Korea Industry Vision 2020

August 3, 2006

Byoung Jun Song, Ph.D

Senior Reaserch Fellow

Korea Institute for Industrial Economics & Trade (KIET)

 Contents

Introduction and Outline

2020 Mega-Trends and Industry Environment of Korea

Industry Vision 2020s of Major Countries and Its Implications

Structural Changes and Competitiveness of Korean Industries

Korea Industry Vision 2020

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 Introduction and Outline

□ What will lead the Korean Economy and Industry in 2020?

○ What will be the most promising sector in 2020?
○ Where should we invest now?

□ Changes in the world industry environment in 2020?

○ Impact of 15 Mega-Trends on Korean industries
○ Various Industry Vision 2020s of major countries and its implications
○ Prospects of the world economy and industries for 2020

□ Past and present of Korean industries

○ Competitiveness of Korean industries

□ Forecast of the Korean industries and promising sectors in 2020

□ Korea industry vision for 2020

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 2020 Mega-Trends and Industry Environment of Korea

□ 15 Mega-Trends: the key factors for developing business environment

□ How will Mega-Trends influence the future of Korean industries?

○ Positive Mega-Trends
- Maturation of Digital and Network Technology
- Fusion Technology: IT, BT, NT, new Materials
- Progress in South-North Korean Economic Cooperation

○ Negative Mega-Trends
- Aging: Change in Demographic Structure
- Degradation of Environment and Natural Resources
- Hegemony of Technology: Standardization and Intellectual Property Rights

□ Through which mechanism will the Mega-Trends work?

○ Labor Input
○ Capital Input
○ Total Factor Productivity
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 2020 Mega-Trends and Industry Environment in Korea

Fields of Mega-Trends 15 Mega-Trends

1) Integration of the World Economy
Change in World
Economic Order 2) Power Shift in World Economic Order and Change in
Comparative Advantage
3) Aging : Change in Demographic Structure

Labor, Resources, and 4) Degradation of Environment and Natural Resources

Management 5) Paradigm Shift in Financial Markets

6) New Wave in Management : Knowledge-based and CSR

7) Maturation of Digital and Network Technology

8) Advent of Bio-economy

Acceleration in 9) Fusion Technology: IT ㆍ BT ㆍ NT ㆍ New Materials

Technology Innovation 10) Challenge to New Technology : Rise of National
Strategic Technology
11) Hegemony of Technology : Standardization and
Intellectual Property Rights
12) New Consumption Pattern
Evolution of New Culture
and Consumption Pattern 13) Evolution of New Culture

14) Progress in South-North Korean Economic Cooperation

Korea-specific Situation 15) Regional Innovation and Balanced National
Development
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 Industry Vision 2020s of Major Countries and Its Implications

□ The industry vision of major developed countries: highly dependent

on population growth rates

○ U.S. will remain the global superpower in 2020 due to the high population
growth rates.

○ Aging will weaken the potential for growth in Japan and EU.

○ Forecast of Potential GDP growth rates for the next 20 years

(estimated by Shell): U.S. 3.1%, EU 2.1%, Japan 1.1%

□ The declining portion of manufacturing sectors for developed

countries will continue in the future

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 Industry Vision 2020s of Major Countries and Its Implications

Forecasts for the proportion of manufacturing in major countries

35
in percent

30 29.4
27.1 27.3 27.1
26.1 25.9
25 24.5
25.2

22.4
21.2 Korea
20
18.6 Japan
17.3
UK
15 15
13.2
US
11
10

0
1980 1990 2000 2010 2020
Source: KIET∙Global Insight (2005)
Note: The shares are on the basis of norminal value added

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 Industry Vision 2020s of Major Countries and Its Implications

□ Despite of the declining proportion of manufacturing, developed countries

will always value the manufacturing industry.

○ Leading innovation and productivity improvement

○ Creating high paying jobs

□ Government policies of developed countries focused on improving

free market environment and providing enlarged infrastructure for
industries.

○ Strengthening intellectual property rights and standardization of technology

and educating/training related experts

○ Increasing R&D investment

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 Industry Vision 2020s of Major Countries and Its Implications

□ As a manufacturing hub, the proportion of the manufacturing

industry in China will increase.

