The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries

KIET Occasional Paper No.107 November 2018 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Kwang Soon Park

Kwang Soon Park Senior Research Fellow, KIET Korea Institute for Industrial Economics and Trade (KIET) Sejong National Research Complex 370 Sicheong-daero, Sejong-si, 30147, Korea Tel : 82-44-287-3114 Fax : 82-44-287-3333 URL : http://www.kiet.re.kr KIET Occasional Paper No.107 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Published on November 23, 2018 in Korea by KIET c 2018 KIET ISBN 979-11-88964-87-1 93320

Table of Contents Abstract... 7 Ⅰ. Introduction... 9 Ⅱ. Characteristics of the Machinery Industry s Global Production Network and Development Comparison with Major Countries... 12 (1) General features... 12 (2) Development comparison with major countries... 16 (3) Characteristics by primary fields... 18 Ⅲ. Historical Overview and Statistical Analysis of the Korean Machinery Industry s Development... 21 (1) The role of the machinery industry in Korean economic development... 21 (2) Upgrading the Korean machinery industry... 23 Ⅳ. Historical Evolution of the Development Policy of the Korean Machinery Industry... 29 (1) Process of development... 29 (2) Development history... 30 Ⅴ. Policy Measures for Industrial Development of the Machinery Industry... 37 (1) Legislation promoting the machinery industry... 37 (2) Measures for building infrastructure... 40 (3) Regional policies... 47

(4) Measures for technological development and value-addition to the value chain... 50 (5) Measures for attracting investment in specific sectors... 54 (6) Measures for quality assurance... 56 (7) Measures for market expansion... 59 (8) Measures for environmental sustainability... 62 (9) Other relevant measures... 63 Ⅵ. Implications for Developing Countries Machinery Industries... 68 References... 76

List of Tables Table Ⅱ-1. Classification according to the KSIC... 13 Table Ⅱ-2. Significance and nature of machinery industry... 15 Table Ⅱ-3. Exports of world machinery industry by major field... 20 Table Ⅱ-4. Export ratio of world machinery industry by major field... 20 Table Ⅲ-1. Status of the korean machinery industry... 21 Table Ⅲ-2. Growth comparison of korean machinery industry in terms of exports. 22 Table Ⅲ-3. Global status of korean machinery industry (2015)... 23 Table Ⅲ-4. Mid to long-term development prospects of the korean machinery industry... 28 Table Ⅴ-1. Major policies by development phase in the korean machinery industry... 38 Table Ⅴ-2. The history of KAMICO... 41 Table Ⅴ-3. The number of employees and main business... 42 Table Ⅴ-4. Major services of KOMMA... 43 Table Ⅴ-5. Korea regional development policies... 47 Table Ⅴ-6. The 5-year plan for regional policies... 49 Table Ⅴ-7. 2020 development prospects in the korean machinery industry... 55 Table Ⅴ-8. Worldwide general machinery market size... 60 Table Ⅴ-9. Prospects for general machinery imports in emerging markets and promising export items... 60 Table Ⅴ-10. ICT convergence in major manufacturing, defense and service industries in Korea... 64 Table Ⅴ-11. R&D investment status of machinery industry... 65 Table Ⅴ-12. Major companies in the domestic machinery industry... 66 Table Ⅵ-1. The production of general machinery in Korea... 73

List of Figures Figure Ⅱ-1. Classification of machinery industry by process... 14 Figure Ⅲ-1. Promotion factor of convergence in machinery industry... 24 Figure Ⅲ-2. Industrial division in the global market (present)... 26 Figure Ⅲ-3. Competitive composition in the global market (future)... 27 Figure Ⅳ-1. Development process of korean machinery industry... 36 Figure Ⅴ-1. Overseas businesses counseling and consulting... 42 Figure Ⅴ-2. KOMMA s business... 44 Figure Ⅴ-3. The vision and objective of balanced national development... 50 Figure Ⅴ-4. The vision of the korean machinery industry by 2020... 51 Figure Ⅴ-5. IT convergence case of a production process machine... 53 Figure Ⅴ-6. Reliability assessment center at KIMM... 56 Figure Ⅴ-7. Total quality assurance solutions by KIMM... 57 Figure Ⅴ-8. Future direction of the reliability assessment center at KIMM... 58 Figure Ⅴ-9. Comprehensive quality assurance system... 58 Figure Ⅴ-10. Reliability certification procedure by KIMM... 59 Figure Ⅴ-11. DNM series control system... 63 Figure Ⅵ-1. Corporate history and structural changes at DMG MORI... 68 Figure Ⅵ-2. Economic loss by stage... 70 Figure Ⅵ-3. Technical status & potential for korean machine tools... 71 Figure Ⅵ-4. Distribution of the korean machine tools industry by region (2016)... 71 Figure Ⅵ-5. Korea s world position and share of market by major items in 2016. 74

