an expectation thatit will also become a major exporting industry (amounting to $5.2 billion in1991) the problems and prospects of this industry will be examined in somewhatgreater detail.
4.28 Machine Tool Industry: The old industry is small and fragmented.Total output in 1976 was about $20 million, and much of it comprised of lowgrade lathes suitable only for use in training schools and in small repairand maintenance shops. Small quantities of drilling and milling machineswere also produced. Slightly over 4000 machines were made in 1976, giving aunit machine value of about $5000.
(million dollars)1972 1973 1974 1975 1976
Production 2.3 5.5 9.0 10.0 20.0
Import 13.4 18.0 34.2 59.5 72.0
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4.29 Ten new plants in Changwon are listed as machine tool makers.They represent a total investment of about $100 million, and their totalcapacity would considerably exceed the apparent home demand for machinetools, but for the fact that few of these plants produce machine tools (theyare largely engaged in special production for the government). Thus, theactual total capacity of the industry is difficult to assess.
4.30 Domestic demand by 1981 is projected at $250 to $300 million. Thebulk of the demand will be for general purpose machines of higher speed andprecision than made in the country today and for special purpose machinesof less sophisticated designs than made in the industrialized countries. Aproduction target in excess of $100 million has been set by the governmentfor the end of the Fourth Plan in 1981, and its achievement should be feasibleprovided the capacities in Changwon are applied to machine tool production.
4.31 Export prospects will largely depend upon the product strategythat the country adopts. If import substitution prevails, obviously notmuch export will be accomplished. If, however, the industry specializesproduction along selected exportable product lines, a substantial exportmight be possible. There are openings in world markets that Korean producerscan exploit. The production of simple, low-cost machines is being progres-sively phased out by traditional makers in advanced countries and shiftingto makers in lower-wage countries such as Spain, Poland and Czechoslovakia,which each exported close to or well over $100 million worth of machinetools in 1975. Taiwan in 1975 exported 75 percent of its small output of$16 million. India and Brazil by contrast have large machine tool indus-tries but export very little.
4.32 A rather lengthy list of machine tools have been designated by thegovernment for import substitution, from lathes to numerically controlledmachines. Presumably, the new plants in Changwon will produce them. Itis cautioned however that until the necessary experience and knowhow inbuilding these machines are accumulated, it would be a mistake to saddlethe machine tool users, such as the auto industry, with unproven machinesof local origin under the banner of import substitution. It would be an evengreater mistake to try to export them. The machine tool industry in Korea isstill at a relatively infant stage. It would seem to make better sense for theindustry to specialize in a few product lines and to simultaneously developknowhow and a supplier base. There are markets for these machines in Koreaand other developing countries. Also, as design is improved and more advancedtechnical features are incorporated, markets can be expanded to advancedcountries for use in jobbing shops, maintenance facilities of large plants andhome-workshops. Diversification into more sophisticated product lines canpossibly be delayed till the eighties. The suggested strategy would enable anorderly growth of the industry as well as a growth of exports.
4.33 Other suggested actions might include: (a) establish domestic sup-ply of precision machine components common to machine tools, textile machineryand other similar product lines; (b) promote RD&E projects on design anddevelopment of precision machine components; (c) provide assistance to the oldsegment of the industry to modernize and expand capacities to produce simplemachines of good quality for home and export markets. These actions aresummarized in Table 4.1.
Table 4.1
Machine Tool Industry, 1977
Capacity
Existing New Main Problem Areas Market Prospects Suggested Actions
- one "large" shop - 10 new plants in - Existing firms - Domestic demand - Rationalize new capacitiesand 45 small- Changwon. Total have antiquated projected at $250 to achieve specializationmedium shops investment about facilities. Most to $300 million by of production along comple-producing low- $100 million. new plants estab- 1981, mostly mentary product lines.grade machines for lished by firms special purposehome market. - Impact of new with no prior machines of higher - Expand production and
plants on industry experience in precision and tech- upgrade quality of general- Total output $20 uncertain (most building machine nology than made in purpose machine tools formillion (1976). are engaged in tools. country today. home market and export.Negligible export. special production
unrelated to - No apparent pre- - Export possibility - Establish domestic supply 4- Some licencing, machine tools). planning to create promising for of precision components
but no venture complementary general purpose common to machine tools,ties with foreign "cluster" of new machines of good textile machinery and otherfirms. capacities in quality. Also, similar product lines.
Changwon opportunistic ex-ports could be - Delay import substitution
- Very weak supplier explored (windows of production-type machineindustry. Machines in world market). tools until the requisitemade with high know-how and experiencelocal content, with are accumulated.components andattachments made in - Give RD&E priority toplant. design and development of
machine components.
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4.34 Plant Equipment Industry: Plant equipment worldwide has been
changing to increasingly larger units over the past two decades. In thermal
power generation plants to be built in Korea in future will all be of 300
to 500 megawatts. Plants of 1000 megawatts and over are common in the indus-
trialized countries. The aim of course is to achieve a greater economy of
scale; delivered energy cost per kilowatt-hour decreases as equipment size
increases. Similar scale economies apply in steelmaking, chemical, cement,
etc. industries. Few developing countries are able to participate in the
supply of equipment at the very large end. They not only lack the produc-
tion capacity, but also the requisite skills in designing, engineering and
manufacturing the giant units.
4.35 The existing plant equipment industry in Korea comprises only four
small fabricators of chemical equipment plus about five heavy machinery plants
that make some plant equipment on a jobbing basis. Production is largely
limited to simple, small equipment for the replacement market. There is very
limited export of products. Major original plant installations in the country
were all imported, often on a turnkey basis.
4.36 Five new projects are under implementation or planned in Changwon,
in a major decision by the government to break into the heavy equipment mar-
ket. The rationale seems sound. Home demand for plant equipment is projected
to accelerate as the tempo of industrialization quickens. A substantial pro-
portion of world trade in plant equipment consists of less complex fabricated
items that Korea, through its shipbuilding experience, has the skills to make.
Most significantly, Korean construction firms have been actively building
roads, ports and plants abroad; as the country develops capacity and capabil-
ity to manufacture original plant equipment, the construction activities can
provide the vehicle for some equipment export. In fact, plant and plant
equipment exports would have to be viewed as an essential unit if the coun-
try is to achieve its machinery export target. The only other machinery
product group offering the possibility of exports of the order of magnitude of
$100 million, is motor vehicles and parts (excluding ships and electronics).
4.37 The projects in Changwon consist of two general makers of plant
equipment and three chemical plant makers. Two are joint ventures - Samsung
Heavy Industry with IHI of Japan and Daehan Chemical Machinery with Kobe
Steel also of Japan. By far the largest unit is Hyundai International, being
built at a cost of about $400 million; the project is designed to have fully
integrated facilities to produce power generation, steelmaking and petro-
chemical plant equipment. The next largest unit will likely be Samsung at
$34 million, but this amount reflects only the first stage cost; at a subse-
quent stage, the project cost could rise above $100 million. The Daewoo
Heavy Industry that purchased the former Hankook Machinery Works in Incheon
may also enter this field, but has not yet revealed its plans.
4.38 Domestic demand for plant equipment, based on projected invest-
ments in electric power, steel, petrochemicals, etc. is expected to exceed
$800 million per year beyond 1980, with some bunching of investments occur-
ring if a second integrated steel plant is built. The above is the gross
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demand. The available market for local manufacture, assuming an import sub-stitution capability of 60 percent, may be estimated to fall in the neigh-borhood of $500 million. This would not appear large enough to sustain allthe new capacities when fully operational. Low domestic content on higher-technology it2ms could further reduce the work load in the plants. With notechnology of its own, no design capability, and no previous experience inbuilding heavy original equipment, the industry can be expected to moveslowly, beginning with assembly-only operations and simple manufacturingtasks, and should require anywhere from 5 to 10 years to attain 'maturity.'
4.39 Exports should govern the long range strategy for this industry.This means giving priority attention to accumulating experience and reputa-tion on potentially exportable product lines, and progressing in stages onhighly technical and complex items that will be difficult to gain quick mar-ket acceptance at home or abroad. The Hyundai group with its track recordin shipbuilding and overseas construction appears to have the capability tolead the export effort. In addition, other new units in Changwon should besupported to give the country a multi export capability by the mid-eightieswhen total export of plant equipment would presumably have to pass the onebillion dollar mark. Other suggested actions for this sector include: (a)establish specialized suppliers of major lines of plant equipment components;(b) direct existing and some new capacities to production of smaller standar-dized plant equipment demand for which will continue to grow in many devel-oping countries with limited resources and small markets; (c) encouragejoint ventures or marketing with reputable foreign firms in end-products aswell as component lines to gain access to up-to-date knowhow (not alwayspossible under licensing arrangements) and product acceptance (see Table4.2).
4.40 Electrical Equipment Industry: Total output of this industry wasabout $50 million in 1975, over 75 percent in transformers and motors. Over80 percent of switchgear requirements of the country (circuit breakers,switches, control panels, etc.) and 60 percent of gauges and meters wereimported. Electrical-grade steels and most types of insulating materialsare not produced in the country. Demand by 1981 is projected at over $300million, with about a third of it in switchgear items. This industry has acomparatively long history in Korea, and could possibly achieve an above 70percent level of import substitution.
4.41 The industry consists of ten major firms, all small by internationalstandard, plus some fifty small makers. Existing plants lack modern toolingand generally have poor layout. Two new plants are being built in Changwonat a total investment of about $35 million, and a high-voltage testing facil-ity will also be built in what appears to be a preliminary move by the in-dustry to enter heavy equipment manufacture. Economies of scale in electricpower generation and transmission have tremendously increased unit capacitiesin the advanced countries as well as in many developing countries. In Korea,new thermal plants will have ratings of 300 to 500 megawatts, and appropriatelysized transformers and switching equipment will be in demand. Their manufac-ture requires design and engineering capabilities as well as large manufac-turing capacities that the industry does not yet have. Unless the local
Table 4.2
Plant Equipment Industry, 1977
Capacity
Existing New Main Problem Areas Market Prospects Suggested Actions
4 small fabricators - 5 new projects in - No prior experience - Domestic demand for - Direct capacity buildingof chemical equip- Changwon: in country in plant equipment towards export competitive-ment and 5 heavy Hyundai Interna- building very heavy projected to exceed ness rather than importmachinery shops tional $380 million; or technically $800 million per substitution, giving prioritythat make some Samsung Heavy Ind. sophisticated plant year beyond 1980. attention to developingp].ant equipment on $34 million (lst equipment. potentially exportablejobbing basis. stage); - Largest home market product mix.
Daehan Chemical - No domestic tech- is power plants.Output limited to Machinery nology or design This market is also - Build capacity in stages onlight plant equip- $26 million; plus capability. most demanding of complex items; these willment for replace- 2 smaller projects technical and manu- be difficult to export.ment market. No in chemical equip- - Problem of market facturing know-how. Establish specializedheavy plant equip- ment. acceptance of suppliers of plant equip-ment produced and unfamiliar product - Plant export essen- nent components.no export. lines tial to achieve
country's target - Encourage joint venture/for machinery marketing with established Oexport. Equipment foreign firms to gain know-export could be hwacs n rdcpackaged in with how access and productoverseas plant con- acceptance.struction activities.- Direct existing and some
new capacities to productionof smaller, standardizedplant equipment demand forwhich will continue to growin many developing countrieswith limited resources andsmall markets.
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industry can adjust to changes in technology and size of equipment, imports
will rise.
4.42 The existing industry can be described as being on the fringe of
heavy equipment manufacture. It faces the strategic choice of either scaling
up facilities to make very large equipment or expanding capacity on conven-
tional items that offer better export prospects. While the propositions
are not mutually exclusive, either option will require a different pattern
of investment and supplier development. The field of very heavy equipment
manufacture is dominated by a small number of multinational firms, and Korea's
entry into this field will require not only a much higher level of capital
investment than is evident to date, but also venture ties with one or more
of the multinationals. There is no independent technology and no RD&E capacity
in the country and market competition is intense worldwide. Also, components
for very large equipment must meet much higher standards of quality, precision
and insulating properties. Expansion of production of such conventional items
as motors, distribution transformers and small to intermediate size power
equipment could lead to export, if capacities are modernized and measures
taken to improve productivity. There will continue to be a market for these
units in many developing countries.
4.43 This industry, contrasted with the other industries examined, has
shown a rather cautious approach to expansion. Possibly, the first require-
ment for it is determination of focus and direction of development. Which-
ever long-range development strategy is decided upon, the following actions
should be necessary: (a) promote export competitiveness of existing industry
through modernization of facilities and specialization of production; (b)
expand switchgear production, especially product lines that are comparatively
labor intensive; (c) establish a national system of certification of elec-
trical products; (d) develop projects in supplier sector, with early atten-
tion to feasibility of domestic production of electrical-grade steels, insu-
lating materials, lightening arresters and meters and gauges (see Table 4.3).
4.44 Motor Vehicle Industry: Through the early seventies, the motor
vehicle industry developed along the classical pattern of developing coun-
tries, starting with assembly of foreign-model cars and progressing into
higher domestic content, with accompanying rising cost of manufacture.
Toyota, Ford, General Motors and Fiat competed in the small market. In
1974, the government regulated a drastic shift to the manufacture of domes-
tic-model cars. The new strategy, patterned somewhat after Japan, was aimed
at establishing a wholly Korea-owned industry, independent of the multina-
tional corporations.
4.45 The auto industry was examined in 1975 at the time of the changeover
in strategy. The reason for re-examining it this time is because of the
expectation in Korea that the auto sector will account for a substantial
portion of projected exports of engineering goods. According to government
plans, the transport equipment sector is projected to export US$7.5 billion by
1991 and motor vehicles and components are expected to provide the dominant
share ($5.2 billion).