○ In China, increased income will lead to boosted demands for service

industries, such as entertainment, tourism, and recreation.

○ Especially, high demands are expected for business services, such as design,
consulting, logistic, and financial services.

□ Ambitious Industry Vision 2020 of India to become a developed country

○ The 4th largest GDP country in the world in 2020

○ Strategically targeted industries: materials, chemicals, pharmaceutical,

biotechnology, and ICT

○ Dual-use technology: driving force for upgrading industries and technological

innovation

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 Industry Vision 2020s of Major Countries and Its Implications

Forecasts for the portion of manufacturing in China

in percent

45
43.1 43.2
40 37.7
35 15.6 15
12.2
30
capital goods
25 intermediate goods
20 17.5 19.2 consumer goods
15.2
15
10
5 10.3 10 8.9
0
2000 2010 2020
Source: 王夢奎 編 (2005)

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 Structural Changes and Competitiveness of Korean Industries

□ Current status of the Korean economy and industries

○ Per capita income: $14,100 in 2004 (24th among OECD member countries)

○ Labor productivity in manufacturing: 42.7% of the U.S.

○ Total trade volume: 480 billion dollars in 2004 (12th in the world)

○ Proportion of manufacturing exports in the world market:

3.5% and 8th largest country

○ Technology competitiveness (2003):

5th largest country in terms of patents registered in the U.S.

□ Evolution and structural change of the Korean industries

○ Rapid development of manufacturing industry has driven the economic growth of

Korea for the past 4 decades.

○ The proportion of the service industry is continuously increasing.

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 Structural Changes and Competitiveness of Korean Industries

Structural Change of the Korean Industry

(unit: percent)

1970 1980 1990 1995 2000 2004

Agriculture & Fishery 31.01 18.11 9.78 6.94 5.27 4.03

Manufacturing 17.79 24.45 27.26 27.63 29.42 28.74

(heavy industry) (40.6) (58.1) (71.0) (76.6) (79.3) (84.2)

(light industry) (59.4) (41.9) (29.0) (23.4) (20.7) (15.8)

SOC 6.47 10.16 13.47 13.63 10.92 11.74

Services 44.73 47.28 49.49 51.80 54.39 55.49

Notes: 1) Nominal value added

2) ( ) indicates percentage of total manufacturing.

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 Structural Changes and Competitiveness of Korean Industries

□ High proportion of manufacturing in Korea

Cross country comparison of manufacture shares

(unit: percent)
nominal real

Korea 2004 28.7 31.7

2002 13.9 17.8

U.S.
1970 24.3 22.7

2002 20.3 21.5

Japan
1980 28.8 23.9

2002 20.8 21.8

Germany
1978 29.1 28.7
Notes: 1) value added
2) ‘real’ for Korea is at 2000 prices, and for other countries, at 1990 prices.
3) 1970 for U.S., 1980 for Japan and 1978 for Germany are the years when their
per capita incomes were at the same level as Korea in 2004

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 Structural Changes and Competitiveness of Korean Industries

□ Korean economy is highly dependent on trade.

Cross countries comparison of trade dependence degree (2000)

80 in percent 73

65.2
70

60

50
41.2
39.6
Trade dependence
40 32.6
Export ratio

30
20.5 20.8
17.1
20
10.1
8.3
10

0
World U.S. EMU Japan Korea
Notes: 1) Trade dependence degree = (total exports + total imports) / total value added
2) Export ratio = total exports / total value added

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 Structural Changes and Competitiveness of Korean Industries

□ Transition of top export items

ICT and
related components
automobile
textile Semiconductor and electronic parts

1970 1980 1990 2000

□ Manufacturing industry has driven labor productivity improvements

in Korea.

○ High productivity improvement in leading industries: automobile,

shipbuilding, machinery, textiles, iron & steel, petrochemical, electronics, etc.

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 Structural Changes and Competitiveness of Korean Industries

Transition of labor productivity growth rates in Korea’s major industries

in percent
0.9
10.4
2001~2004 6.6
2.9

0.9
service industries
12.7
1996~2000 leading industries
10.4
3.6 manufacture
total industry

1.7
11.4
1991~1995 8.7
4.7

0 2 4 6 8 10 12 14

Source: The Bank of Korea(2005), National Income Account;

The National Statistical Office, Annual Report on the Economically Active
Population Survey
Notes: Labor productivity = Value added at 2000 prices / employed person

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 Structural Changes and Competitiveness of Korean Industries

□ Competitiveness improvement in trade is sustaining in Korea.