Abstract This paper outlines various factors and the implications they carry, which major developing countries such as Indonesia, Malaysia and Vietnam should consider when establishing detailed policies to nurture their machinery industries. The paper consists of five main sections. Section 2 reviews the characteristics of global production network of the machinery industry and compares its development course in major countries. Section 3 presents an historical overview and statistical analysis of the Korean machinery industry s development. The evolution of development policy of the Korean machinery industry is presented in Section 4. Section 5 analyses policy measures for industrial development of the machinery industry, and the implications the research carries for developing countries machinery industries are described in Section 6. The machinery industry can develop through steady accumulation of technology and experience, and it tends to rely on an implicit knowledge base, which is why it is difficult for developing countries to target for growth.

8 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries The development of the Korean machinery industry was largely dependent on policy formulation and implementation by the Korean government. The development of the machinery industry in advanced countries such as Germany and Japan is mainly due to the competitiveness of companies with more than 100 years of experience. However Korea had weak competitiveness and a relative lack of experience, so the Korean government has actively crafted relevant legislation, built essential infrastructures, implemented locational development policies, supported technological development, reliability improvements and environmental sustainability from the 1960s until now. The machinery industry is a very difficult sector to develop in the short term. It is also not easy to drastically shorten the developmental period. Therefore, it is necessary for developing countries to thoroughly review Korea s policy trends when designing machinery industry policies.

Ⅰ Introduction In Korea, the machinery industry was one of the most underdeveloped industries of the manufacturing sector until the 1960s. However, as the industrialization process began with a 5-year plan for economic development, advanced countries such as Japan and the United States transferred and invested in the technology in Korea. In the early stages of industrialization, Korea s machinery industry depended on foreign countries due to its poor production base and quality levels. It has since advanced through the following development stages: 1) establishing production infrastructure, 2) restructuring, 3) export industrialization, and 4) independence and advancement. Demand for the development experience of Korea s machinery industry, which grew rapidly in a short period of time, is continuously expanding in developing countries. After Korea joined the OECD Development Assistance Committee (DAC) in 2010, there has been a significant increase in visits by officials and industry personnel from Vietnam, Indonesia, Malaysia, Brazil, Chile and other developing countries.

10 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries As Korea s machinery industry grew rapidly in a relatively short period of time, major machinery that had been dependent on imports, such as machine tools and heavy construction equipment, grew into major export items. It also maintains a competitive relationship with developed countries in the world market. Developing countries want to know the background of Korea s growth and want to learn about successful industrialization. Therefore, the purpose of this study is to share the development process in Korea with other developing countries. This paper contains various examples from Korea s experience, including cases where government policies aimed at the Korean machinery industry were or had become ineffective. The half-price supply policy for agricultural machinery implemented by the Kim Young-sam government helped boost domestic demand and the supply of related companies in the short term. However, these companies have neglected to make efforts to develop new products for a considerable period of time, resulting in the delayed launch of new models such as tractors and leading to other adverse effects such as poor external competitiveness. This case, which is considered to be a policy failure of the government, can serve as a lesson for developing countries that are trying to cultivate their machinery industry much as Korea has done. While existing KSP (Knowledge Sharing Program) studies have mainly explored the advantages of Korea, this report is different that it seeks to help developing countries avoid failure by plainly describing the policy missteps made by the Korean government. We used data and information from various sources for our in-report analyses. Data on global machinery industry is sourced from the UN Comtrade database, and data for the Korean market is mainly sourced from the yearly reports of the machinery industry. Experts and related