Table 4.3
Electrical Equipment Industry, 1977
Capacity
Existing New Major Problem Areas Market Prospects Suggested Actions
- Industry at fringe - 2 new plants in - Existing facilities - Domestic demand for - Promote export competitive-of heavy equipment Changwon. Total lack modern tooling all types of equip- ness through modernizationmanufacture, 10 investment about and- have poor layout. ment projected at of existing plants and"large" firms plus $3.5 million. over $300 million specialization of produc-some 50 small - Production scale far by 1981. tion.firms. - Electrical equip- below manufacturers
ment Testing Lab- in advanced - Export prospects - Expand switchgear produc-- Total output $50 oratory to be countries. best on small to tion (circuit breakers,million (1975), established in intermediate size switches, control panels).mostly transform- Changwon. - Products substandard equipment forers and motors. in design and developing country - Establish national systemExport below 10% reliability. markets. of certification ofof output (wires products.and cables not - Supplier sectorincluded). weak. Electrical- - Development strategy needs x
grade steels and better focus and direction- Large firms have most insulating as to commitment to heavylicencing ties materials not equipment for home marketwith foreign produced. or concentration onfirms, mainly standard, intermediate-Japan. No joint- size equipment for export.ventures. No RD&Ecapacity.
Table 4.4
Motor Vehicle Industry, 1977
Capacity
Existing New Main Problem Areas Market Prospects Suggested !.ctions
4 auto firms plus - 5 or 6 auto parts - Export targeted to - Substantial motor - Separate auto partsabout 150 parts plants in Changwon. grow rapidly, but vehicle and parts industry from domesticmakers; industry Total investment costs not compet- export essential to car manufacturingproduces Korean- $45-50 million. itive. country's export program; promote asmodel cars under targets in machin- "strategic exportdomestic car man- - Industry financi- ery sector. industry" and encourageufacturing ally constrained venture/marketing tie-program; no ties on capacity expan- - Domestic demand ups with parts makers inwith multination- sion needed to constrained by high major markets.als. achieve improved cost of car owner-
economies of scale. ship (taxes). Pro- - Liberalize technologyTotal output jected at about licencing procedures.(1976): 48,300 - Supplier industry 150,000 vehicles byvehicles includ- fragmented and 1981. - Establish RD&E programsing 25,000 parts not up to designed to assist autopassenger cars. OEM standard. - Export prospects firms meet export perform-
dependent on sup- ance standards on safetyExport (1976) - Industry has no port industry and emission;$14 million by RD&E capacity and receives. establish a test trackparts makers and no privileged facility.$8 million by access to know-howauto firms. possessed by multi- - Relax domestic content
national makers. requirement to a level thatproperly reflects localsupplier capacity to pro-duce original equipmentparts at acceptable costand quality.
- Provide partial tax reliefto build a viable homemarket base for export tomajor markets; avoidpremature export ofvehicles to these markets.
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4.46 Are these expectations reasonable in the context of world tradeand the present state of the motor vehicle industry in Korea? In industry'sfavor, it is possibly the leading engineering industry in the country. Themajor makers have fully integrated production facilities and the supplierindustries can produce almost all the parts needed for building vehicles.Against it are the cost, market, and technological factors. The domesticmarket is still essentially a small commercial-luxury market and the pri-mary components, intermediate subassemblies and end products made in thecountry are not cost competitive in international terms. Since the industrydoes not come under the classification of a strategic industry, it cannotobtain preferential financing. Since it has no ties with the multinationals,it has no privileged access to their technologies. While most knowhow canbe acquired through licensing and other means, some of the more criticalelements such as those dealing with emission control are generally not avail-able. The RD&E capacity of the industry is very limited. The industry doesnot even have a test track facility for car and parts makers to conduct mini-mally-essential controlled field tests on performance, reliability and safetyof their products. Nevertheless, the industry has grown, has exported somevehicle parts, and, within the past two years, has begun trial export of com-plete cars and pickups to scattered markets in the Middle-East and LatinAmerica.
4.47 The U.S. market will provide the ultimate test. From 9 to 11 mil-lion new cars are sold annually in the United States, including foreign carsales of about 2 million. In the small car market, foreign cars are dominantwith over 50 percent of the market. Detroit believes sale of small cars willincrease from 30 percent of all cars sold today to as high as 60 percent bythe early eighties, and can be expected to move aggressively against furthersales gains by imports. Still, the projected rapid growth of this marketsegment could provide an opportunity for Korea (100,000 units translate toless than 2 percent of the projected small car market in the eighties). Itshould be noted, however, that while the small car market is highly pricesensitive, the popularity of German and Japanese cars may be attributedas much to technology and performance as to price.
4.48 Profile of Auto Industry: The industry will be briefly described,mainly to update earlier information. There are four makers of motor vehiclesplus about 150 firms that supply parts. Hyundai and Kia have emerged as the
"big" two, the former leading in car sales and the latter in truck sales.The third maker, Asia, has discontinued car production and will likely concen-trate in future on commercial and special-purpose vehicles. The fourth,Saehan, (formerly General Motors/Korea) is expected to resume car production,but has not yet made its plans known.
Capacity Production (Number)1977 1973 1974 1975 1976 1977 (9 mos.)
All Vehicles 220,000 26,100 30,300 36,400 48,300 55,300
Cars only 150,000 12,800 9,100 17,600 25,600 28,500
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4.49 The capacity of the Hyundai plant in Ulsan, the largest in Korea,is shown below:
Assembly plant - cars 56,000 units/year (sedan, wagon)
truck, bus 24,000 units/year (pickups,1, 3, and 7 ton trucks, busesof all types)
Stamping plant - 80,000 bodies/year
Engine plant - gasoline engines 56,000 units/year
diesel engines 24,000 units/year
Foundry - 20,000 ton/year
Forge shop - 4,800 ton/year
4.50 The market decline that began in 1969 reversed in 1973/1974, andwith the economy expanding at the rate of 9 percent plus annually, a con-tinuing growth in the domestic market for private and commercial vehiclescan be foreseen. Passenger car production in the first nine months of 1977totalled 28,500 units; the total for the year could exceed 35,000 units.By 1981, the domestic demand for passenger cars (new and replacement) isprojected by industry sources at 60,000 to 80,000 units per year. If smalltrucks and pickups are added, the combined demand could exceed 150,000 units,or be nearing the point at which the auto makers feel they can be pricecompetitive. The unknown in the picture is exports, which will be discussedlater.
Automotive Parts
4.51 Market protection and domestic content regulations led to proli-feration of parts makers. Scale effects become less important in partsmanufacture and heavy investments in plant installations are not required.The number of establishments is estimated at over 150, but since many pro-duce non-auto items as well, there is an element of arbitrariness in theclassification:
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No. of Establishments
Mechanical components 38
Stampings 44
Plastic, rubber & othernon-metal parts 30
Hardware 10
Electrical parts 18
Others 14
Total 154
4.52 The existing industry, heavily concentrated in the Seoul and Pusan
areas, is undercapitalized and technically unsophisticated. Only a dozen
or so are capitalized at over US$1 million, and less than one in five have
technical licensing ties with foreign firms. The Changwon machinery complex
includes to date five or six auto parts plants making radiator, carburetor,
diesel fuel injector, coil spring, forgings and driveline components. While
small in number, they are relatively well-equipped plants and should add sub-
stantially to the parts industry capacity. The Changwon plants range in
investments from $2 million for the smallest plant to $30 million for the
largest plant.
4.53 Most parts are produced in Korea, but the products, particularly
the functional items as opposed to the structural items, are marginal in
quality by international standards. Prices are also high, compared to the
landed prices of equivalent imports.
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Cost Index Quality(Landed Price 100) Rating
Water pump 100 CSuspension spring 110 BShock absorber 110 CAxle subassembly 120 CTransmission subassembly 130 CFuel pump 130 DWiper motor 130 DIgnition coil 150 DPiston & piston ring 150 CWheel disc 160 BRadiator 180 CBrake subassembly 220 CAlternator 220 DSpark plug 310 DStarter motor 320 DSteering subassembly 320 C
Source: Korea Automobile Manufacturers' Association.
Quality Rating: A Equal to best international productsB Satisfactory quality and performanceC Marginally satisfactoryD Unsatisfactory
4.54 Electrical under-the-hood items are practically all rated unsatis-factory, necessitating frequent replacement. Most rubber and plastic parts,while not shown on the list, are also unsatisfactory; on a 500 mile trip(round trip from Seoul to Masan), the mission driver carried a reserve supplyof half a dozen V-belts for replacement en route. Transmission subassembliesdelivered to car makers have rejection rates as high as 20 percent (noise,sticking shift, etc.), necessitating inspection of each unit before assembly.It might be noted that parts manufacture largely grew around the less discri-minating repair and replacement demand. When foreign model cars were pro-duced in Korea, original equipment parts were either imported or assembledlocally under multinational licensing. The shift to the production of domes-tic model cars appears to have caught the independent parts makers unpreparedto meet the demand,for original equipment parts for the new domestic models.Moreover, lack of standardization and interchangeability of components havemeant that the parts suppliers must satisfy the varied specifications of alarge number of discontinued as well as new car models. The car makers them-selves appear to have been preoccupied with getting their new integratedmanufacturing facilities operational and not to have given major attentionto the problems of their suppliers.
4.55 Exports: In recent years, domestic motor vehicle demand was ableto absorb the full output of the auto makers. There was therefore little
- 88 -
incentive to manufacture for export even if cost had been competitive, which
it is not. Ex-factory cost of small cars made in Korea is, by conservative
estimation, 50 percent or more above the international level of about $2000.
The situation appears to be changing. On the one hand, government targetsfor the machinery sector will require a substantial export contribution fromthe motor vehicle industry. On the other hand, the industry itself perceives
export as possibly the only way to break out of the cycle of high cost and
small local demand.
4.56 In the first eight months of 1977, export of passenger cars and
pickups totalled $9.4 million. About half of this total came from exportof the Pony sedan, an attractively styled car that handled well on a testdrive. It reportedly has excellent fuel economy, but other performancefeatures such as frequency of repair are unknown. Total export of cars and
pickups in 1977 could reach $14 or $15 million, which converts to about 6500vehicles at average FOB of $2200 per vehicle. By 1981, industry sources pro-
ject export of $200 to $300 million worth of vehicles, which would roughlyequal the projected domestic sales.
4.57 Export of auto parts is shown in the following tabulation. Totalexport increased from $1 million in 1971 to $14 million in 1976, but onlyfour items were exported in any significant quantity. Among these four,
only the export of suspension springs and auto bulbs increased steadily yearto year.
Export of Auto Parts(in thousand dollars)
1970 1973 1975 1976
Piston Ring 130 1,030 2,285 1,153Spring 73 676 1,455 2,478Tire Chain - 712 1,748 1,455Auto Bulb - 557 2,018 2,276Piston & Pin 32 525 1 745Cylinder Liner 36 169 300 325Metal Bearing 23 207 262 408Axle Shaft 40 106 130 216Safety Glass - 97 51 69
Wheel Disc 8 310 225Radiator - 27 26 81Others 145 924 1,598 3,570
Total 479 5,038 10,184 13,789
Source: The Korea Automobile Manufacturers Association.
4.58 In 1976, two firms out of a total of 150-plus auto parts makers
accounted for 50 percent of all auto parts export:
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Daewon Steel Products - Suspension spring $4.61 million& tire chain
Namyung Enterprise - Auto bulb $2.28 million
Daewon is reported to be planning a new facility in Changwon machinery complexto produce springs. The exact status of this project is not known, but on thebasis of past export performance, the project certainly appears deserving ofsupport.
4.59 Industry Prospects - Suggested Actions: The long-range export tar-get for all transport equipment is $7.5 billion in 1991. If ship exports of$2.3 billion are subtracted from this total, the balance is $5.2 billion,the bulk of which must come from the auto sector. This would seem a lot toexpect from an industry that only began integrated manufacture of motor vehi-cles in 1975, has no RD&E capability or venture ties with multinationals,and is constrained in growth by what amounts to disincentives on domesticcar ownership.
4.60 Industry sources project export of $200 to $300 million worth ofvehicles by 1981. It should be cautioned, however, that too hasty an attemptto penetrate any of the major auto markets could prove detrimental to longrange opportunities. When Japan passed the 100,000 mark in passenger carexports in 1965 (50 percent of sales were to less developed countries and50 percent to advanced countries), the country already ranked fourth in theworld in motor vehicle production with almost 2 million vehicles producedthat year. The implication is that any substantial export should requirea strong market base involving substantial resources in finance, technologyand marketing. What happens to the motor vehicle industry in Korea in thenext several years will crucially determine whether it can build towardsa million-vehicle export by the end of the next decade.
4.61 The dimension of this challenge may be seen from the following tableon the export performance of major car producing countries in 1974:
Production Export('000 units) ('000 units) Export Value ($ million)
VehiclesAll Passenger All Passenger & Parts
Vehicles Cars Vehicles Cars fob
U.S. 10058 7331 816 601 7927Japan 6556 3932 2618 1727 5227France 3463 3046 1949 1765 4179W. Germany 3105 2840 1881 1707 9987U.K. 1937 1534 725 565 3056Italy 1773 1631 734 686 2406
Includes motor vehicles, railroad equipment and aircraft, excludes ships.
Source: Japan Annual, 1977, published by Kokuseisha, Tokyo, Japan.
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Motor vehicle and parts export in 1974 comprised roughly from 70 percent to
90 percent of total transport equipment export excluding ships. The per-
centage for the U.S. was lower because there was substantial aircraft ex-
port. Also, with the exception of the U.S., that produced mainly for the
home market, motor vehicle exports in the other countries comprised from
40 percent to 60 percent of total vehicular production.
4.62 In a previous examination of the motor vehicle industry of Korea
(1975), export was not considered. Rather, a number of actions were sug-
gested because a healthy auto industry was thought important to the devel-
opment of machinery industries as a whole. The suggested actions included:
- rationalization of the industry structure;
- relaxation of the domestic content regulations.
The export factor adds a sense of urgency to these actions. AlsoI technology
and supplier industry development should merit special attention.
4.63 Development programs should be initiated on design and quality
improvement of components that rate marginally satisfactory or unsatisfac-
tory by international standards, and on performance features critical to
export such as impact safety and emission control. With careful planning
and mobilization of technical resources in the country plus the advisory
assistance of foreign experts, the industry might in five years or so accu-
mulate the necessary spectrum of knowhow to back up its export strategy.
The program should include the following elements-' (a) liberalize and
expedite technology licensing procedures; (b) establish a test track facil-
ity; (c) initiate locally-relevant RD&E programs within the auto firms;
(d) develop correlated R&D programs in the research institutes.