○ Export-specialized industries in Korea: automobile, petrochemical, shipbuilding,

textiles, and ICT, etc.
○ Import specialized industries: pharmaceutical, aircraft, parts and components,
and materials, etc.
○ Improving terms of trade: export unit price changed from 43% of the German's
export unit price in 1990 to 60% of that in 2004.
○ The share of mid-tech or high-tech products in exports is continuously increasing.

□ Large benefits from trading with China

○ Contributed to the Korean economic growth by 0.66% annually from 2000 to 2004.
○ The Korean heavy industries benefited the most.
○ Light industries and agricultural products were negatively affected.

○ This trend will continue until 2010s and aggravate the bi-polarization of the
Korean industries between light industries and heavy industries.

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 Structural Changes and Competitiveness of Korean Industries

□ 'Hollowing-out' may not be critical in Korea, yet.

○ The current state of 'hollowing-out' in Korea is at the same level as in Japan in

the early 1990s.

○ Policy measure may be needed for the specific sector where 'hollowing-out' is
abnormally accelerated.

□ Bi-polarization between manufacturing and service may gradually

be alleviated, but bi-polarization between heavy industries and light
industries are not likely to be.

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 Korea Industry Vision 2020

1. Forecast of the Korean Economy for 2020

□ Potential GDP will grow at 4.3% annually by 2020

○ Because of sluggish growth of inputs, potential GDP growth rate will decline for
the next 15 years

Growth factors and potential GDP growth rates forecast

1981 1991 2005 2011 2005

(unit: percent) ~1990 ~2004 ~2010 ~2020 ~2020
7.5 6.2 4.9 4.0 4.3
Potential growth rate (100.0) (100.0) (100.0) (100.0) (100.0)
1.0 0.6 0.5 0.3 0.4
Labor (13.9) (9.2) (10.7) (6.7) (8.4)
4.8 2.9 1.8 1.3 1.5
Capital (64.5) (45.9) (37.7) (33.0) (35.0)
1.6 2.8 2.5 2.4 2.4
Total Factor Productivity (21.6) (44.8) (51.7) (60.3) (56.6)

note: Data in parenthesis implies degree contributed to growth.

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 Korea Industry Vision 2020

□ According to baseline forecasts, Korea’s GDP growth rate for 2005-2020

will be 4.6% and per capita income will be $45,000 in 2020.

Forecast for GDP growth rates and per capita incomes by scenario

Upper-bound Baseline Lower-bound

(unit: percent) (Active policies) (BAU policies) (Passive policies)
Annual GDP growth rates
5.1 4.6 4.1
(2005~2020)
Per capita income
48.8 45.2 42.0
(1,000 dollars)
Source: KIET∙Global Insight (2005)
note: Assume fixed 1,000 won/1 dollar exchange rate

□ Based on the upper-bound forecast, annual GDP growth rate will be 5.1%
and Korea will become the global top 10 country in terms of GDP.

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 Korea Industry Vision 2020

World GDP and ranking forecast (upper-bound scenario)

(unit: billion dollars)
2004 2020 (fixed exchange rate) 2020 (won appreciation)
nation GDP rank nation GDP rank nation GDP rank
U.S. 116,675 1 U.S. 276,858 1 U.S. 276,858 1
Japan 46,234 2 China 102,858 2 China 102,858 2
Germany 27,144 3 Japan 95,494 3 Japan 95,494 3
U.K. 21,409 4 U.K. 51,632 4 U.K. 51,632 4
France 20,026 5 Germany 51,591 5 Germany 51,591 5
Italy 16,723 6 France 45,060 6 France 45,060 6
China 16,493 7 Italy 35,258 7 Italy 35,258 7
Spain 9,914 8 India 29,331 8 Korea 32,375 8
Canada 9,788 9 Spain 26,082 9 India 29,331 9
India 6,919 10 Korea 24,377 10 Spain 26,082 10
Korea 6,797 11 Canada 22,775 11 Canada 22,775 11
Source: KIET∙Global Insight (2005)
note: 1) nominal GDP
2) 'Fixed exchange rate' implies that current exchange rate will be maintained until
2020, while 'won appreciation' means that won will appreciate to 770 won per
1 dollar, which is the PPP exchange rate.
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 Korea Industry Vision 2020