Ⅰ.Introduction 11 group surveys were also conducted. We analyzed the policy change and development process of the machinery industry step by step. The paper consists of five main sections. Section 2 reviews the characteristics of global production network of the machinery industry and compares its development course in major countries. Section 3 presents an historical overview and statistical analysis of the Korean machinery industry s development. The evolution of development policy of the Korean machinery industry is presented in Section 4. Section 5 analyses policy measures for industrial development of the machinery industry, and the implications the research carries for developing countries machinery industries are described in Section 6. The purpose of this project is to provide the factors and implications that should be considered when establishing detailed policies to nurture the domestic machinery industries of major developing countries such as Indonesia, Malaysia, and Vietnam. However, the Korean machinery industry achieved considerable results before the development of the Chinese industry. This is different from later developing countries. And Malaysia and Indonesia have significant investments and capital in China. Policies that foster the machinery industry considering these points will be the subject of future research.

Ⅱ Characteristics of the Machinery Industry s Global Production Network and Development Comparison with Major Countries (1) General features Based on the KSIC, the sectors of the machinery industry are classified into five fields: fabricated metal products, general machinery, electrical equipment, precision machinery, and transportation machinery. The machinery industries, meanwhile, could be classified into basic parts, subassembly, and finished products according if categorized by function and production process. The general machinery industry label variously applies to basic parts, subassembly, and finished products, depending on the nature of the product. A valve, spring, bearing, or pump would be most likely described as basic parts. The following flow chart describes a typical production process in the machinery industry: design and drawing welding, sheet metal work, forge welding, cast, and heat treatment inspection cutting and other work inspection assembly test painting product shipment

Ⅱ.Characteristics of the Machinery Industry s Global Production Network and 13 Development Comparison with Major Countries Table Ⅱ-1. Classification according to the KSIC Machinery industries (Based on 10 th revision of KSIC) Fabricated Metal products C25 General machinery C29 Electrical equipment C28 Transportation machinery C30~31 (excl. shipbuilding) Precision machinery C27 Metal structure Boiler Metal tank and metal container Internal combustion engine Wind/water power machine Valve Generator Motor Automobile engine Medical device Converter Power supply and control system Automobile Car body and trailer Metal tooling Power transmission gear Wire and cable Automobile parts Measurement and analysis instrument Glasses Photo and optical instrument Tool Furnace Battery Plane and parts Clock Machine element Material handling machine Refrigerating and air conditioning system Liquid and gas filter and purifier Packing and filler Machine tool Agricultural machinery Construction and mining machinery Textile machinery Semiconductor machinery Mold Household appliances Other general machinery Bulb and lamp Illumination system Two-wheeled vehicle Bicycles Source : Korea Association of Machinery Industry (KOAMI), Machinery Industry Yearly Report 2017, August 2017 (in Korean). Note : 1) The English names are mainly based on International Standard Industrial classification (ISIC) Rev. 4 2) Korea Standard Industrial Classification The five business categories include fabricated metal products (C25), other machinery and equipment (C29), electrical equipment (C28), medical, precision and optical instrument, and clock (C27), automobile and trailer (C30), other transit carrier (C31, excluding shipbuilding (C311) under the tenth revision of the KSIC.

14 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Figure Ⅱ-1. Classification of machinery industry by process Intermediate Goods Internal combustion engine, Hydraulic oil pump, Valve, Bearing, Power transmission gear etc. Final Products Capital Goods Machine tools, New production equipment etc. Source : the author. Durable Consumer Goods Agricultural machinery, Construction and mining machinery, Textile machinery etc. The machinery industry is a core foundation industry that supplies the facilities of leading export industries including the automobile, steel, and semiconductor industries. The machinery industry includes construction equipment, machine tools, refrigeration and air conditioning equipment, molds, agricultural machinery, textile machinery, fluid machinery, infocommunication production equipment, and new production equipment. The characteristics of businesses in the machinery industry differ depending on intended use of the goods produced. Manufactures can be divided into intermediate and final products. Machines or goods used mainly as intermediate materials have a very wide range of applications. Internal combustion engines, hydraulic pumps, valves, bearings, and power transmission gears are representative of intermediate goods. Final products can be further subdivided into capital goods and durable consumer goods. Capital goods include machine tools and new