4.64 Prospects for export of auto parts are difficult to assess under
prevailing conditions of cost and quality of products in Korea. It will
ultimately depend upon how quickly the auto parts industry can be reorga-
nized and can become competitive in international terms. World market for
auto parts is also difficult to determine since distinction between parts
and finished vehicles is often not made in world trade statistics. Vehi-
cles are often shipped in the form of knocked-down parts, and auto compo-
nents trade is customarily recorded under the heading of vehicles and not
under separate component headings. While the total volume of auto parts
trade cannot be measured accurately, its approximate trend suggests that
the manufacture and supply of parts and accessories have developed beyond
after-sale servicing aspects into separate production and marketing activ-
ities of their own, often unaffiliated with the firms manufacturing the end
products. The manufacturers in industrialized countries have also become
increasingly receptive to the import of original equipment parts from coun-
tries at an intermediate stage of development. While a substantial share
of such imports are from their own subsidiaries in these countries, there
should be market openings that Korean producers can exploit.
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4.65 It appears that the development of the supplier industries in Koreahas been constrained by their being captive to the domestic car manufacturingprogram. Actually, the total market for auto parts can be quite varied, fromdomestic markets in such related end-product lines as agricultural and con-struction machines to overseas markets in retail outlets (repair and replace-ment market) and in tie-ups with foreign auto parts makers (original equipmentmarket). Korea could probably penetrate the overseas auto parts markets moreeasily than the major car markets.
4.66 It is suggested that supplier industries be promoted as "strategic"export industries separate from the domestic car manufacturing program. Inconjunction with this action, financing could be made available to auto partsmakers for capacity expansion and/or modernization, and incentives could beprovided those meeting conditions of price, quality and export. Collabora-tive arrangements with foreign firms in the major markets (joint venture,production under subcontract, joint marketing, etc.) should be encouragedas possibly the most effective means of acquiring knowhow as well as gainingmarket access. Many components will require to be standardized, and withexports in mind, such standardization could be accomplished on United States,European or Japanese standards. Intensive development of the supplier indus-tries is possibly the only way that the country will be able to progresstowards the long range export targets. A strong component industry has apervasive industrialization effect in that it will not only serve to strengthenthe auto industry but also most other machinery industries.
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V. COMPARATIVE ADVANTAGES IN FOCUSING THE PROGRAM
Introduction
5.01 The actual priorities to be given to different industries or prod-uct lines in the machinery sector depend not only on the technical and marketopportunities but also on the comparative advantages Korea may enjoy in laborusage or in other resources. Within the industries there are relative dif-ferences in the efficiency of firms by size. An evaluation of productivitiesand efficiencies should help focus the development program on those areas ofrelative comparative advantage.
Labor Productivity and Relative Efficiencies
5.02 The major advantage which Korea enjoys in the production of machineryis the low wages of its skilled labor relative to that in more advanced coun-
tries. In 1975 wages accounted for 15 percent of total production costs inthe Korean machinery sector. Even in the U.S. industry, characterized bymuch higher mechanization, wages account for 29 percent of gross output. Thewage share of value added in the two countries was 40 percent for Korea and51 percent for the U.S. This cost advantage could however be eroded if laborproductivity were sufficiently low. However, labor productivity is not the
sole determinant of the competitiveness of the sector. The efficiency withwhich fixed assets (primarily buildings and equipment), and material inputsare utilized will be of importance.
5.03 Two sources of data exist on value added and employment, namely,the various reports on the Mining and Manufacturing Survey issued by theEconomic Planning Board and the Korea Development Bank's Financial Analysis,a yearly publication. Both sources indicate a lower average labor productin machinery production than in all manufacturing. Data from the FinancialAnalysis suggest that part of this may be attributable to the lower quantityof productive equipment and buildings per worker in the machinery sector,though this is tentative given the difficulties involved in using the bookvalue of capital stock as an accurate gauge of the level of productive capitalavailable to a sector.
5.04 The data in Table 5.1 indicate that between 1971 and 1975 the abso-lute differential in value added per worker between all manufacturing andmachinery decreased in constant prices though it grew in current prices.This, of course, does not imply anything about relative efficiency as we do
not have time series data of several factors affecting measured labor produc-tivity such as constant price capital stock and changes over time in the levelof effective protection. There are also considerable differences in laborproductivity among the subsectors of machinery in both years.
- 93 -
Table 5.1
Value Added per Worker - 1971, 1975
(Won)
All Manufacturing Machinery -
Current Price Constant Price Current Price Constant Price
1975 = 100 1975 = 100
1971 814,123 1,536,092 456,494 745,789
1975 1,991,452 1,991,452 1,298,211 1,298,211
Note 1. Sector 382, excludes electrical machinery and vehicles.
Sources: Report on Mining and Manufacturing Survey, 1971, 1975 (Seoul,Economic Planning Board), for value added and employment.
Prices obtained from the Economic Statistics Yearbook, 1977(Seoul, Bank of Korea, 1977). The manufacturing pricedeflator was obtained as the implicit price deflator inthe national accounts statistics (pp. 267-69), and themachinery price deflator from the wholesale price index.
- 94 -
5.05 The rate of growth of real value added (nominal value added minusthe wholesale price index for machinery) was 44.6 percent per annum whilethat of the quantity index was 23 percent. The latter is inadequate as manynew products added by the sector were not adequately reflected in the index.For the entire manufacturing sector the two are in close agreement. The fol-lowing analysis is based on real value added calculations though some modifi-cations would be needed if the quantity index is not as seriously understatedas we believe it to be. 1/
1/ Our analysis relies on a simple accounting relation. Let .p equal the
unit price of a commodity, w the wage per worker, L the amount of laborused in producing the quantity, Q, r the rate of return on capital, Kthe quantity of capital used to produce Q, f the price of a unit ofintermediate input, M the quantity of intermediate inputs used toproduce Q. Given these definitions:
(1) p = wL + rK + fM
Q
(la) p = wz + rk + fm
where z, k and m are the unit labor, capital, and intermediaterequirements. Differentiating (la) yields
(2) dp = zdw + wdz + rdk + kdr + fdm + mdf
= [dw + dz] wz + dr + dk] rk + df+ dm] fm
and dividing by p,
(3) dp = Ydw + dw +Tr + dk + rdf + d mp Lwz LrkJ Lf m J
where w, k, and m are the shares in total cost of labor, capitaland intermediate inputs.
- 95 -
Table 5.2
Compound Rates of Growth of Output, Employment,Wholesale Prices and Wages
1970-75
Average AverageValue Added in Index of Labor Wholesale DailyCurrent Prices Production Employment Product Prices Wage
(1-5-3)
Manufacturing 42.3 24.9 13.8 11.5 17.0 24.6
Machinery 59.5 23.0 22.8 21.8 14.9 28.1
Sources: Index of industrial production, Economic Statistics Yearbook, 1977.
Prices - see preceding Table. Value added, employment andwages, Report on Mining and Manufacturing Survey, 1971, 1975.
5.06 All manufacturing and machinery exhibited growth rates of reallabor productivity of 11.5 and 21.8 respectively. On the other hand, pricesincreased more slowly in machinery as compared to wages (14.9 vs. 28.1) thanin all manufacturing (17.0 vs. 24.6). The ability to absorb wage growthwithout fully passing it on in the form of higher prices partly reflectsthe growth of labor productivity. However, the differential in the twosectors in their ability to absorb wages through growing labor productivityis almost identical. Thus, the explanation of the machinery sector's betterprice performance than that of all manufacturing has to be attributable toone or more of the following: (1) purchased intermediate inputs in machinerybeing used with increasing efficiency or their prices growing at a slowerrate (as a result of differences in international price patterns) than forthe entire manufacturing sector; (2) the productivity of capital increasingmore in machinery or the rate of return on its capital declining relative tothe rest of manufacturing. We consider each of these in turn.
5.07 The major externally purchased inputs of the machinery sector are
iron and steel and non-ferrous metals, whose price indices increased at ratesof 19 and 16 percent respectively compared to 17 percent for all manufactur-ing. Thus differential price movements of purchased inputs cannot haveplayed a major role in explaining the machinery sector's price performance.It is possible that there is increasingly effective use of raw material, forexample, a smaller number of errors in metal cutting which reduces the wastageof material. The plant visits, however, found that such practices were (inlate 1977) not very good, with considerable material wasted. Though it isnevertheless possible that such practice may have improved in the 1971-75period, the general art was sufficiently low in 1977 to permit an inference
of limited productivity gain in the period which we are examining.
- 96 -
5.08 Having now ruled out the possibility that the superior price per-formance of machinery is to be found in either the wage-labor productivityconnection, slower price rise of its material inputs, or more effective useof material, the only remaining explanation must be found in either the moreeffective use of plant and equipment, in the sense of increasing value addedper unit of such assets, or a lower rate of return earned by the owners ofthese assets. Consider first the latter.
5.09 It is difficult to obtain a rate of return on assets because ofthe difficulty of measuring book value. Available evidence of other measuresof profitability do not suggest a decrease. Indeed, it is hardly likely
that continued investment would take place if the rate of return on assetswere falling unless this was generally true throughout the economy - investorsin this sector have the alternative of investing in other sectors. But thereis no evidence that rates of return were in fact falling elsewhere. Thus,the major explanation of the machinery sector's better than average totalproductivity growth must lie in improving capital productivity. This mayhave occurred as a result of better maintenance or improved operative per-formance. Given the observations made in plant visits, these are still farbehind best practice and permit considerable improvement. The role of in-creasing utilization of installed capacity is likely to have been important.There are two reasons for believing this to be the case. First, a recentstudy of the level of capacity utilization in Korea suggests that it hasbeen growing and accounts for a significant percentage of increasing totalproductivity for a cross section of industries. 1/ More pertinent is thelow level of output in many subsectors even in 1975, a year of considerablygreater output than 1971. The level of output in many items in 1971 was sosmall that inevitably considerable amounts of equipment must have been usedfor only a small fraction of a week, even recognizing the fact that many shopsproduce several types of goods in order to increase their average utilizationrate. Even during our visit many producers contended that much greater outputcould be produced with the given plant, though this would require an expandedlabor force.
5.10 If we are correct in evaluating the past performance of the machinerysector and its ability-to limit price increases despite rapidly growing wages,there are a number of reasons to be optimistic about its potential futureperformance. One of the better established empirical facts in productionanalysis is the rapid learning-by-doing that characterizes production in themetal working and machine industries. 2/ It has generally been found that
1/ Young Chin Kim and Jene K. Kwon, "The Utilization of Capital and theGrowth of Output in a Developing Economy; The Case of South Korean Manu-facturing," Journal of Development Economics, Vol. 4, No. 3, September
1977, pp. 265-78.
2/ See for example A.A. Alchian, "Reliability of Progress Curves in AirframeProduction," Econometrica, 31, 1963; Leonard Rapping, "iLearning and WorldWar II Production Functions," Review of Economics and Statistics, 47,1965 pp. 81-86; and Werner Hirsch, "Manufacturing Progress Functions,"Review of Economics and Statistics, 34, 1952.
- 97 -
the labor input per unit of output declines with cumulative production expe-rience even as the equipment per worker remains constant. The Korean machinery
industry has yet to benefit from such learning experience: cumulative output
has, for many products, been quite small. This limited production may explain
the observation of fairly inefficient operative and managerial performance.
Even if no conscious effort were made to upgrade efficiency within the sector,
it is very probable that improved performance would accompany the growth of
production. However, the pace of learning may also be accelerated by efforts,
discussed elsewhere in this report, to raise the effectiveness of both workers
and management. As the efficiency of labor increases, it will augment the
growing productivity of capital, so that the sector is likely to become
increasingly competitive.
5.11 It should be emphasized that both increasing utilization of capacity
and learning through production are inherently limited in nature. Capacity
utilization will reach some upper limit and the greater planning ability and
manual dexterity stemming from an accumulation of experience also cannot
acrrrue forever. As the industry moves towards the level of "best practice"more costly efforts to upgrade productivity will be necessary including a
substantial R&D eapability. However, in the medium term large cost reductions
are still achieveable from " learning-by-doing".
5.12 Nevertheless, there are two developments that could retard the rateof short te-- productivity growth, na-mely, the failure to conrentrate on a
fairly small number of products so that a large cumulative output is not
ach-4-ved, a0 d the i4nability to realize sufficient specialization thrniobh a
complex subcontracting system. Both failures may result as the natural
outcome of a premature heavy capitalization of the sector. Large scaleinvestment in the sector not implemented by competitive bidding for available
lunds iL LLNClJy to Leau u Lto a few fi L,Ls obtaining a-n 4inorJLdir-.at-e share of fundsand using these for equipment purchases. Given the low levels of existingproducti4or (Table )4. 4 141i-1 i.s,- le these fi-s will s,ek to utilize
~LUULLLIII\iaU~ .*JJ.L L . .L.LLW.L -ti-la
their equipment more fully by branching into additional product lines, never
fully realizing the productivity gains to bUe achieved Uy concentration on afew products. While the diversification does allow the amortization of someL'ixte'U costs over a 'Larger totaL l output, .it. is ulike.Ly t-LIL uci produs w ll-
be produced competitively relative to world prices. Moreover, the high pricesof such products will limit their sales.
5.13 On the other hand, the rapid growth of larger firms is likely tolead to the bidding away of workers from some of the smaller companies in the
mechanical engineering sector, thus making it more diffic-ult for these firms
to specialize in products for which the total demand may not warrant large
scale production. Indeed, there are complaints that such labor market tight-
ness has already appeared. We will return below to these questions.
- 98 -
Table 5.3
Production of Selected Items and Number of Producers
Number of Number of
Branch Units Produced Producers
Machine Tools (38230)
Lathes 3,114 27
Shaping Machines 276 7Milling Machines 434 7
Sawing Machines 654 --
General Purpose Metal Press 3,546 23
Hydraulic Metal-Working Press 778 11
Agricultural Machinery (38220)
Planting and Sowing Machines 8,089 4
Manual Threshers 6,345 24
Machine-Operated Threshers 18,557 60
Plows 278,646 20
Sprayers 219,883 27
Construction Machinery (38240)
Loaders 9,260 1Concrete Mixers 137 6
Winches 405 5
Textile Equipment (38242)
Spinning Frames 220 4
Twisting Machines 614 11
Dobby Looms 551 5
Flat Knitting Machines 1,313 3
Circular Knitting Machines 1,201 15
Source: Report on Mining and Manufacturing Survey, 1975, Tables III. 1
and III. 3.