□ Trade volume will increase to over 1,400 billion dollars, ranking Korea as
the 7th largest trading country in the world

Global trade volume ranking in 2020

(unit: 1 billion dollars) Trade volume1) Rank

United States of America 6,380 1

China 5,281 2
Germany 2,959 3
United Kingdom 1,826 4
Japan 1,753 5
France 1,725 6
Upper-bound 1,583 7
Korea
Baseline 1,396 7
Italy 1,220 8
Source: KIET∙Global Insight (2005)
note: 1) Trade volume is only for goods.

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 Korea Industry Vision 2020

□ Balanced growth of domestic demand and exports

○ Increase in income will substantially boost demands and the imbalance between
exports
and domestic demand will be moderated.
Growth rate forecasts by expenditure item (baseline scenario)

2001 2005 2010 2016 2005

Real growth rate (%) ~2004 ~2010 ~2015 ~2020 ~2020

Consumption 2.7 5.7 5.5 4.7 5.3

Investment 3.1 6.0 5.2 3.5 5.0

Exports 11.1 7.8 6.9 5.7 6.9

Imports 8.5 9.1 8.1 6.8 8.1

GDP 4.6 5.3 4.7 3.6 4.6

Source: KIET

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 Korea Industry Vision 2020

□ Over 3.6 million jobs will be created by 2020, and employment rate will
increase to 67%, reaching the level of developed countries.

Forecast of job creation and employment rate

Employment rate
Job creation
(2005~2020)
2004 2010 2015 2020
(unit: thousand jobs, percent)

Baseline 3.620 59.8 62.1 64.0 66.8

Upper-bound 3,780 59.8 62.3 64.4 67.2

Lower-bound 3,530 59.8 61.9 63.9 66.6

Source: KIET

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 Korea Industry Vision 2020

2. Fourteen Most Promising Sectors

□ Why do we need to select the most promising sectors?

○ For a continuously growing and upgrading industry, new technology and new
products are needed.
○ Solid information for the future industry will induce rational investments and
lessen risks and uncertainty for investors.

□ Rationale for selecting promising sectors

○ Potential for growth (A): high growth rates in 2020

○ Profitability (B): large market size, and high technological competitiveness of

Korea in 2020

○ Externality and public interest (C): large technological side effects and
strategically important items

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 Korea Industry Vision 2020

□ Dynamic and analytical screening process

Process of selecting promising sectors in 2020

Lists of Promising Items

41 Items Selected
Add Your Title
Technology Road Map

List of Promising items

Selected by public institute 2nd Selection
Potential for Growth
Promising items of 1st Selection Profitability
Foreign Countries
Externality and
Strategic Importance Public Interest
Possibility of <Delphi Survey+
Commercialization Industry Forecast+
by 2020 Mega-Trends Analysis>
Competitiveness in
Technology 85 Items Selected
<Screened by Experts>
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2020 promising sectors(14 sectors, 41 items)
14 s ector s
Next generation of Semiconductor
Bio-organ, New Medicine
Ubiquitous Network
The new generation of Display
New concept Computer
The next generation of Vehicle
Contents Industry
Medical Service
The next generation of Energy
Robot
High-tech Chemical Material
Advanced Air/Marine Transportation
Hyper-Precision Equipment components
High-Tech Machinery and System
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Korea Industry Vision 2020
41 pr omis in g p rodu ct s / techn ology
The next generation of Memory, Non-memory Semiconductor
Advanced Biomedicine, Bio-organ
DMB, Telematics, the next generation of Mobile Phone, Home Network, Ubiquitous
Computing
Digital TV ,Hologram Navigator, LCD, OLED
Wearable Computer, High Performance Distributed Intelligence Computer
Intelligent Vehicle, Fuel Cell Vehicle, Eco-Vehicle
Culture Content, Game
Obstinate Disease Prevention and Curing Service, Senile Disease Treatment Service
Secondary Battery, Solar Battery, Hydrogen Energy
Industrial Robot, Service Robot
Artificial Intelligence Polymer, Fine Chemicals for Electronic Information, Green
Chemical Material, Nano-Textile
High-Value Added Shipping, the next generation of Air and Space
Ultra-Micro Process Machinery, MEMS, High-Tech Sensor,  Heat Sensor,  Elder Caring
Medical Machinery, Bio-Chip
Intelligent Flexible Manufacturing Systems , High Functional Environmental
Equipment, High-Efficiency Power Generation Plants
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 Korea Industry Vision 2020