Ⅱ.Characteristics of the Machinery Industry s Global Production Network and 15 Development Comparison with Major Countries Table Ⅱ-2. Significance and nature of machinery industry Core foundation industries Key industries of advanced countries Dominant position in the industry Leading industry of future growth Source : Author writing. Supplying manufacturing equipment to leading export industries including semiconductors, automobiles, and shipbuilding - Performance of manufacturing equipment influences upon product quality and international competitiveness machinery elements, bearing, and steel industries (parts/material) are developing downstream industries USA, Germany, and Japan hold 10~15% of manufacturing industries - Korea holds 8.5%; high potential * Production equipment is the evaluation scale and no. 1 trade surplus product in developing countries In the general machinery field, it is difficult that latecomers to catch up to dominant players - High value-added business with long period of technical development time and strong relations between upstream/ downstream industries * Slight change in ranking of leading countries comparing to textile and telecommunication equipment Expanding next generation industry through the fusion with new industries such as IT, NT, BT - Developing intellectualization, high-tech, and green facilities - Expanding mechatronics, and developing micro machine and robot markets production equipment. Durable consumer goods include agricultural machinery, construction and mining equipment and textile machinery as shown in Figure Ⅱ-1. The machinery industry is a leading indicator and basic industry that supplies production equipment to other industries, as an orderbased industry. The industry determines the competitive power of manufacturing businesses with significant forward and backward linkage effects 1) between industries. 1) See Bank of Korea (2004), pp. 128~129.

16 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries The machinery industry uses accumulated technology through technological innovations achieved over long period of time. The technology and products used in the machinery industry have relatively long verification periods and take a long time to acquire reliability. Since whole production process could not be automated, the industry highly depends on technical professionals. Reliability of product and specific demand shall be material to sales of new product. (2) Development comparison with major countries There are considerable differences in the development of the Korean machinery industry compared to other countries. In Germany, the powerhouse of the machinery industry, finished product producers and component suppliers have strong external competitiveness. The Japanese machinery industry is strengthening its position in infrastructure based on the spirit of Monozukuri. In Taiwan, on the other hand, the machinery industry is developing around SMEs rather than large corporations. 1) Korea From the earliest stages of development, the Korean government has a strong desire to grow the machinery industry, and its investment was focused on large companies. Problems include a lack of professionalism due to the horizontal expansion of a single manufacturer rather than the specialized systematization of small companies, the slowing down of small enterprise development due to quantitative expansion of large scale facilities, and the intensification of technological dependency due to a lack of indigenous technology.

Ⅱ.Characteristics of the Machinery Industry s Global Production Network and 17 Development Comparison with Major Countries 2) Japan Small enterprise developed by strengthening relationships between parent companies and affiliates. Dominated the global market with balanced policy promoting both major and small companies. Secured dependent technology and established an export industry by developing parts, materials and foundation technologies and later high technology. Built a continuous development base with a continued export industrial structure. 3) Taiwan The industry has been developed around small enterprises rather than the major firms. Parts manufacturing systems require less capital than finished product production. Lack of R&D and facilities investment is a weakness. The absence of major domestic customers, such as automakers or steel producers, is also a weakness for Taiwanese machinery makers. 4) Germany In Germany, parent companies focuses on design, coordination of final assembly, and development of core technology. Subcontractors supply products to various enterprises across myriad industries. They emphasize the role of trade associations for joint marketing, research service, customer cooperation and the establishment of joint research centers. The Germans pursue a quality-focused, high-value-added market strategy and also have a traditional handicraft manufacturing industry.

