Why Korean corporates are accelerating their offshore investments

April 24, 2018

SEOUL – In a research note on Korea’s corporate leaders, the French banking group, Natixis, nominates one of the key reasons for their growth -  in addition to persistently high spending on R&D - is their flexibility in reorganising the supply chain to offshore production to reduce costs and expand access to faster-growing markets.

“Our bottom up research shows that the top 40 firms in the KOSPI2 gain most of their revenues from overseas, with the tech sector receiving as much as 74% of total earnings from abroad and Samsung Electronics earning as much as 87% of revenue from sales externally,” Natixis says.

“But even for consumer cyclical sector, 51% of revenue is derived outside of Korea.”

The report says that, for offshoring and market access, China was a favourite destination of Korean corporates until 2010 because of favourable investment incentives, cheap labour costs, and large market potential.

But all these factors have largely disappeared as China tries to move up the value chain, and there are higher wage costs, a more saturated market and riskier investment profile due to geopolitical tensions.

“Therefore, Korean firms have shifted investment and moved more production to Southeast Asia to locations such as Vietnam,” Natixis says.

“In terms of revenue source, the US remains key, although emerging Asia is becoming more important.

“Since 2010, Korean corporates have deployed capital to the US to both acquire tech firms and employ greenfield investment to avoid US duties.

“For example, they invested 70% more FDI to the US than the total capital to Asia in 2017.”

Natixis says two factors will further accelerate this trend of Korean corporates’ offshoring production:

a) President Moon’s intention to further increase the minimum wage and the recent corporate tax hike, as higher costs of doing business in Korea will cause the private sector to respond by decreasing investment onshore, increasing both offshoring to Southeast Asia and investing more in automation; and

b) on-going trade tensions between the US and China, which will cause Korean firms to further diversify out of China and increase investment to the US.  www.natixis.com (ATI).