- 99 -
Specific Industry Performance
5.14 Table 5.4 shows value added per worker, and current average wagelevels by sector (in current prices). There is considerable variation in bothvariables. Average product per worker may differ because of differences inthe quantity of complementary factors or because of production efficiency.These cannot be separated given the absence of reliable sectoral data oncapital stock. Nevertheless, possible misallocation of labor among sectorsis of some concern. If wages are assumed to reflect differences in marginallabor product across sectors, the variation in intersectoral wage structureimplies substantial inefficiency within the sector as a whole. Workers in asubsector such as textile equipment could produce a greater net output if theywere employed in the manufacture of metal forming equipment. However, thewage differences may be attributable to differential skill requirementsin each subsector, the more skill intensive branches having to pay higherwages. 1/ Though it is currently difficult to proceed on these issues withoutconsiderably more data on the characteristics of workers by sector, they areworth further attention.
Table 5.4
Value Added and Average Annual Wage Per Worker - 1975
(1000 Won)VA/L Wage
Engines and Turbines 1,038 441Agricultural Machinery 1,414 433Metal & Woodworking Machinery 1,289 502Textile Machinery 973 412Construction & Mining Equipment 491 213Metal-forming Equipment 1,712 557
Source: Report on Mining and Manufacturing Survey, 1975.
5.15 Size Differences Among Firms: An examination of the sub-branches ofthe machinery sector allows us to focus on some of the questions just raised.First, the value added per worker within sub-branches generally increasesbetween the smallest firms (5-19 workers) and those in the middle size range(50-99) but does not systematically increase for still larger firms. Thefrequency distribution of the size class with the maximum value added perworker is the following:
1/ We assume that wage differences do not reflect the respective levels ofeffective protection. Other evidence on Korea suggests that the inter-sectoral variation in effective protection is much smaller than that in
wage levels across machinery subsectors.
- 100 -
5-9 10-19 20-49 50-99 100-199 200-299 300-499 over 500
0 1 1 4 3 0 2 1
These findings are surprising, as it is likely that the largest firms utilizemore capital per worker, which should raise the value added produced by each.
While it is possible that the larger firms produce, on average, less pro-tected products, this seems unlikely. On the other hand, it is possible thatthe differences in product per worker reflect a different product mix among
firms of different size, the smaller ones concentrating on higher valueadded products within the domestic market. This is clearly possible as thefive digit branches still encompass a large number of products; indeed, ourplant visits suggest that a typical firm produces a large range of products.Thus, the higher product per worker characteristic of medium size plants mayreflect the astuteness of management in choosing a product mix and/or obtain-
ing more efficient production. But this simply reinforces the inference that
medium size firms are more efficient than larger ones; intelligent productchoice is no less important than productive efficiency in calculating socialproductivity, assuming that product prices are accurate indicators of socialvaluation. Thus, it would appear that, at least through 1975, the mostefficient companies were in the medium size classes. If this remains true,
it is from them that both efficient output and exports may be expected. It isnoteworthy that this pattern also existed in 1971 for the much smaller andless well developed sector. Table 5.5 shows the relevant data for the largersub-branches in 1971.
5.16 The available evidence should not be construed as implying that thesmallest firms are inefficient relative to those of medium size for they maywell have sufficiently lower capital per worker so that their social costs ofproduction are not higher. Even if the value added per worker in the middle
size firms is greater than that of the smaller ones, the latter will neverthe-less be socially efficient if their capital stock per worker is sufficiently
smaller than that of the former. Currently, there are only weak data with
which to test this possibility, but in other countries such differences incapital per worker are not unusual. 1/
5.17 We have utilized the available data to perform some tentative ana-lyses of the relative efficiency of firms with 20-299 workers and those with
300 and more, using data from the Korea Development Bank. The major diffi-culty in using their data is the validity of the reported capital stockestimates. We utilize those presented, recognizing that the following resultsmust be viewed as preliminary. Assuming that the social cost of labor is that
1/ For data from Japan and India see Bert F. Hoselitz, The Role of Small
Industry in the Process of Economic Growth (The Hague, Mouton, 1968).Other descriptions of the Japanese structure are given in L. Klein andK. Ohkawa, Economic Growth: the Japanese Experience Since the Meiji Era,
Richard D. Irwin, 1968.
- 101 -
Table 5.5
Value Added Per Worker by Size of Firm - 1971
(thousand won)
Number of Agricultural Metal-Cutting Metal-Working TextileWorkers Machinery Machinery Machinery Machinery Equipment
(382) (3822) (38221) (38231) (38242)
1 5-9 297 287 392 251 242
2 10-19 305 266 --- 315 292
3 20-49 388 303 367 429 341
4 50-99 566 970 358 307 510
5 100-199 452 675 --- 683 167
6 200-499 704 --- --- --- 289
7 Over 500 671 676 ---
Source: Report on Survey of Mining and Manufacturing, 1971
- 102 -
paid by the smaller scale firms (603,000 won in 1975 and 805,000 won per annumin 1976), and that the social rate of interest is 20 percent, 1/ for theentire machinery sector and for most sub-branches in both years, the largescale sector exhibited higher social costs of production.
5.18 Only in the metal working and woodworking machinery sectors are thelarger firms more (socially) efficient in both years (Table 5.6). In the
other subsectors, the larger firms frequently exhibit substantially highersocial costs. In special machinery a huge increase in social costs between1975 and 1976 reflects, we believe, the large increase in capacity atChangwon which has been barely utilized. Whether the higher social costsof larger firms are similarly explained in general is not known.
5.19 These data suggest some fundamental questions. It is clearlytempting to encourage the growth of a large scale sector as it may more easilyundertake the major export marketing efforts which will be required. Thecurrent inefficiency may thus be transitory, representing start-up difficul-ties, the failure to realize high capacity utilization and so on. If so, shortterm efficiency is being sacrified for presumed benefits in the longer term.However, such a developmental path may require a long period in which efficientproduction is foregone and the bulk of exports concentrated in less efficientfirms. It would be more desirable to encourage umbrella marketing groups inwhich the medium and smaller companies could also participate rather than relyon the private export'efforts of the more costly producers. Only if totaldomestic resource costs, production plus marketing, per unit of foreign ex-change earned is lower in the larger sector, would emphasis on their expan-sion be warranted. Given their current level of productive inefficiency,their greater marketing efficiency would need to be substantial to justifytheir further encouragement.
5.20 The 1975 Survey data indicate a potential hurdle to the rapid expan-sion of the sector, particularly if it is achieved by the growth of largerfirms. The maximum wage differential between small and large firms often
exceeds 100 percent. Such differentials may be manifestations of the diversityin skills, differences in average experience, or simply designed to increaseemployee satisfaction in order to raise efficiency and reduce turnover.
Unless the differential is purely skill related, employees in small companieswill seek jobs with the large companies as they expand; it is unlikely thatthe entire labor force expansion of the latter will be met by new entrants.
Such expansion is thus likely to deplete the smaller firms (including some ofthe middle size ones) of some of their best workers, assuming that they willbe among the first to attempt a switch. Clearly, such labor market behaviorwill forestall a movement towards the generation of a robust small scalesector producing a set of specialized products.
1/ Both assumed social costs could be amplified to allow for Little-Mirrlees questions. Given the considerable difficulties encountered inestimating these we have used some rough static measures of alternativecosts. Given the uncertainties with respect to the capital stock esti-mates, more precision in estimating social factor costs is, at thispoint, unwarranted.
- 103 -
Table 5.6
Index of Social Costs of Production - 1975, 1976
By Size Class
(Social Cost in Wages and Capital Cost to Produce One Unit of Value Added)
Small and Medium-/ Large 2/
All Machinery
1975 .83 .86
1976 .74 .92
Engines and Turbines
1975 .62 .721976 .66 .63
Agricultural Machinery
1975 1.13 1.41
1976 .87 .69
Metal and Woodworking Machinery
1975 1.09 .54
1976 1.10 .48
Special Machinery
1975 .83 1.191976 .67 1.21
Other Machinery
1975 .80 .61
1976 .70 .95
1/ 20 - 299 employees
2/ Over 300 employees
Source: Financial Analysis for 1976 (KDB)
- 104 -
5.21 The widening of the wage distribution between 1971 and 1975 may beseen in Table 5.7 which shows the wage by size of firm for four subsectors.Though it is difficult to generalize from the relatively small sample, thefollowing is a plausible interpretation of the patterns. In the two "older"sectors, agricultural and textile equipment, there has been an evolutionarydevelopment; firms of roughly the same size as existing ones have entered thesectors, exhibit similar levels of productivity, and pay wages approximatelyin line with the existing structure. In metal cutting and working either newfirms have entered or existing firms have radically changed their productiontechniques, allowing them to produce considerably more value added per worker.This greater output is reflected in wage levels; while it is not evident whyfirms should pay so much more than their competitors unless skill differen-tials are very large, this is an often noted phenomenon.
5.22 Of course, nothing is particularly wrong if more productive firmsdraw labor away from less productive ones - indeed, this is how efficientlyfunctioning factor markets should behave. The difficulty is that the firmsattracting labor are, given the average productivity data, not efficient inproduction; there is little export of metal cutting or metal working equipmentwhile both agricultural and textile equipment are either currently exportedor will soon be exported as marketing becomes better organized. On the otherhand the machine tool sectors are not currently competitive, are sellingprimarily in the protected domestic market, and may be receiving more favor-able financial treatment than the other sectors. 1/ Nevertheless the largerfirms in these sectors are rapidly raising wages and increasing their laborforce.
5.23 It may be argued that these developments should not be evaluated ona short term basis alone; in the long run it is the larger companies that arelikely to become the most efficient in production, proficient in marketing,design and research. While this may be so, there is another side, namely,that the mechanical engineering sector cannot be efficient without smallspecialized firms. Thus, the bidding away of their workers at too rapid arate militates against the long run achievement of an efficient sector.
5.24 Can this process of a growing dualism be slowed by policy if it isdecided that it is undesirable? Fairly simple analysis suggests that itis indeed possible as the larger firms are able to pay higher wages only iftheir cost of capital is lower. Thus, if they earned the same rate of returnon their capital as medium size firms, they would not be able to affordhigher wages. Their ability to pay higher wages must thus be attributable to
1/ There is at least tentative evidence that the older sectors are moreefficient than the new ones. Using data from the KDB Financial Analysisthe metal and woodworking sectors exhibit lower total factor productivitythan other sectors for which data are presented, i.e., the value addedproduced by the combined application of labor and capital is less inthese two sectors. Given the caveats mentioned earlier, particularly,the book value estimates of capital stock, this conclusion requiresfurther confirmation.
- 105 -
Table 5.7
Changes in Wage Structure by Size of Firm(thousand won)
Agricultural Textile Metal-Cutting Metal-FormingNumber of Equipment Equipment Machinery MachineryEmployees 1971 1975 1971 1975 1971 1975 1971 1975
1 5-9 103 264 111 242 125 298 115 335
2 10-19 112 278 123 292 150 365 147 362
3 20-49 127 323 152 341 176 329 200 568
4 50-99 246 507 183 510 212 436 164 516
5 100-199 153 411 121 167 142 800 384 -
6 200-299 - 589 181 289 - - - -
7 300-499 259 568 - - - 611 - 717
8 Over 500 - 497 - - - - - -
Ratio ofhighestwage tothat insize group3 2.04 1.82 1.20 1.50 1.20 2.43 1.86 1.26
- 106 -
their lower cost of capital which may be reflected in lower interest costs onborrowed funds, and/or a lower return on equity capital. The data in Table 5.8
calculated from the KDB Financial Analyses for 1976 confirm this hypothesis.
The large firm in all branches exhibited a lower borrowing rate in both 1975and 1976, and in 1976 the large scale sector exhibited considerably lower rates
of return on equity capital. Indeed, the rates of return on capital in thelarge scale sector appear to be considerably below the social productivity of
capital.
5.25 Thus, policy instruments to slow the development of a dualisticwage structure and the concomitment shifts in the labor market are readily
available to the government. Lending policies which do not discriminateamong firms of different size with respect to interest rates would be required.
5.26 More generally it should be noted that differential interest ratepolicies exert effects very similar to extensive import protection. Thelatter allows firms to pay higher wages than would be possible and thus drawworkers into inefficient (by world standards) manufacturing sectors. Dis-criminatory interest policies will permit the attraction of workers intolarger, so far inefficient, firms. What is gained through the maintenance ofcorrect trade policies may be partly squandered by discriminatory financialpolicies.
Selected Comparisons with the Structure of the U.S. Machinery Sector
5.27 To obtain some reference points about the possible directions of
future growth of Korea's machinery sector, it is useful to examine a number of
features of this sector in the U.S. We utilize data from the 1967 Census of
Manufactures though similar results are obtained using both earlier and latercansuses. With one exception (steam engines and turbines), all subsectors
contain large numbers of small and medium size firms. For example, in theproduction of construction machinery 84 percent of firms had fewer than 250employees and in metal cutting machine tools this figure was 92 percent.
Though even in these sectors the percentage of total employment accounted for
by the large firms (500 or more employees) is substantial (84 and 63 percent),there is a thriving smaller scale sector. Moreover, as will be shown, the
smaller firms exhibit the same average labor productivity as the larger firms
and it is not a lower wage structure that enables them to survive. While amore detailed breakdown of individual branches might reveal only large firms
in some subcategories, for many products it is known that both small and largeproducers coexist. The presence of a range of companies does not appear to beattributable to market imperfections such as differing wage rates being paidby firms of varying size. It is probable that firms of diverse size areproducing different products and each size group represents the minimum cost
range for its product.
- 107 -
Table 5.8
Rate of Return on Net Worth and
Average Cost of Borrowed Funds (%)
1976
Average Cost of
Net Profit/Net Worth Borrowed Funds
Large Small & Medium Large Small & Medium
Machinery - entire sector 5.8 19.9 5.8 11.6
Engines and Turbines -8.0 21.9 7.0 10.3
Agricultural Machinery 2.4 12.4 9.9 11.6
Metal and Woodworking Machinery 29.4 31.9 8.2 11.7
Special Industrial Machinery 2.6 18.4 7.3 14.3
Others 7.1 17.3 5.6 11.4
1/ Calculated as "interest and financial expenses" divided by short plus long
term financial obligations.