18 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries 5) Sweden Swedish built an industrial foundation with technical innovation through the introduction of technology in the initial period. Also, it led the mechanization and centralization of export products. Functional manpower and capital had already been formed before the 1870s. Rapid growth occurred in the machinery industry as machine demand great increased due to the mechanization of manufacturing processes and the modernization of farming methods. (3) Characteristics by primary fields A machine tool is a mother machine that produces machinery. The machine tool is the foundation of machinery industry and the primary target of equipment investment as a typical capital good. Since a machine tool directly influences a product s quality, productivity, and technical development, the competitiveness level of the machine tool industry has a crucial effect on the competitiveness of other industries. The machine tool industry is highly correlated with equipment investment trends in the manufacturing business, so the industry is sensitive to boom and bust cycles depending on the economic circumstances of related demand industries. Business upturns and slumps indicate lead and lag. Construction machinery is a general term for the machinery and equipment used in engineering and building. Such equipment is classified by its function, and these functions include earthwork, leveling, transport, roadwork, and rubble. Construction equipment is an integrated assembly industry (systematization with the related parts industry). It is greatly influenced by the construction business due to high dependence on

Ⅱ.Characteristics of the Machinery Industry s Global Production Network and 19 Development Comparison with Major Countries builders, its main source of demand. The construction equipment industry is a typical technology and capital-intensive industry. Foreign advanced enterprises develop technology transfers and OEM supply relationships with developing countries. Due to the heavy weight and high costs of construction equipment, shipping expenses are an important factor in export prices. In addition construction equipment has a relatively long production cycle due to the limited range of applications in the electronics sector. Refrigerating and air conditioning equipment refers to machinery that either cools the temperature of a product or area. For refrigerating and air conditioning equipment, developing technologies that boast high efficiency and energy-saving features are keys to growth in the sector. The steady development of alternative energy equipment and related technologies will be significant for environmental conservation. Refrigerating and air conditioning equipment is a crucial component in high tech industries, such as cryogenics, electronics, and biotech. Air conditioning machinery is generally produced by specialized manufacturers. The mold industry has wide-ranging industrial relationships and recorded a trade surplus with about 2 trillion won of market scale. Mold businesses often exhibit characteristics typical of small businesses since the business can be with certain specialized skills, little capital and simple equipment. Most skills in mold industry are passed down by field experience; only recently has technical data been systematically digitized and passed down. Now we will look at the current export status of the major machinery sectors. Worldwide exports of machine tools and construction machinery amounted to 73.5 and 78.1 billion USD (2016), respectively. The decline in exports over the last three years in the field of machine tools and

20 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries construction machinery is due to slowing growth in China, the largest export market. The strengthening competitiveness of Chinese machinery and growth in that country s level of self-sufficiency are also significant factors. Table Ⅱ-3. Exports of world machinery industry by major field Among the four major sectors, the share of refrigerating and air conditioning equipment is the highest at 7.9 percent. In addition, that sector s market share has steadily increased over the past three years, from 7.5 to 7.9 percent. This is because demand for improved quality of life in developing countries has led to increases in air conditioning demand. The decline of the export ratio over the last three years in the field of machine tools and construction machinery is due to slowing growth and China s increasing self-reliance. Unit : billion USD 2014 2015 2016 Machine tools 90.5 78.8 73.5 Construction machinery 109.6 88.4 78.1 Refrigerating and air conditioning equipment Source : UN, UN Comtrade DB. 117.8 109.5 110.1 Mold 19.2 18.2 17.8 Table Ⅱ-4. Export ratio of world machinery industry by major field 2014 2015 2016 Machine tools 5.8 5.6 5.3 Construction machinery 7.0 6.3 5.6 Refrigerating and air conditioning equipment Source : UN, UN Comtrade DB. 7.5 7.8 7.9 Mold 1.2 1.3 1.3 Unit : %

Ⅲ Historical Overview and Statistical Analysis of the Korean Machinery Industry s Development (1) The role of the machinery industry in Korean economic development 1) Change of status in the domestic market The production scale of the machinery industry in 2014 was 102.4 trillion won, which ranked sixth among all manufacturing industries (6.9 percent). Also, the industry had the largest number of companies (13.9 percent) and the second largest number of employees (11 percent). The Table Ⅲ-1. Status of the korean machinery industry Unit : trillion KRW, firm, head 2010 2014 2016 Amount and share of production among all manufacturing industries 92.3(6.9%) 102.4(6.9%) 100.9(7.1%) Number and proportion of firms 8,598(13.8%) 9,521(13.9%) 9,382(13.6%) Number and proportion of employees 282,127(10.7%) 319,008(11.0%) 315,741(10.7%) Source : Korea Institute for Industrial Economics and Trade (KIET), ISTANS DB.

