To seize growth opportunities in the age of artificial intelligence (AI), South Korea must maintain its semiconductor competitiveness while focusing on the transition of manufacturing to AI (M.AX), according to Kwon Nam-hoon, head of the Korea Institute for Industrial Economics and Trade. He emphasized the need for South Korea to create substantial added value centered on its strengths in semiconductors and manufacturing, rather than merely following the competition in AI software.
In a recent interview with Aju Economy, Kwon stated, "The areas where our country is making money in the AI revolution are ultimately semiconductors and information technology (IT) devices." He noted that the potential for generating revenue through AI software or sovereign AI is significantly lower than through industries that utilize or are linked to AI.
Kwon stressed, "The area where South Korea should truly compete is manufacturing," highlighting that M.AX is the most critical and urgent task among various discussions related to AI.
Earlier this year, the Korea Institute for Industrial Economics and Trade projected that South Korea's exports would reach approximately $940 billion, a 30.3% increase from the previous year. Exports in the first half of the year also hit a record high of $496.7 billion, with discussions emerging about the possibility of achieving $1 trillion in annual exports. The Korea Development Institute recently forecasted that exports would total $1.745 trillion this year.
Kwon remarked, "The talk of reaching $1 trillion in exports is very positive," acknowledging the significant impact of semiconductors. He explained that the surge in semiconductor exports, coupled with increased demand for IT equipment due to the expansion of AI data center construction, has contributed to this growth.
He also noted that despite high exchange rates and turmoil in the Middle East, other sectors' exports did not suffer as much as expected, positively influencing overall export growth. Kwon commented, "Some of this was due to luck, and some was due to our effective responses," but cautioned that fortunate circumstances could change at any time, necessitating continued vigilance.
However, the increasing reliance on semiconductors raises concerns. Kwon pointed out that since around 2010, exports from industries other than semiconductors and automobiles have not increased in nominal terms. He noted that since around 2015, automobile exports have also stagnated, leading to a situation where exports have effectively become a "one-tool" reliance on semiconductors.
Looking ahead, Kwon identified potential risks, including a decline in export competitiveness due to the rising value of the Korean won, the relocation of key production facilities overseas, and competition from Chinese manufacturing. He expressed concern that if the $350 billion investment in the U.S. materializes, it could weaken South Korea's domestic production base.
Kwon stated, "There has been a trend of important production facilities moving overseas, particularly centered around the U.S., and this trend is likely to accelerate, which could impact our domestic production capacity."
He emphasized the need for M.AX to spread the benefits of the semiconductor boom across the manufacturing sector. However, he cautioned that simply making existing tasks easier through AI implementation does not constitute a genuine transformation.
Kwon suggested that to promote M.AX, companies need to establish successful case studies and data frameworks for reference. He highlighted the importance of creating an environment where data can be collected and utilized at low cost while maintaining security, as well as standardizing data and enhancing the AI capabilities of existing workers.
He explained that M.AX would only be effective if smart factories and digital transformation (DX) are sufficiently advanced. Kwon argued that the policies of the Ministry of Trade, Industry and Energy regarding M.AX and the Ministry of SMEs and Startups' smart factory initiatives should not be pursued as separate projects.
Kwon noted, "Large companies have the capital and workforce to find their own paths, but the focus of M.AX should be on revitalizing small and medium-sized enterprises and the manufacturing ecosystem, which have weakened competitiveness."
Kwon made it clear that while the export structure's heavy reliance on semiconductors poses risks, delaying domestic semiconductor investment is not an option. He warned that if South Korea's relative production capacity diminishes amid the global competition for semiconductor production facilities among the U.S., China, Japan, and Europe, it could weaken the country's industrial leadership.
Kwon stated, "The global semiconductor market is expanding, and countries are competing to attract production facilities. If our production capacity shrinks in this process, we could face significant strategic challenges in the future, making it essential to increase domestic semiconductor production facilities."
He evaluated the government's push for semiconductor mega projects as a policy aimed at maintaining this domestic production base. Kwon noted, "When the mega project was announced, there was mention of accelerating the completion of the Yongin semiconductor cluster," adding that the proactive approach to the mega project is a positive development.
He also expressed confidence that even if semiconductor demand does not increase as expected, investments in infrastructure will still be beneficial. Kwon emphasized, "Industrial sites with stable power and water supply are crucial for maintaining domestic manufacturing capacity and developing regions. Investments will not be wasted, as other industries can also utilize them, not just semiconductors."
For the semiconductor mega project to translate into actual investment and production, Kwon recommended improvements not only in power and water supply but also in the working hours of research and development personnel. He discussed the need for a "white-collar exemption" related to the 52-hour workweek for personnel in advanced industries like semiconductors, stating, "If we cannot demonstrate flexibility even in areas that require it, we cannot expect flexibility in other sectors either."
Kwon proposed that if comprehensive institutional reforms are challenging, work hour flexibility should be implemented first in special zones related to mega projects. He stated, "If special zones are merely given more subsidies without addressing the actual regulatory bottlenecks, they will not succeed," adding that introducing a white-collar exemption could be a first step toward labor market flexibility.
However, he cautioned against emphasizing labor market flexibility alone. Kwon asserted, "There is no disagreement on the premise that increasing labor system flexibility must also enhance stability," emphasizing that the issue is more about methodology than direction, making it practical to apply it first through special zones.
Kwon stressed that the semiconductor boom does not automatically lead to improvements in South Korea's economic structure. He argued that opportunities secured through exports must be linked to expanding domestic production capacity, M.AX, and strengthening the manufacturing ecosystem to enter a new growth phase.
He concluded, "When opportunities arise from outside, we must leverage them to change ourselves to reach a new stage. In times of increased uncertainty, we need a long-term perspective on the industry rather than short-term optimism or pessimism."
* This article has been translated by AI.
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