Source: Financial-Analysis for 1976 (Seoul, The Korea Development Bank, 1977)
Tables 2, 6, 8.
- 108 -
5.28 The average wage and value added per worker by size class are shown
in Table 5.9 for major subsectors of the U.S. machinery sector. It is notable
that considerable uniformity exists of both variables across size classes,
whereas the Korean data exhibited considerable variation in both measures.
In the U.S., with the exception of farm machinery, there is no trend by size
class in either variable and the variation around the average is quite small--
except for the smallest firms (1-4 employees) there is rarely more than a 15
percent deviation in any size class from the mean for the sector. The major
exception to this uniformity is found in the larger size companies in farm
machinery and almost surely reflects the very large scale economies for some
types of standard farm equipment. However, these are clearly unusual, having
standardized products which are produced in very large runs.
5.29 The uniformity in the U.S. may be contrasted with the earlier data
presented on Korea which show considerable variation across firm sizes in both
average labor product and wages. Moreover, in many size classes in Korea
there are still very few firms whereas in the U.S. there are a very large
number of producers in each class. These discrepancies between the current
U.S. and Korean structures, namely, the greater variation in wages and produc-
tivity and the absence of numerous firms in some size classes suggest that a
"natural" evolution of the Korean machinery sector is likely to be towards a
"denser" sector with more producers in each size class exhibiting a greater
similarity of both wages and value added per worker than at present. The
realization of this evolution will be contingent on the absence of policies
which discriminate among firms of different size. In particular, preferential
credit allocation, in the size of loans and/or the interest rate charged, may
prevent these developments.
5.30 While there is no basis for arguing that the U.S. size structure is
optimal, or the only desirable path, it does represent the result of a long
evolutionary process in which survival of the most appropriate size firms may
be assumed to have occurred. Thus, there is a presumptive case that the small
and medium size firms do fill a vital role, often in specialty products needed
by larger producers within the sector, but also in sales outside the sector.
While the number of small and medium size firms in Korea will inevitably grow
because of the increasing number of potential entrepreneurs, achieving effici-
ency in the sector will require neutrality among firms of varying size of a
variety of policies including domestic lending policies. Moreover, it is
worth noting here that premature protection of metal cutting and working
equipment, the major capital input used throughout the sector, may be one such
non-neutral policy insofar as it will raise the cost of equipment to smaller
producers who currently do not have much equipment, whereas many of the larger
firms have a substantial amount on hand, and their excess capacity is such
that purchases over the intermediate term will often not be necessary.
5.31 It must be emphasized that a more balanced development among firms
of different size implies a greater national product produced by the resources
used in the sector. As wages are equalized among different size classes, the
movement of workers among firms will equalize their contribution to national
product whereas currently it is likely that some quite skilled workers are
employed in the lower wage firms, operating with less equipment than their
- 109 -
Table 5.9
Value Added and Annual Remuneration Per Employee
By Size Class of Firm - U.S. 1967
(dollars)
Metal Cutting Dies, Tools, Jigs TextileSize of Firm: Farm Machinery Machine Tools Fixtures MachineryNo. of Employees VA/L W/L VA/L W/L VA/L W/L VA/L W/L
1-4 13,556 5,333 19,750 8,250 17,933 7,933 15,333 7,000
5-9 11,364 5,636 16,000 8,000 14,557 8,658 12,800 7,000
10-19 11,484 5,581 19,957 8,217 13,612 8,481 10,400 6,100
20-49 11,551 5,694 13,581 8,163 14,214 8,988 10,447 6,237
50-99 11,284 5,716 16,000 8,904 15,031 9,503 9,667 6,190
100-249 12,524 5,707 15,593 8,321 15,102 9,398 10,952 6,476
250-499 14,028 6,413 16,736 9,632 14,646 9,104 11,030 6,597
500-999 16,200 7,467 17,928 8,245 11,674 9,391 10,660 6,489
1000-2499 16,500 7,596 15,333 8761 14,683 11,171 9,189 6,250
2500 and over 17,634 8,079 14,363 8,960 -- --
Average 14,978 6,946 15,955 8,714 14,496 9,092 10,179 6,380
- 110 -
equally skilled compatriots in larger establishments. On the other hand, theequipment of many of the largest companies is not being used efficiently giventheir low labor productivity despite high equipment-labor ratios. If the wagestructure becomes more even as a result of a "denser" sector and increasingcompetition for factors, and the smaller firms obtain greater access toexternal finance as well as save internally, the marginal and average productof both workers and equipment are likely to become similar to that in thelarger firms. Certainly the U.S. data imply roughly this pattern.
5.32 If the U.S. structure of production is accepted as demonstrating theconsiderable technical possibilities for efficient variation in size as wellas the existence of fairly competitive factor markets, the question of why theKorean sector currently exhibits such diversity in wages and productivity aswell as gaps in size groups may usefully be addressed. Several mutuallycompatible answers are possible.
5.33 First, it is probably the case that limited production experience inKorea has constrained the number of entrepreneurs. Most of the smaller U.S.companies were founded by employees in the sector who, after a time, begantheir own firms. As both the number of workers and their cumulative experienceincrease, new firms will surely begin production in Korea. Often they willfill gaps in the existing product structure and will populate the smaller andmedium size classes, thus eliminating some of the gaps currently identified,as well as generating more competitive factor markets, with a consequentincreasd equalization of both wages and labor productivity.
5.34 A second source of diversity in the current production structureappears to originate in the encouragement of larger firms, particularly, asdiscussed earlier, through the provision of low interest loans. As we haveseen earlier, these firms do not typically exhibit high average labor produc-tivity but do pay higher wages. Our plant visits suggest that, given theirconsiderable excess capacity, it is unlikely that they currently have highercapital productivity than smaller firms. Their rates of return on equity arelow and they currently receive concessionary finance. While such finance tolarger companies could be justified if there were reason to believe that, oversome reasonable time period greater size would confer efficiency gains, theU.S. data imply this is not the case.
Areas of Potential Korean Comparative Advantage
5.35 Earlier, we have emphasized that the competitiveness of the ma-chinery sector will depend partly on its lower wage rates for skilled laborrelative to those in potentially competitive contries. Such international wagedifferentials will be of greater importance in those product lines in whichrelatively small production runs are typical rather than larger ones in whichfixed equipment costs need to be allocated over large quantities before a lowprice can be charged. Though we have shown that most subsectors of machineryare characterized by numerous small companies in the U.S., two summary meas-ures may be useful: the percentage of employment concentrated in firms
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employing fewer than 250 or 500 workers; we denote these by N2 5 0 and N5 00.In four sectors, N2 5 0 is greater than 50 percent--woodworking equipment; con-veyors and conveying equipment; dies, tools and jigs; and food products machinery.
5.36 For N50 0, several other sectors exceed 50 percent, namely, oilfieldmachinery, paper industry machinery, printing trades equipment, elevators,machine tool accessories, and textile machinery. While it is certainly notour contention that Korean industry will replicate the U.S. structure, it doesseem promising to at least consider production in the sectors just cited. Putanother way, undertaking further production in typically large scale sectorsis likely to conflict with Korea's presumptive comparative advantage stemmingfrom low skilled labor costs.
5.37 Nevertheless, to identify subsectors likely to possess a compara-tive advantage, it is necessary to take account of one finding of our factoryvisits, namely, that neither operative nor foreman skills are, as yet, at ahigh level. Thus, many workers do not know the cutting potential of theirequipment, using three or more "cuts" where one cut at a metal block would beadequate. Many other examples can be found in Chapter III. These resultssuggest that just as Korea's comparative advantage is not likely to lie inproduct lines characterized by very large production runs in which skilledlabor costs are likely to be relatively small, it is also not currently to befound in specialities which require extremely high levels of worker familiaritywith the operation of equipment.
5.38 For guidance about the level of skill required in a U.S. subsector,it seems reasonable to assume average wage levels roughly indicate the skillrequirements, particularly as U.S. intrasector wage differentials by firm sizeare relatively small (Table 5.9) and exhibit no distinct pattern. Moreover,despite the fact that the larger firms have some market power, this concentra-tion has had little impact on the wage structure. Finally, it is known thatthe entire sector is characterized by high formal and vocational education 1/so that intersectoral wage differentials are not likely to be utilized as amechanism to screen the educationally unqualified. These considerationssuggest that subsector wage levels should be a fairly good measure of skillrequirements, remembering that such differnences are superimposed on a gen-erally high skill sector.
5.39 Assuming, then, that those branches in which U.S. average wages arehighest are those requiring the greatest skills, it would be wise for Korea toavoid the early establishment of major efforts in these sectors. Of course,at a later stage of development, with the accumulation of skills many may wellbecome candidates for efficient production. In particular, engines and tur-bines, dies, tools and jigs, and metal cutting machine tools may be inappro-priate, though to be sure, some promising product lines may well exist ineach. At the low and medium end of the wage spectrum are farm machinery,
1/ See, for example, the data of the U.S. Bureau of Labor Statisticssummarized by Richard Eckaus, "Economic Criteria *for Education andTraining", Review of Economics and Statistics, (May, 1964).
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woodworking, food products machinery, textile equipment, pumps and compressors,construction, mining and oilfield equipment. These lower wages sectors do,of course, contain some extremely high technology sectors (e.g. off-shoredrilling), but simpler ones as well. It is noteworthy that with the exceptionof textiles, all show quite high average product of labor despite their lowerwage levels.
5.40 Combining the lower wage subsectors (less than $8,000) with thosecharacterized by N2 5 0 or N5 00 yields the following subsectors for attention:
N250 N5 0 0
woodworking equipment oilfield machineryconveyors and conveying elevators and moving stairways
equipment machine tool accessories andfood products machinery components
textile equipment
This list does not constitute an "optimal" ordering of desirable productionspecialties but it contains product lines that are also included in Chapter IV.It seems reasonable to look within these sectors for product lines for furtherexpansion. It is worth noting that the first column contains two types ofequipment used extensively in LDCs, namely, woodworking and food productionequipment, whereas the second contains products likely to be more intensielydemanded in developed countries, with the exception of textile producingequipment.
5.41 Finally, the data in Table 5.9 can be used to identify areas inwhich close scrutiny is required before further expansion is undertaken giventhe combination of high skill and large scale: steam engines and turbines andmetal cutting machine tools appear unpromising, though again individual itemswithin both sectors may be appropriate.
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VI. REVISING THE RESEARCH AND DEVELOPMENT PROGRAMS
Introduction
6.01 To date, Korea has moved rapidly in the industrialization of itseconomy by concentrating on products that are labor-intensive and on marketsthat are price-sensitive. Its plan for the next decade places a very highpriority on the development of the heavy machinery industries where marketcompetition is based less on cost and more on technological superiority andproven performance of products. Quite possibly, the single most importantkey to how well the country does over the next decade will be how effectivelyit builds its technological capacity. As is shown below, the present R&Dprogram is not aimed at the critical problems. Spending is projected toincrease at a rate significantly higher than that of GNP, but much of themoney will be for creation of new institutes with a high cost in bricks andmortar. The priority need is for developmental work on products and processesthat is best done by industrial firms. A program to stimulate R&D work inthese firms is the highest priority, plus some revisions to the existingprograms.
6.02 In recognition of the importance of technology, the Korean govern-ment proposes to increase its spending on R&D, from about 0.5 percent of GNPtoday to 1.5 percent of GNP by 1981. Since the GNP itself is projected togrow at a 9 percent plus rate, the government plan amounts to quite a generoussupport for the development of the R&D sector. However, from a developmentstrategy viewpoint, the total amount of support is not the main issue. Theissue is whether the spending will result in a national R&D structure thatwill effectively serve the technological needs of the industries, needs
such as improvement in plant layout and tooling, upgrading of product designand quality, expansion of product range, application of modern productionmethods to a reduced level of output, efficient substitution of labor forcapital where feasible and development of processes for utilizing localnatural resources. A notable feature of the government plan is that a largeportion of the R&D money is earmarked for "capital investment," namely theestablishment of about ten new research institutes as well as the expansion ofseveral existing institutes. The question is whether a R&D system composedmainly of a network of independent research institutions will provide thetechnological instrument appropriate to an industrial strategy that calls fora major expansion of the production and the export of sophisticated engineer-ing goods.
Korea's Pattern of R&D Spending
6.03 The pattern of R&D spending in Korea will be examined from the
following three points of view: (a) general spending pattern, in particularR&D spending as percent of GNP. This indicates the priority of R&D activitiesin the economy; (b) number of scientists and engineers employed in R&D. This
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indicates the resource that is available and how it is being used; (c) percentresearch performed by industry. This indicates whether the structure of theR&D establishment in the country is appropriate to its industrial stage a-dplans.
6.04 General Spending Pattern: Total spending on research and develop-ment in Korea increased over the past decade from about 3 billion won in 1966to an estimated 60 billion won in 1976, in current values. As percent of GNP,it increased at a somewhat higher rate than the GNP growth, from 0.3 percentof GNP in 1966 to 0.5 percent in 1976. Table 6.1 shows the spending patternin recent years, with 1966 chosen as the reference year. 1/ Table 6.2 givesa breakdown of the 1976 spending by source of funding and performance.
Table 6.1
Growth of R&D Sector-
R&D Spending Number of Scientists(Million won R&D/GNP & Engineers Employedcurrent) (percent) in R&D
1966 3,164 0.30 3,0001971 10,667 0.34 5,3001972 12,028 0.31 5,6001973 15,628 0.32 6,1001974 23,012 0.34 6,3001975 42,664 0.47 10,3001976 60,900 0.50 11,660
(est.)
Source: Handbook of Korean Economy, 1977, EPB.Science and Technology Annual, 1976, MOST.
1/ Towards the end of the First Five Year Plan (1962-1966), Korea beganits drive towards industrialization. A new government department, theMinistry of Science and Technology, was established in 1967.
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Table 6.2
R&D Spending by Source and Performance, 1976(million won)
R&D Performance Source of FundingAmount Percent Government Private
Government Institutes 20,457 34 20,456 1Non-Profit Institutes 23,323 38 17,677 5,646Industry 15,141 25 316 14,825Universities 1,979 3 1,012 967
Total 60,900 100 39,462 21,438
Source: Ministry of Science & Technology, ROK, 1977.