22 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Table Ⅲ-2. Growth comparison of korean machinery industry in terms of exports All industries 1980 1990 2000 2010 2012 2014 2016 Unit : million USD Share of machinery 17,505 65,016 172,268 466,384 548,008 572,665 495,426 1980 2016 Machinery 346 3,152 11,231 37,841 45,891 45,007 41,991 2.0% 8.5% Source : Korea Institute for Industrial Economics and Trade (KIET), ISTANS DB. trend in 2016 is similar to the table Ⅲ-2. Not only does the industry boast the most companies: most of those firms are small and medium-sized enterprises. More than 90 percent of all businesses in the sector are SMEs. So it is important to strengthen the infrastructure of SMEs in the field of machinery. It should also be noted that the machinery industry s share of total manufacturing exports increased from only two percent in 1980 to 8.5 percent in 2016. The growth in market share of the machinery industry is mainly due to efforts to improve its levels of technology, strengthen external competitiveness and expand the domestic supply base through import substitution. The growth of the Korean machinery industry has great implications for developing countries including, Vietnam, Indonesia, India and others. 2) Change of status in the global market Korean machinery industry exports in 2015 amounted to 50 billion USD and accounted for 3.5 percent of the world export market, ranking eighth in the world. Korea has occupied seventh or eighth ranking every year since 2010, overtaking France in exports.

Ⅲ.Historical Overview and Statistical Analysis of the Korean Machinery Industry s Development 23 All industries Machinery Table Ⅲ-3. Global status of korean machinery industry (2015) Unit : billion USD, %, ranking Trade Export Import All Korea All Korea All Korea Amount 32,230 963 16,107 527 16,123 436 Share 100.0 3.0 100.0 3.3 100.0 2.7 Ranking - 8-5 - 8 Amount 2,825 88 1,406 50 1,419 38 Share 100.0 3.1 100.0 3.5 100.0 2.7 Ranking - 8-8 - 9 Source : Korea Association of Machinery Industry (KOAMI), Machinery Industry Yearly Report 2017, August 2017 (in Korean). (2) Upgrading the Korean machinery industry 1) Overview Fused products and the commercialization of related parts are in demand due to productivity enhancements and demand for more flexibility in the machine field. In the case of the auto industry, which is the machinery industry s biggest source of demand, businesses demand a process system package to deal with a flexible multi-product manufacturing system, rather than unit equipment. The automation of the entire manufacturing process (intelligent robots and flexibility in core manufacturing equipment) is demanded for flexible multi-product manufacturing on mass production lines. Machine convergence is also in demand, as supporting IT combines machines and production systems through networks that connect devices and processes.

24 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Figure Ⅲ-1. Promotion factor of convergence in machinery industry High-tech MT technology Demand Pull Promotion factor of convergence in general machinery industry IT software Source : the author. environmental material The arrival of latecomers with imported facilities are indirect factors that have promoted convergence and accelerated development. Intensifying competition with developing countries as well as developed countries has led to changes in the machinery industry. It also serves as a factor to upgrade the Korean machinery industry. 2) Changes in industrial initiative Advanced countries centered on manufacturing and high performance products Advanced countries including Japan and the U.S. still control a great part of the machinery industry. Latecomers cannot easily catch up the dominant position. Even China will not easily catch up to those countries positions in the industry. Japan has controlled 10 percent of manufacturing business in the general machinery field in the face of its long recession that began in the 1990s. The U.S., Japan, and Germany, the three major industrial powers,