□ Assessment of 41 promising products and technologies by selecting

rationales
Assessment of Promising Items by Selecting Rationales

(A) Potential for growth (B) Profitability

(C) Externality & Public Interests

○ A+B+C: Advanced Biomedicine, DMB, Ubiquitous Computing, the next

generation of Mobile Phone, Secondary Battery, Eco-Vehicle, Fuel Cell Vehicle,
Culture Contents
○ A+C: Service Robot, Bio-organ, Senile Disease Treatment Service, Obstinate
Disease Prevention and Curing Service, Hydrogen Energy, Green Chemical
Material
○ C: Industrial Robot, Bio-Chip, High-Efficiency Power Generation Plants

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 Korea Industry Vision 2020

3. Future of the Korean Industry

□ The manufacturing sector will grow at 4.9% annually by 2020 and

rank as the 7th largest trading country in the world.

2005~2020 Growth rates of Manufacturing and ranking

2020 ranking in the world

Annual growth rate
(2005~2020) Exchange Won
rate fixed appreciation

Baseline 4.9 % 7th 6th

Upper-bound 5.6 % 7th 5th

Lower-bound 4.0 % 8th 7th

note: real value added at 2000 prices

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 Korea Industry Vision 2020

□ Balanced growth of manufacturing sector and service sector

Growth rates by sectors (baseline scenario)

2001~2004 2005~2020
(unit: percent)

Manufacturing 6.6 4.9

Service 3.8 4.9

GDP 4.6 4.6

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 Korea Industry Vision 2020

□ Manufacturing sector will lead the productivity growth until 2020.

○ Productivity growth rate for high-tech industries: 7.9%
○ Productivity growth rate for ICT industries: 6.0%

Labor productivity growth rates by sectors

3.7
entire
industries 2.9

3.1
services 2005~2020
0.9
2001~2004

5.1
manufacture 6.6

0 2 4 6 8

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 Korea Industry Vision 2020

□ Leading manufacturing industries and knowledge-based service

industries will lead overall industry growth.

Growth rates and contribution degree in service sector (baseline)

shares 2005~2020
contribution contribution
2004 2020 growth rates
(unit: percent) degree percent
financial &
14.2 19.8 7.1 1.6 31.6
insurance
business services 9.0 12.9 7.2 1.1 21.5
telecommunition &
7.6 9.3 6.3 0.7 14.7
broadcasting
culture services 2.0 3.2 7.8 0.3 5.8
knowledge
32.9 45.2 7.0 3.2 63.8
services total
services total 100.0 100.0 4.9 4.9 100.0

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 Korea Industry Vision 2020

□ Trade dependence will decrease to 68% in 2020

○ According to the baseline forecast in 2020:
- Approximately $63 billion surplus in goods and $56 billion deficits in services
Trade dependence forecast for major countries
90
in percent 85.5
80 78.8
71.1
70 68

60 60.5
57.8

50
2004
40.9
40 37.8 2020
30
22.4
20.6
20 20
16.2
10

0
Korea U.S. U.K. Germany Japan China

Source: KIET∙Global Insight (2005)

note: 1) Trade dependence = (exports + imports)/total value added
2) nominal

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 Korea Industry Vision 2020

□ The share of leading industry exports among total Korean exports will
continuously increase from 70% in 2004 to 75% in 2020.
Forecast of share in total export by industry (baseline scenario)