6.05 In 1976, out of a total estimated R&D expenditure of 60.9 billionwon, the Government supplied over 39 billion won or 66 percent of the total.Private sources supplied the balance of the money. While the private spendingon R&D may be low by advanced country standards, it is remarkably high for adeveloping country. However, some explanations are in order. The Governmentfunding of research went exclusively for the support of public and privateresearch institutes. There was a negligible amount of Government contractingof research to private industry (the total was substantially below one millionU.S. dollars in 1976). In fact, almost all research and development done byindustry was self-funded.
6.06 Industry R&D is a relatively recent phenomenon in Korea, and hasnot been studied closely. Also the definition of what constitutes R&D,especially where industrial corporations are concerned, is considerably moreelastic in the developing countries than in the industrialized countries.In the United States, for example, the definition of R&D excludes product orprocess improvement of a routine or minor nature, routine product testing,quality control, market research, technical services and other non-techno-logical activities.
6.07 In the absence of a standardized procedure covering the reportingof corporate R&D accounts, it is not possible to estimate to what extentthese activities are included in the industry R&D totals in Korea. It may bepresumed that, if a more rigorous accounting system were adopted, the industryspending totals on R&D could be substantially less than what is shown inTable 6.2.
6.08 The public and private research institutes in Korea accounted forover 70 percent of all R&D activities in the country in 1976. Industry asa whole did 25 percent or 15 billion won (US$30 million) worth of research,which is less than many larger corporations in the industrialized countriesspend alone on research and development. The following tabulation comparesthe R&D performance in Korea with those of Japan and the United States:
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ROK Japan U.S.(1976) (1974) (1976)
Total R&D Spending 60.9 2,421 38.1(billion won) (billion yen) (billion dollars)
Total in billionU.S. dollars 0.13 8.3 38.1
(Percent)
Government Insitutes 34 13 16Non-Profit Institutes 38 3 6Industry 25 66 68Universities 3 18 10
Source: Science & Technology White Paper, Japan, 1976; National ScienceFoundation, U.S., 1977.
6.09 The contrasting R&D sector structure of a developing country versusthe highly industrialized countries is evident from the table. In the in-dustrialized countries, the bulk of R&D is performed within industry. InKorea, as in most developing countries with some significant R&D efforts, theR&D mainstream is comprised of Government-research institutes with industryin a somewhat minor role.
6.10 The structural difference is also reflected by the character of workperformed. In leading industrialized countries, the trend in R&D has beentowards greater emphasis on development work which leads to new products andprocesses. 1/ In Korea, basic and applied research comprised 70 percent ormore of all R&D performed in the country:
(Percent)
Japan
ROK, 1974 1966 1974 U.S., 1976
Basic Research 26 30 15 13Applied Research 44 29 22 22Development 30 41 63 65
1/ Basic research - Original investigations for the advancement ofscientific knowledge not having specific commercial objectives.
Applied research - Investigations directed to the discovery ofscientific knowledge having specific commercial objectives withrespect to products or processes.
Development - Technological activities of non-routine nature concernedwith translating research findings or other scientific knowledge intoproducts or processes.
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6.11 The Japanese case is noteworthy. In 1966, almost 60 percent of allR&D performed in the country was in basic and applied research. Developmentcomprised about 40 percent. By 1974, the situation had reversed, withdevelopment work comprising over 60 percent of all R&D. This turnaround wasachieved through a deliberate policy of promotion of development work notonly within the industry but also in the Government research institutes.In Korea, while there has been a growing awareness of the need to to do moreproduct development work, neither the industry nor the research institutesappear to have the requisite capacity or orientation to undertake the type ofproduct development work relevant to local manufacturing activities; this isparticularly true of machinery manufacture.
6.12 'Manpower Resources: The underdevelopment of the R&D sector isperhaps best shown by R&D manpower comparisons. The numbers in the followingtabulation represent only the full-time-equivalent scientists and engineersemployed in R&D, and do not include the research support personnel:
JapanROK, 1976 1966 1974 U.S., 1976
Total number of Scientists &Engineers Employed in R&D 11,660 129,000 238,000 542,000
Total Employed in R&Dper 1,000 people 0.3 1.3 2.3 2.5
(Percent)
Government Institutes 21 ) 15 12 19Non-Profit Institutes 9 )Industry 28 51 55 68Universities 42 34 33 13
6.13 Korea in 1976 had almost 12,000 scientists and engineers working inthe area of research and development. About 30 percent or 3,600 were employedin the public and private research institutes. The largest number, over40 percent, were in the academic sector and may be presumed to include manypart-time researchers. The balance of less than 30 percent were employedby industry. Comparable figures for the industrialized countries show thelargest number of scientists and engineers employed in industry, almost 70percent in the case of the United States. Proportionally more scientiststhan engineers were engaged inR&D in Korea, by a wide margin. In the U.S.,of all the scientists and engineers working in research and development,two-thirds were in development work, of whom eight in ten were engineers.
6.14 There are some apparent similarities in the economic conditions ofKorea today and that of Japan about ten or fifteen years ago--a per capitaincome in excess of US$800 and a total export of about US$10 billion. AsKorea moves into the higher-technology industries, its R&D capacity will bean increasingly crucial factor. Here, the similarity ends. Japan in 1966
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had 129,000 scientists and engineers working in R&D, or 1.3 research workers
per 1,000 people. Korea in 1976 had 12,000 or 0.3 research workers per
1,000 people. To parallel Japan's capacity of 1966, the R&D establishmentin Korea would need to have about 50,000 scientists and engineers or over
four times the present number.
6.15 The annual R&D spending per researcher, or "unit cost", averaged
5.22 million won (US$10,800) in 1976:
Number of ScientistsR&D Spending & Engineers Employed Unit Cost(million won) in R&D (million won)
Total 60,900 11,660 5.22
Universities 1,979 4,810 0.41
Industry 15,141 3,260 4.65Government Institutes 20,457 2,490 8.21Non-Profit Institutes 23,323 1,100 21.18
6.16 The national average of US$10,800 seems low. The industrialized
countries spend from US$40,000 to US$80,000 per full-time-equivalent scientistand engineer employed in research and development. The U.S. national averagein 1976 was US$68,900. While personnel cost is the largest component in the
total R&D cost, it does not necessarily follow that the cost of doing researchin a developing country is cheap. The low average spending in Korea maybe taken as an indication that there is no substantial R&D work outside theresearch institute system.
6.17 There is an obvious spending imbalance, with spending per researcherin non-profit institutions 4.5 times the industry average. In industrializedcountries, industry spending per researcher generally exceeds the nationalaverage reflecting the higher cost of development work relative to basic andapplied research. The low spending per researcher by industry in Korea doesnot mean that it has been able to get more research out of its money butrather that research within industry has not progressed much beyond simple,
low-cost activites. The non-profit research institutes were promoted inKorea to undertake R&D efforts associated with industrialization. Modernfacilities were built and native-born scientists and engineers were recruited
from abroad at salaries considerably above the national norm. What impactthey have had on the economy is difficult to measure. The process oftransfer of research results to industrial goods and services is lengthy and
involved, and some of the possible measures of research benefits such as salesgrowth, profitability, productivity increases, etc., cannot be meaningfullyapplied to developing economies with short R&D histories. It should bepointed out, however, that independent research institutes by themselvescannot carry R&D to the point of producing results useful to the industry.The rules for effective technology transfer across international boundarieshold equally true for transfer across institutional boundaries within a
nation, which means that for R&D in the research institutes to be cost
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effective in terms of industrial benefit, there must be complementary R&Dcapacity within the industry. With reference to the performance of the R&Dsector in the industrialized countries, spending levels between US$20,000 andUS$30,000 per research scientist and engineer may not be unreasonable forKorea. Industry in Korea today is far below this range and the non-profitresearch institutes considerably exceed it.
6.18 Research by Industry: There is very little information on thisimportant subject. Statistics on R&D spending by industrial firms have notbeen compiled in Korea on a regular and standardized basis. The 1976 datashown in Table 6.3 is from a recent survey conducted by the Government(Ministry of Science and Technology). The data are tentative, but may bepresumed to be generally indicative of the industrial R&D spending pattern.In 1976, industry spent a total of 17.5 billion won R&D; it performed about15 billion won worth of research and contracted out about 2.5 billion won.R&D within industry is largely self-contained, with not much linkage orcross-funding between industry and other R&D elements in the public or privatesector.
Table 6.3
R&D Spending by Industry, 1976
Major Firms Sales in R&D ExpenseSurveyed Million Won Million Won % of Sales
Mining 3 22,869 33 0.14
Manufacturing 263 4,271,759 16,658 0.39
Food, Beverages 30 491,384 848 0.17Textiles, Apparel 26 702,446 2,638 0.38Paper & Allied Industries 7 37,749 66 0.17Chemical Products 79 917,217 2,214 0.24Mineral Products 16 201,123 1,078 0.54Metals 35 1,094,874 1,526 0.14*Machinery 61 664,569 7,991 1.24Other Manufacturing 9 182,397 296 0.16
Service Industries 12 138,357 780 0.56
All-Industry Composite 278 4,432,985 17,491 0.39
* The term is customarily used in Korea to include industrial machinery,electrical equipment including electronics, and transport equipment.
Source: Ministry of Science and Technology, ROK, 1977.
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6.19 All industry average spending on R&D in 1976 was estimated at0.4 percent of sales. The lowest percentages (0.1 to 0.3 percent) werereported by the mining, food, paper, chemical and metal industries. Thenext higher group (0.4 to 0.6 percent) comprised textiles, mineral productsand service industries. The machinery industries spent the most, reportingR&D spending of 1.24 percent of sales. As shown in Table 6.4 the corporateexpenditures on R&D in many Korean industries compare surprisingly wellagainst the U.S. industries. This should not be taken too literally. Thecompilation is tentative and the percentage values would be much lower if thecorporate R&D expenses were computed along the standard accounting methodused in the United States. During plant visits, no significant on-going R&Dactivities were observed, even in many of the larger machinery plants.
6.20 The R&D system in Korea is comprised, in the main, of a set of
research institutes. There are volumes of statistics on their performance,but not much is known about what goes on within the industry. In themachinery area, it is not clear what the R&D priorities are, how closelyrelevant are the expenditures to the R&D needs, or whether the R&D structureis adequate to undertake the necessary development efforts. With the countrystriving to establish modern, high-technology industries, it is remarkable
Table 6.4
Corporate R&D Spending as Percent of Sales, 1976
R.O.K. U.S.
All-Industry Composite 0.4 1.9
Food, Beverages ) 0.5
Paper ) 0.1 to 0.3 0.8Chemicals ) 2.6Metals ) 1.2
Textiles, Apparel ) 0.4Mineral Products ) 0.4 to 0.6 1.2Service Industries ) 0.6
Automotive ) 2.5Electricals, Electronics ) 2.8Instruments, Office )Equipment ) 5.4
Machine Tools ) 1.2 1.9Industrial Machinery ) 1.9Farm & Construction )
Equipment ) 3.0
Source: U.S. Corporate Spending on Research and Development,Business Week, June 27, 1977.
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that so little attention has been paid to the parallel development of research,
development and engineering capacity within the industry, particularly sincea long lead time is required to build such capacity. The proper role ofindependent research institutes in relation to the industry is a supportive
one. Without a corresponding capacity within the industry to translateresearch results into products and processes, there is some serious doubtthat the indicated pattern of spending can be cost effective.
Projected Investment in Science & Technology, Fourth Plan
6.21 The projected investment in science and technology, under the FourthPlan is shown in Tables 6.5 and 6.6. The totals for "Science & TechnologyInvestment" in Table 6.5 include expenditures on R&D proper plus Governmentspendings on activities in support of science and technology such as inter-national scholar exchange and science and technology promotion. Separate
totals for R&D spending are not given, but roughly, these may be estimatedat 85 to 90 percent of the science and technology investments. The two mainfeatures of the Plan are: (a) increase of science and technology investment
from 0.58 percent of GNP in 1976 (R&D spending was 0.5 percent of GNP) to
1.50 percent of GNP in 1981; (b) expansion of the research institute system,including the establishment of ten new research institutes.
Table 6.5
Science and Technology Investment, Fourth Plan
(billion won, 1975 value)
Investment /1 Funding by SourceValue % GNP Government Private Govt/Private
1977 79.6 0.7 55.5 24.1 70 / 30
1978 112.7 0.9 73.3 39.4 65 / 35
1979 136.4 1.0 81.9 54.5 60 / 40
1980 193.4 1.3 106.4 87.0 55 I 45
1981 243.2 1.5 121.6 121.6 50 I 50
Total 765.3 438.7 326.6
/1 The totals include R&D expenditures proper plus Government
expenditures on activities in support of science andtechnology, such as international scholar exchange andscience and technology promotion programs.
Source: Science & Technology Sector Plan, 4th Plan, 1976.
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Table 6.6
Major R&D Programs, Fourth Plan
Billion Won (Percent)
Expansion of existing non-profit research institutes
Korea Institute of Science & Technology 75.5
Korea Atomic Energy Research Institute 21.5
Korea Science & Technology Information Center 9.5
Sub-Total 113.5 (14.8)
Government research organizations 132.3 (17.3)
New institutes to be established during plan period
Korea Research Institute of Ship and Ocean 19.3
Korea Standards Research Institute 13.2
Korea Nuclear Fuel Development Institute 38.0Korea Chemical Research Institute 15.5
Resource Development Institute 29.4
Korea Heat Conservation & Testing Laboratory 4.2Korea Communications Research Institute 19.5
Korea Institute of Machinery and Metals 15.3
Korea Electrical Equipment Testing laboratory 14.6
Korea Electronics Research Institute 14.6
Sub-Total 183.8 (24.0)
Other R&D programs, including basic science programs 108.2 (14.1)
Total, institutional programs, 1977-1981 537.8 (70.2)
Total, R&D support activities, 1977-1981 61.0 (8.0)
Total, all programs, 1977-1981 598.8 (78.2)
Total projected S&T investment, 1977-1981 765.3 (100.0)
6.22 Total spending on science and technology is projected to increase
from 49.3 billion won in 1975 (R&D spending was 42.7 billion won in 1975)
to 243.2 billion in 1981, at 1975 prices. The grand total for the Fourth
Plan is 765.3 billion won. With reference to Table 6.6 about 70 percent of
this amount is budgeted for R&D programs in the research institute sector.