Ⅲ.Historical Overview and Statistical Analysis of the Korean Machinery Industry s Development 25 together control more than 40 percent of the world machinery market through monopoly and oligopoly. Germany and Japan are maintaining a differentiation strategy in technology and are aiming at securing market share through low-price products. Japan is the biggest robot manufacturer, with 60 percent of global robot demand. Japan additionally has developed cutting-edge robot technology, including household robots. Developing countries such as China are set on conquering the global market through product differentiation and low-price products China, an emerging market, shows drastic growth in the lower-level machinery industry. China is at the cusp of developing next-generation machines, such as ultra-high speed and precision devices. Advanced countries are developing and commercializing the next generation of machines and new growth sources as well In case of machine development, in next-generation growth engine industries, such as IT, optics, electronics, semiconductor facilities, systems, micro devices, and nano-tech manufacturing equipment, the advanced countries are also at the developing stage or commercialization stage. In case of the high value-added mold business, the U.S., Japan, and Germany have held the dominant position. 3) Technology and new product trends The machinery industry has become a mechatronics industry due to the development of the ICT and electronics industries. The scope of the

26 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Figure Ⅲ-2. Industrial division in the global market (present) Aerospace U.S.(Group A) Machine Tools Automobile, Appliances, Electric Equipment General Parts Germany Taiwan Korea China Japan Source : Japan Machine Tool Builders Association internal data (author s translation). businesses has expanded as machinery firms have create new technologies and products by combining electronics technology and IT with machine technology. This trend will likely continue, resulting in the synthesis of other technologies, producing opti-mechatronics and bio-mechatronics. Such technologies will influence the future of human engineering and psychological engineering. In addition, such combinations will promote development between component technologies. Mechatronics technologies influence not only competitiveness of industry, but also human societies and the general welfare. The future machinery sector is expected to consist of products integrating advanced electric, communication, computer, robot and nano-technologies and competing on machining quality rather than on competitive pricing. The industry may grow more complex due to expansion of its competitive structure rather than industrial separation. As the product competitiveness of Korean, Taiwanese, and some Chinese enterprises improves, a more competitive relationship with Japanese major machine

Ⅲ.Historical Overview and Statistical Analysis of the Korean Machinery Industry s Development 27 Figure Ⅲ-3. Competitive composition in the global market (future) Aerospace U.S.(Group A) Machine Tools Automobile, Appliances, Electric Equipment General Parts Germany Japan U.S.(Group B) Taiwan Korea China Expansion of Competition Source : the author. tool builders in the middle product group may emerge. In addition, some American enterprises (Haas Automation, for instance) have joined the B group, raising expectations for intensified competition. 4) Mid to long-term development prospects Productivity and added-value of the Korean machinery industry are expected to record average annual increases of 6.5 and 5.7 percent respectively from 2011 to 2020 each due to demand growth for advanced models. In the case of high added value machines and systems, the industry will expand as new products are developed featuring multifunction, high speed, machine technology convergence. Also, the manufacturing structure of domestic enterprises will focus on the same technologies. Korea has maintained price and quality competitiveness in the mid to high-end product sphere; however, as foreign competition intensifies, growth rates will be limited to single digits. Average annual growth of 7.4 percent is expected from 2011 to 2020. The development of

28 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Table Ⅲ-4. Mid to long-term development prospects of the korean machinery industry Unit : % 1991~2000 2001~2010 2011~2020 Production 9.2 8.7 6.5 High added value 12.0 7.7 5.7 Employment 0.2 3.2 2.1 Exports 21.6 12.5 7.4 Imports 6.0 9.6 8.1 Source : Korea Institute for Industrial Economics and Trade (KIET). new products and demand for high quality goods are factors influencing export growth, which is further buoyed by growing demand in emerging markets and the acceleration of technical innovation. However, in case of general purpose machinery, demand from emerging developing countries should remain stable, but international competitiveness will weaken.