(unit: percent) 2004 2010 2015 2020

Automobile 7.6 8.3 8.3 8.3
Shipbuilding 5.0 3.5 2.5 2.0
General Machinery 4.4 5.7 6.1 6.3
Textile 4.9 3.2 2.3 1.8
Iron & Steel 2.8 2.3 1.9 1.6
Petrochemical 5.3 5.1 4.7 4.4
Computer & Office Machinery 7.4 5.6 5.8 5.9
Semiconductor & Electronic Parts 20.0 20.4 20.7 20.8
TV & Communication Equipments 2.7 2.9 2.9 2.9
Telecommunication Equipments 10.2 15.5 18.8 20.7
Leading industry total 70.3 72.4 74.0 74.7
note: 1) shares of industry in total export
2) real

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 Korea Industry Vision 2020

□ Korea will advance to become the 7th largest manufacturing country in

the world (baseline scenario)

○ Based on upper-bound forecasts, proportion of manufacturing will be 4.6%,

placing Korea in 6th place

Status of the Korean manufacturing industry in 2020(baseline)

(unit: percent)
Korea China India U.S. Japan Germany France U.K. Italy

3.5 7.8 1.0 11.7 7.5 10.5 5.2 4.4 4.2

2004
(8) (3) (9) (1) (4) (2) (5) (6) (7)

4.0 14.5 1.6 12.7 5.6 8.5 4.7 4.2 3.3

2020
(7) (1) (9) (2) (4) (3) (5) (6) (8)

Source: KIET∙Global Insight (2005)

note: 1) nominal
2) ( ) indicate rankings in the world market

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 Korea Industry Vision 2020

□ Global market shares of the Korean leading industries will increase

in 2020

Forecast of world market share and ranking by industry

2020
2004
(unit: percent) upper-bound baseline lower-bound
Automobile
(unit: percent) 2.8(7th) 4.0(6th) 3.5(7th) 2.9(7th)
Shipbuilding 30.5(1st) 30.0(1st) 26.0(1st) 21.4(1st)
General Machinery 2.0(8th) 4.3(8th) 3.7(8th) 3.1(8th)
Textile 3.5(6th) 2.3(7th) 2.0(8th) 1.7(8th)
Iron & Steel 4.4(6th) 8.3(3rd) 7.8(3rd) 6.4(4th)
Petrochemical 3.6(7th) 4.4(5th) 3.8(7th) 3.1(8th)
Source: KIET∙Global Insight (2005)
Electronics &
8.3(4th) 10.1(3rd) 8.7(3rd) 7.2(3rd)
Semiconductor
note: 1) shares in terms of dollar

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 Korea Industry Vision 2020

4. Vision of the Korean Economy and Industry

□ Three sectors to fuel the Korean Economy as engines of growth

Growth rates and contribution degrees of three major sectors

2005~2020 contribution contribution

(unit: percent) growth rates degree degree rate

Leading industry 5.2 1.4 30.7

Knowledge services 7.0 1.8 40.0

New promising sector - - approximately 10

GDP 4.6 4.6 100

note: real value added at 2000 prices

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 Korea Industry Vision 2020

□ Korean economy to rank 10th in the world

Vision of the Korean industry (upper-bound)

status indicators 2004 2020

GDP 11th 8~10th
Total trade volume 12th 7th
Manufacturing exports 8th (3.5%) 6th (4.6%)

leading industry exports 5th (5.0%) 4th (6.7%)

note: ( ) indicate market shares.

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 Korea Industry Vision 2020

□ Per capita income approx. $50,000 (upper-bound)

○ Achieving welfare state status

Forecast of Major welfare indices

2004 2010 2015 2020

24,583 34,398 45,202

per capita GDP($) 14,144
(25,171) (36,077) (48,796)

62.1 64 66.8
Employment rates(%) 59.8
(62.3) (64.4) (67.2)

Working hours/year 2,339 2,185 2,064 1,950

Note: ( ) implies upper-bound scenario.

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 Korea Industry Vision 2020
Korea's Industry Vision 2020 Active Korea 5.1% growth (upper-bound)
$49,000 Welfare State
◊ Leading industry, Knowledge services, Promising new industry:
Three sectors as the engine of growth
◊ Innovation in manufacture led productivity growth in Korea Economy
◊ Balanced growth of domestic demands & exports induces balanced
growth of service & manufacture

41 P romisin g S ectors

Korean Economy
Per capita income: $49,000
GDP: 10th largest
Total trade volume: 7th
Export of leading industry: 4th
Reflecting Industry
15 Mega-Trends Vision 2020s
of Major Countries

World E conomy
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Thank you