If the Government R&D support activities were added, the percentage increases
to almost 80 percent. This would presumably leave about 20 percent for
industries to invest in their own R&D activities.
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6.23 Ten new independent research institutes are scheduled to be builtat an average cost, over the Plan period (1977-81), of 18.4 billion wonor US$38 million. The machinery sector is to be served by the followingtwo new institutes:
Korea Institutes of Machinery and Metals 15.3 billion won
Korea Electrical Equipment Testing Laboratory 14.6 billion won
In addition, the Korea Standards Research Institute will be largely concernedwith problems of quality control and standards of products and processes,particularly for the small- to medium-scale industries. The Korea Instituteof Science and Technology had hitherto conducted industry-oriented researchand development but in the future will re-direct its efforts to "long-range"and "large-scale" R&D programs of national concern and will increasinglyemphasize software over hardware research. A somewhat different role forKIST is suggested later. A total of 75.5 billion won (US$160 million) isbudgeted in the 4th Plan for this purpose.
6.24 Increase of R&D spending at a higher rate than GNP growth can beviewed as normal for countries at intermediate stages of industrialization.In fact, world-wide, the following spending pattern would roughly apply:
(a) Countries at an early stage of industrialization - R&Dsystem is in infancy and comprises relatively simplecomponents such as testing laboratories and instrumentcalibration facilities. Spending will be low and willnot likely show any consistent pattern.
(b) Countries at an intermediate stage of industrialization -
R&D spending will increase rapidly, reflecting a growingsophistication in manufacturing activities. It can beexpected to increase at a faster rate than the growth ofthe economy as a whole.
(c) Countries at an advanced stage of industrialization -the R&D sector can be described as fully matured andthe spending rate will typically slow to a rate roughlyparalleling GNP growth. Most advanced countries can beexpected to maintain an R&D spending rate in the rangeof 2.0 to 2.5 percent of GNP.
6.25 The R&D/GNP ratio in Korea increased from 0.3 to 0.5 percent overthe past decade. While a faster rate of increase should be feasible, theindicated rate of the Fourth Plan would appear to be quite a bit over-ambitious. For example, it took Japan 15 years (1953 to 1968) to go from0.59 to 1.44 percent. Korea proposes to accomplish this increase in 5 years.
6.26 The main thrust of the Plan is expansion of the research institutesystem and a large part of the projected spending will be for bricks andmortar. The real constraint will be manpower. In the Plan, the number ofscientists and engineers employed in R&D is projected at 14,000 in 1981, an
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increase of 4,000 over the 10,000 reported as employed in R&D sector in 1976.
Other Government compilations (Ministry of Science and Technology, 1977)place the number of scientists and engineers employed in R&D at 10,300 in1975 and 11,660 in 1976. The discrepancy is not explained, but the Planfigures might simply be taken to indicate that an additional 4,000 scientistsand engineers will be needed by 1981.
6.27 With reference to the R&D spending breakdown a large majorityof them will be employed by the research institutes. Presumably, they willnot for the most part be recent college graduates, since they must carrythe burden of formulating and implementing new programs. Persons with somesignificant industrial experience or industrial R&D experience must be re-cruited from abroad, but the recruitment of any substantial number willlikely prove difficult.
6.28 The'R&D spending per research scientist and engineer averaged 5.2million won (US$10,800) in 1976 for the nation. The projected spending of243 billion won in 1981 in the science and technology sector or roughly over200 billion won in R&D spending (R&D spending excludes Government spendingon general science and technology activities), works out to an average R&Dspending of about 14 million won (US$30,000) per research scientist andengineer in 1981. The projected average spending per researcher in 1981 isalmost 3 times the value in 1976. While "cost" will increase by a factorof three, "benefit" to the economy or industry is uncertain. The new programsby and large will not be effectively operational till around the mid-eighties.
6.29 The Government share of funding of all activities is projected todecrease from 70% in 1977 to 50% in 1981, with corresponding increase in theprivate share. The intent is to induce greater spending by industry on itsown R&D as well as in support of the research institute programs. The follow-ing tabulation compiled from data given in the Plan, suggests the net effectcould be a delay in the buildup of industry's own R&D capacity. Ten percentwas assumed for Government spending on general science and technology activi-ties. It could be higher, which would reduce the amounts on the last line ofthe table.
(billion won, 1975 value)
1977 1978 1979 1980 1981
S&T Investment 79.6 112.7 136.4 193.4 243.2
Less: 10% assumed for
Government spendingon general S&Tactivities 8.0 11.3 13.6 19.3 24.3
R&D Expenditures 71.6 101.4 122.8 174.1 218.9
Less: Spending on R&Dinstitutional programs 56.8 105.1 116.5 125.1 134.3
Amount available forindustry's own R&D 14.8 -- 6.3 49.0 84.6
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6.30 A question of priority may be raised. Many industries in Korea arein the process of transition from the manufacture of labor-intensive goods tothat of technology-intensive goods, notably capital goods and electronics.They possess very limited research, development and engineering capabilities,but the Government targets on import substitution and export for the FourthPlan and beyond require that they acquire these capabilities as rapidly aspossible. The preferential channeling of R&D funds into the building ofindependent research entities to the extent indicated by the Plan can onlydetract from the ability of industries to invest in their own technologicalfuture. While the independent research institutes can and do perform manyvaluable services for the industry, they cannot substitute for in-plantR&D work.
6.31 The planned reduction in the Government share of S&T funding doesnot seem as significant a point as is implied in the Plan, and may in factprove counterproductive. Government funding of R&D in the industrializedcountries range from 25 percent in Japan to over 60 percent in France (1973).The latest figure in the U.S. is 53 percent (1976). Admittedly, defense-related research is an important variable. If defense R&D is factored out,the resulting percentage for Japan would not change by much, for France itwould drop to about 50 percent, and for the U.S. to below 40 percent. Therange is still quite wide.
6.32 The Government plan on science and technology contains very littleinformation on what is to be done about R&D within industry. It is not clear,for example, what the R&D priorities are by industry or by product line, whatperformance is expected of each industry, what the R&D manpower requirementsare for each industry, or what strategies and incentive measures are intendedto promote R&D within the industrial sector. Under the Plan, the industrial-ization strategy of the country is keyed to the development of the machineryindustries. These industries are largely technology-intensive or equivalentlyR&D-intensive.
6.33 For reference, the R&D performance by selected U.S. industries isshown in Table 6.7. It shows the leading R&D-performing industries, asmeasured by the number-of R&D scientists and engineers per 1,000 employees,and further shows which industries are research-intensive and which aredevelopment-intensive. It is noted that the machinery industries (fabricatedmetal products, machinery, electrical and electronic equipment and motorvehicles) are not only R&D-intensive, but also strongly development-intensive.Development work is costly and must usually be done in-house by companiesthemselves since the activity is intimately tied in with their manufacturingprograms as well as their ability to compete in the market (basic and appliedresearch can more readily be contracted out).
Table 6.7
R&D Performance of Selected U.S. Industries, 1974
R&D Scientists Spending (million dollars)& Engineers per Basic Applied Development1000 Employees Research (A) Research (B) Work (C) (A+B)/C
Food 7 22 110 162 0.81
Textiles, Apparel 3 2 23 44 0.57
Paper & Allied Products 8 5 70 144 0.52
Chemicals & Allied Products 39 -/ 267 940 1157 1.04
Primary Metals 6 9 132 175 0.80
Fabricated Metal Products 10 5 59 224 0.29
Machinery 28 26 323 2144 0.16
Electrical & Electronic Equipment 40 181 854 4453 0.29
Motor Vehicles & Parts 22 9 154 2230 0.07 2/
Scientific Instruments 37 22 111 875 0.15
1/ Leading R&D-performing industries.
-/ Development-intensive industries.
Source: National Science Foundation Report NSF 76-322.
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Strategic Considerations for Future Development
6.34 Increasing complexity and cost of development work have led world-wide to industry dominance of total R&D performance. By contrast, the R&Dsystem in Korea is comprised mainly of universities and research institutes.In the absence of any significant R&D activities within industry, the researchinstitutes are expected to cover national R&D needs, vertically from basicresearch to product development and horizontally across a multitude of dis-ciplines and product lines.
6.35 While many firms employ engineers, these men are mainly engagedin production work. Very few work on product design or development. Somefirms have moved into the stage of product design adaptation, attempting tomake changes in product components to permit local sourcing, machining withequipment available in the plant, or reducing costs. There are of coursegood reasons why an enterprise, whose objective is the making and sellingof a product at a profit, will refrain from trying to "re-invent the wheel"and will obtain the technical information needed for its business throughlicencing or perhaps copying someone else's product. From a national stand-point and considering the long-term implications, this approach leavesmuch to be desired especially when there are no corresponding activities toexpand on the acquired knowledge.
6.36 R&D requirements of mechanical industries are strongly product-oriented, development-intensive and costly. This is why the auto industryin the U.S. annually spends billions of dollars on R&D, not including evenhigher downstream spending, to improve products that they have been makingfor over half a century, and why very little of this work is done outsidethe industry or reported in public literature. If the projected technologyorientation of machinery manufacture in Korea is to have any chance of successin the sense of achieving exports of plant equipment, motor vehicles andparts, etc., a much higher level of commitment of R&D money to machinerysector should be absolutely necessary. Further, it would not make sense todo the planning exclusively in research institutes. A new research institutewill take anywhere from 5 to 10 years to become effectively operational, andeven then, its role will largely be supportive only.
6.37 One further note with regards to KIST. The projected reorganizationof its mechanical engineering program aimed at developing long range capabi-lity in automation is questionable not only as to priority, but also in timing.As the only organization in the country with facilities and experienceaccumulated for over ten years to undertake contract research on behalf ofthe industry, it should continue this service for at least another 5 yearsuntil new units such as KIMM can take over or until a new national R&D struc-ture is shaped that will result in redefining its role.
6.38 As Korea moves into the higher-technology industries-, its R&Dcapacity will be an increasingly crucial factor. National planning shouldaddress the total R&D system and not simply one or more of its components.
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There is a critical need to revise the R&D effort. Universities and researchinstitutes characteristically build horizontal (functional) chains of activi-ties, the former along basic research and the latter along applied research.Industrial firms tend, by and large to build vertical (product-oriented)chains of activities, cutting across the functional lines. Rationalizationof the R&D sector structure in Korea in terms of functional and product-oriented activities should be an important planning goal.
6.39 Demands for R&D originating in the industry sector call for develop-ment work rather than basic or applied research. Some arbitrary increasein national spending on R&D or the establishment of a network of researchinstitutes is not likely to satisfy these demands. The issue is not whatpercentage of GNP can or should Korea devote to R&D, but how the money isto be spent. Under the Fourth Plan, over 80 percent of total funds willapparently be allocated to building and expanding research institutes andrelated programs leaving little for industries to conduct any R&D of theirown, and this despite a projected large increase in private share of totalfunding. The implication is that industry will not be able to sustain evenits 1976 level of performance till after 1980.
6.40 While cost-benefit concepts as applied to industrial programs aredifficult to apply to R&D programs, some general justification of cost effec-tiveness of R&D spending should be necessary. This specifically appliesto all the new institutes. The national average spending per researcher(scientists and engineers employed in R&D) is estimated at about US$30,000in 1981, which is almost three times the average in 1976. The averagespending per researcher of non-profit research institutes in 1976 was overfour times the average for industry that year. This appears to be theopposite of what is desirable.
6.41 Independent research institutes have a vital role to performin applied research areas and on missions of special national importance.It would be a mistake to saddle them with the nuts-and-bolts developmentand engineering work that demand the empirical know-how of men in thefactories and properly belong in industry.
6.42 Basic and applied research capacity appears relatively well estab-lished in the country. While the importance of development work is recog-nized, it remains largely an orphan ignored by the science and technologycommunity and neglected by the business community. In 1976, over 3,000scientists and engineers were reported as employed in R&D by the industry,with about a third by the machinery industries. It is not known what thesemen did, but from the low funding support they received, it may be surmisedthat they did not have much impact. Concerted actions by government andindustry should be required to promote R&D within industry. Some suggestedactions include (a) immediate consideration of tax and other incentivesto encourage enterprises to undertake R&D; (b) reviewing funding plans toensure adequate support of R&D programs within industry; and (c) formulatingmeasures for a systematic expansion of industrial R&D capacity.
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6.43 In the machinery sector the R&D needs are largely on elementsthat go into the making of almost any piece of finished industrial equipment:
- Improvement of metal-cutting practices
- Reduction of scrap rate in foundry and forgingprocesses
- Development of better quality and wider rangeof components (auto and machinery parts)
- Upgrading of product designs and assemblytechniques.
Major R&D programs should be identified as to their scope, where they fitin the development scheme, the cost and manpower requirements, from whichrough estimates of the magnitude of R&D efforts desired or feasible underthe fourth plan should be made.
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VII. SOME POLICY AND INSTITUTIONAL IMPLICATIONS
Introduction
7.01 There are several additional issues of policy formulation orrevision and institutional support that merit attention in preparing asystematic program of development for the machinery industries. The missiondid not have the time or resources to investigate them in depth, but theyshould be discussed at least briefly, including the mission's suggestionsfor further action by the Government. There are three points to emphasize:(1) there is need for a new review and evaluation of the incentive system,particularly as it may affect machinery exports, but also including an eval-uation of the present method of approval of imports of machinery that are"similar" to domestic products; (2) present licensing procedures probablyshould be changed and greater stimulation provided to seek licenses from awider variety of sources than at present; and (3) technical assistance, ofseveral kinds, is needed by the machinery industries to do things that theyprobably cannot do by themselves.
The Incentive System
7.02 There has not been a serious systematic study of the industrialincentive system for about five years; yet circumstances have been changingand will do so even more as the Fourth Plan is implemented. Over the pastfew years incentives have been changed by the Government, however, in responseto specific conditions.
7.03 Easy access to imported capital goods in the 1960s and early 1970sretarded the development of the capital goods industry, and especially thatof the nonelectrical machinery sector; particularly for exporters, the slightoverevaluation of the won, tariff exemptions on imported capital goods,complete and automatic exemption from tariffs in the case of capital goodsimported under foreign capital financing, the financing of purchases bysupplier's credits which carried low rates of interest relative to thoseon the domestic market, all worked to increase the attractiveness of capitalgoods imports. In contrast, the import control of nondurable consumer goodsand the export incentive system favored the development of the householdelectrical appliance sector, electronics and shipbuilding.
7.04 Starting in 1973, however, the Government has been undertakingchanges in the incentive system: a reduction of export incentives, reformof the tariff system, and changes in the system of tariff exemptions onimported machinery and equipment as well as on materials used in fabricatedmetal structures. Briefly, as of 1974, exporters no longer receive exemptionson their imports of capital goods. Exemptions are to be granted to importersonly in selected "key" industries; exemptions are further subject to theconditions that the imported capital goods be essential to the manufacturing
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process, embody the latest technology and not be domestically produced.Complete and automatic exemptions, however, continue to be granted in thecase of capital goods imported under foreign capital financing. A question-able measure of encouragement addressed to the machinery sector consists ofthe imposition of quantitative controls on competing imports immediately uponthe initiation of domestic production. This is accomplished either by thesetting of effective quotas on capital goods items already on the "restrictedimport" list, or by the addition of new items to the list. Other measureswhich may jeopardize productive efficiency less, have been the institution ofa number of specialized medium and long-term credit funds for the provisionof won financing for the purchase of domestically-produced machinery. Thelargest of these, the National Investment Fund, is to finance 18% of invest-ment in the machinery sector and 13% of total fixed capital formation inmanufacturing during the Fourth Plan Period, at interest rates of about 14%(about 3 percentage points lower than the current unsubsidized commercialshort-term rate) and for periods of 8 years. In addition, domestic investors
in the machinery sector are to be eligible for a wide range of tax benefits:reduction of or exemption from corporate income tax, a reduction in incometax equivalent to 8% of investment expenditures, accelerated depreciation,a tax reduction (to 8%) on undistributed profits in the event of investmentsundertaken for new technology development and the setting up of reservefunds for product development, as well as to other special incentives ifdomestic investment is tied to foreign direct investment.
7.05 It is interesting to note that the changes in policy which wereundertaken in 1973-74 may already have had some identifiable impact on themachinery sector, by 1975. The incentive measures are likely to have workedto the special benefit of the latter, since the other two branches of thecapital goods industry, in their capacity as exporters of such commoditiesas ships, electronics, railway freight cars, domestic electrical appliances,etc., were already eligible for the incentives which were accorded to exportactivity in general. Estimates of production in the heavy industry sectorreveal that the share of nonelectrical machinery in the output of the capitalgoods industry (in current prices) had been declining steadily since 1967. Inthat year, the share of the subsector was about 23%; in 1969-70, it had fallento around 14%; by 1974, it was 6.8%. The recent measures appear to have re-versed the decline in trend; the share of nonelectrical machinery in the totalmachinery industry's output had actually risen to about 7.4% in 1975, and theupward trend appears to have been sustained in 1976, and is projected to growfurther during the Fourth Plan.
7.06 In particular, the current method of reviewing machinery importsthat may be "similar" to and competitive with domestic production may not leadto the best results. This has been mentioned earlier in this report. Atpresent, KOSAMI is charged with conducting the review, which is tantamount
to asking the industry to police itself. There are many opportunities forabuse in such a system, and it is suggested that a determination by an agencyor office outside the machinery sector may be more efficient.
7.07 Although we were not able to obtain a list of prohibited imports,
we were repeatedly informed that such a list exists, though its components
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are periodically reviewed. Outright prohibition runs the risk of increasingthe level of costs throughout the equipment producing sector insofar as someimports such as machine tools are among the major inputs used in the pro-duction of machines. Appropriate imported equipment may be necessary forspecific production tasks. Moreover, in the non-engineering sector, costmay be unnecessarily increased where relevant equipment is not obtainable.Engineering industry representatives are likely to be less than objective inany event.
7.08 If infant industry protection is desired, it should take the formof uniform effective protection of value added, probably at lower levelsthan we would estimate currently exist. Currently the modal nominal tariffis 40 percent. One of the few economic instruments available to the govern-ment to encourage the reorganization of plants to achieve greater efficiencyis greater competitive pressure. Though consultants' visits, industrialextension services and so on will undoubtedly help the generally receptivefirms and workers, their openness to advice will be catalyzed by greatercompetitive pressure. Given the current state of most of the plants visited,substantial cost decreases are possible simply from reorganization withoutrequiring additional investment.
7.09 It was said that a partial study of the levels of effective protec-tion had been undertaken, but the mission was not given access to the results.If the elements of an incentive system are to be constructed so as to helpachieve the Fourth Plan targets (particularly on exports), the study ofeffective protection should be completed and used as a basis to make changes.
7.10 In order to stimulate export sales of machine products, particularlyin new markets, it may be desirable to consider allowing expenses of estab-lishing market agencies and service networks to be deducted from the corporatetax base at a rate greater than 100 percent for some fixed period. This wouldbe to meet the initial fixed costs of penetrating new markets. On a studybasis only, the government might find it worthwhile to evaluate the conse-quences of more drastic measures to stimulate machinery exports, such as a taxon the difference between actual exports and presumptive export capability.
Licensing and Technology Agreements
7.11 The Bureau of Foreign Capital Management of the EPB controls thereview process of applications for foreign licensing arrangements. The Bureauexhibits considerable awareness of the need for specialized knowledge withinthe machinery sector and is willing, where attractive opportunities exist,to allow higher royalty rates than those prevailing in the past. In 1975royalty payments were roughly 1 percent of total sales ($2.040 million), arelatively small amount compared with some other countries attempting rapiddevelopment of the sector. In the past licensing arrangements have primarilybeen with Japan (67 percent of all agreements) and the U.S. (21 percent).In 1976, 70 percent of royalty payments were to Japan. There is a stronginterest in diversifying the geographic sources of licenses in order to avoid
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too heavy a reliance on limited resources and to take advantage of otheradvanced technologies.
7.12 The terms of licensing have been fairly conservative compared tothose of other countries, royalties most often falling below 3 percent ofsales and the royalty period being relatively short, usually less than 7 years.The Bureau is now quite willing to relax these limits, a sensible move giventhe need to learn more of the "art" of production as well as the acquisitionof hardware and designs. Evaluation of applications for new foreign licensesappears to be carried out with considerable care. Our interviews suggestedthat the major criteria for benefits from a license were whether the productwas in fact a new one or the process was newly developed and offered somelearning opportunities. The technical evaluation currently undertaken byvarious ministries and outside groups such as KIST might be augmented by someeffort to establish the probable costs of transfer to the Korean economy ofprocesses utilized in other countries.
7.13 The higher the costs of absorbing a new technology, the smaller willbe the net benefits from a license. If predictors of the cost of transfercan be obtained, the screening process could then transmit this informationto licensees to indicate to them some of the questions that might usefully beaddressed in any licensing negotiation.
7.14 A recent study, though limited in its sample might be helpful indrafting guidelines to firms. 1/ The paper attempts to determine the costsof transferring technology from one country to another, the costs consistingof four parts:
(1) preengineering technical exchanges in which the transfereelearns about the product and the general nature of itsproduction process;
(2) engineering costs of the actual transfer such as modifica-tion of existing designs to allow for scale differences orlocally available materials as well as changes in productdesign to meet the needs of local or export marketsdifferent from those of the transferor;
(3) research and development costs incurred by the transfereein dealing with remaining difficulties occurring once\production is begun;
(4) excess manufacturing costs during the start-up phasewhich may include training or retraining of operativesand foremen, wasted material used in unacceptableoutput, and so on.
The four above costs, it will be noted, do not include payments for hardware.
1/ D.J. Teece, "Technology Transfer by Multinational Firms: The ResourceCosts of Transferring Technological Knowledge", The Economic Journal,June, 1977, pp. 242-61.
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Table 7.1
Number of Licensing Approvals by Industry(As of December 31, 1976)
(Unit: US$1,000)
RoyaltyClassification Granted Cancelled Expired Payments
Mining and Manufacturing 642 32 250 82,081.7
Food Processing 13 - 7 1,895.8
Wood and Paper Manufacturing 6 1 2 111.2
Textiles 18 - 6 607.6
Man-made Fiber 16 2 5 7,299.6
Non-Metallic Products(Ceramics & Cement) 15 - 5 467.6
Petroleum and Chemicals 126 3 50 22,069.2
Pharmaceuticals 26 2 16 1,153.5
Metals 66 5 23 20,774.9
Electrical Machineryand Electronics 137 6 66 9,571.0
Machinery 182 12 58 14,273.7
Shipbuilding 8 - 2 3,662.5
Others 29 1 10 195.1
Total (all sectors) 690 32 278 87,574.5
Source: EPB.
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Table 7.2
Fee Payments by Country(As of December 31, 1976)
(Unit: US$1,000)
U.S. Japan W. Germany Others Total
1962-1966 272.8 3.5 8.3 21.0 305.6
1970 805.0 1,050.1 544.7 - 2,399.2
1971 1,778.7 2,178.6 218.2 101.9 4,277.4
1972 1,966.1 3,666.1 466.0 671.0 6,769.2
1973 4,238.7 4,707.3 877.0 544.5 10,367.5
1974 6,681.3 11,517.7 98.4 1,216.4 19,513.8
1975 3,201.7 11,779.5 1,407.3 2,133.9 18,522.4
1976 3.559.9 14,971.1 252.2 2,448.0 21.231.2
Total (1962-76) 24,322.9 51,693.7 4,412.3 7,145.6 87,574.5
Source: EPB.
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7.15 Of considerable interest for the licensing procedure are thosecharacteristics of the transferred process or the transferee which seem toreduce transfer costs. Good predictors of the potential for obtaining lowcost transfers were:
(1) the number of firms elsewhere already using the processto be transferred or a substantially similar one;
(2) the number of years elapsed since the technology wasfirst applied commercially;
(3) the experience of the transferee as measured by the yearsof its own production experience.
7.16 This methodological approach is mentioned primarily to emphasizethe point that in presenting the application for license by the firm, and inthe review of it for approval, an analysis should be made of the cost ofimplementing the transfer of knowledge of the machine or process, the timeit will take to become effective, and the benefits (in increased outputand/or reduced cost) that are expected to result. A general considerationis whether it contributes to upgrading technological capabilities. Mostimportantly, the process of application and review should establish clearlythat all aspects and knowledge about the machine or process are being covered,and that no significant part, aspect, component, or knowledge about theoperation is being withheld from the Korean purchaser.
Technical Assistance
7.17 The machinery industries both now and in the future require a greatdeal of technical assistance to undertake work that individual enterprisesgenerally cannot. The technical assistance ranges from provision of technicalinformation on machine processes; comparisons of machine performance of dif-ferent foreign producers; practical information on standards and measurementssuch as are commonly found in trade and similar publications; adaptive re-search, development and testing to determine aspects of machine design andoperation that could be incorporated in Korean enterprises; testing theperformance of specific materials in particular uses with respect to wearand tear, metal fatigue, etc. and other topical technical areas related tothese industries. This is a type of assistance that each enterprise willnot undertake for itself, because the various activities are not, in eachand every case, related uniquely to the problems of that enterprise. Butin total the assistance is essential to the success of all the machineryindustries. The activities could be described as applied research and devel-opment in machine performance and characteristics, and engineering work atthe technical level.
7.18 The functional areas for work are essentially three: First, thedigest, publication and dissemination of information on a wide range oftopics in measurements, materials characteristics, and machine operations.
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Second, the comparison testing of machines available from foreign suppliers,
under different operating conditions, to determine design characteristics
and performance, is essential to provide guidance to Korean manufacturers.
Third, work on the behavior and characteristics of materials in the specific
circumstances in which they are used in the machinery industries is necessary.
For short hand, the three program elements might be called: technical
information; machine operations and characteristics; materials sciences.
7.19 Technical information: In all of the western countries there are
multiple sources of information on a current basis in technical journals,
reports of technical societies, official publications, and meetings, and other
papers. There is not a single source of such information in Korea with any
substantial coverage of topics. The technical publications and papers report
on results of experiments and operations, performance of tools, new designs
in equipment, and a wide range of related topics. The publication of these
materials and the dissemination given to them insures that there is an easy
flow of technical information available to enterprises and a ready reference
when one is needed. In the US the Government maintains five computer banks
covering technical information relative to materials and machines. Any user,
foreign or domestic, has access to them and the charge for research on any
topic is nominal. A description of just the technical books and publications
available would itself be a very large document.
7.20 It is imperative that this flow of technical material be sifted,
evaluated, then selections made for regular dissemination to Korean manufac-
turers. This would be one of the best ways to help obtain a general upgrading
of information down to the very smallest firms. The establishment of such a
technical information data system need not be an overwhelming task, if
designed appropriately to reflect the needs of the Korean enterprises.
7.21 Machine operations and characteristics. It is general practice for
firms to obtain machines that are built by their competitors and to learn
everything they can about them. They not only learn what the competition is,
but also are able to alter machine designs and operating practices to become
more efficient themselves. The same situation applies in Korea. There is a
need for some unit that wiil systematically obtain different kinds of machines,
some of which may be produced but more of which may represent somewhat more
advanced designs. These should be thoroughly disassembled, the characteris-
tics and design noted, and the machines then operated under a wide range of
conditions to determine their performance. A careful analysis of the results
and their interpretation would then reveal information of value to Korean
producers of similar items. Or it may be that with modifications in the
machine they can be made more suitable for Korean use. This kind of activity
may be done by a few of the largest firms but there is no evidence that it is
at all widespread. Yet from this type of activity flows information that is
of immediate practical use to enterprises in their day-to-day operation.
7.22 Materials sciences: Allied to the work on the machines themselves
is work on the main materials used in the machinery industries. Tests on
their behavior under conditions of heat, fatigue, pressure, and a variety
of other circumstances, taken singly or in groups, are essential in improving
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the quality of output. The design of such tests on materials should not be
in the nature of basic research nor to reproduce data commonly found in
handbooks, but should be designed in terms of the problems that are facing
the Korean industries.
7.23 The mission has no specific recommendation on fixing responsibility
for this work. It conceivably could be undertaken by an independent institute
with Government support or through some cooperative arrangement within indus-
try. It is, however, important to recognize that provision of this assistance
has a potentially high payoff to the development of the machinery industries.