Ⅳ Historical Evolution of the Development Policy of the Korean Machinery Industry (1) Process of development Developmental processes in the machinery industry can be classified into two types. The first type is independent development, based on long experience, accumulated capital, and technology. The second type is dependent development, based on experience assembling finished products, localizing parts, and developing an independent model owing to a lack of capital and imported technology. The first case parallels the developmental model of advanced countries with long industrial histories; the second case mirrors the developmental model of most developing countries with little capital and simple technology. The Korean machinery industry fits the mold of the second type. Korea had lagged in the machinery industry until the 1960s but as the 5-year economic development plan was implemented, the industry developed markedly, greatly contributing to the industrialization of Korea. In the initial period of industrialization, Korea depended heavily

30 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries on imported materials due to a weak manufacturing base and poor product quality but has since advanced through the following stages: 1) establishing production infrastructure, 2) restructuring, 3) export industrialization, and 4) independence and advancement. Korea has not yet achieved complete technological independence, but has managed to reach a self-support level of 70.2 percent (2004). Yet the country has exhibited a net surplus in the export of transportation machinery and general machinery since 1998. (2) Development history 1) Beginning period (1960s) As the 5-year economic development plan was promulgated in 1962, industrialization began in earnest. Due to the devastation wrought by the Korean War, the country s manufacturing base was also destroyed, and the remaining factories had obsolete facilities. Korea s machinery industry held just 10.8 percent of production density in 1963 (excluding electronic and shipbuilding) and exhibited just 13.3 percent of production density when the first economic development plan concluded in 1966. During the period of first and second economic development plans, the production of light industry goods for export was increased, but the production of domestic machines was limited to simple manufacturers using basic technologies and skills. Production density fell to 11.9 percent following the completion of the second economic development plan (1967 to 1971). However, heavy investment was made in the chemical and machinery industries during first two development phases. The basic plan for

Ⅳ.Historical Evolution of the Development Policy of the Korean Machinery Industry 31 promoting the machinery industry was announced after promulgating The Machinery Industry Promotion Act in 1967. Since 1968, as loans for domestic machinery were first offered, the first practical policy for expanding demand was executed, and the Korea Association of Machinery Industry was established to enhance of product quality. 2) Establishing production infrastructure (1970s) During the five years of the third and fourth economic development plans (1972 to 1981), the production foundation of the machinery industry was built. The government announced the Heavy and Chemical Industrialization policy in 1973. Consequently, it promoted restructuring the heavy industry and chemical sectors. It was at this time that large-scale infrastructure underpinning the country s industrial base was constructed. This infrastructure formed the basis for the industrial foundation of the industrial machine, shipbuilding, transporting machinery, steel production, petrochemical, and electronics sectors. Following the opening of the Changwon machinery industrial complex in 1974, the machinery industry has shown rapid growth, centered on major machinery manufacturers including Kia Precision, Daewoo Heavy Industries, Dongmyung Heavy Industries, Kia, Samsung Radiator, Ssangyong Heavy Industry, Tongil, and Hankook Chemical. As a result, the production density of the machinery industry was 21 percent in 1981, and machinery accounted for 16.3 percent of all exports. Technology levels in the machinery industry did not show significant improvement. Nor was the production system operated as rational specialized production system, and since the industry grew horizontally, centered on major enterprises, specialized small enterprises did not emerge.

32 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Trade deficits increased from 625 million USD in 1972 to 926 million USD in 1981. The textile, electronic, and auto industries exhibited adverse conditions. Since more than 60 percent of capital goods facilities were Japanese products, parts imports for those machines grew in tandem. The government tried to localize the machinery industry to reduce overseas dependence, establishing strong policies improving quality, spurring growth, stimulating specialization in the industry, promoting systematization, setting quotas for purchasing domestic products, expanding funds for manufacturing domestic machinery, and strengthening the quality control system. 3) Reorganization period (1980s) The machinery industry expanded quantitatively due to continued demand growth. However low levels of technology and low productivity eventually led to a slump in the industry. A thorough restructuring was carried out to build a foundation for export industrialization and import substitution through technical innovation and productivity improvements aiming for continuous growth in the machinery industry. In July 1986, this reorganization policy was promulgated by merging policies targeted at the disparate electronic, textile, steel, petrochemical, nonferrous metals, and machinery industries into a new, macro industrial policy, The Industry Development Act. The government actively urged the localization of businesses in the machine, parts, and materials sectors, promoted production automation and project standardization, established a quality assurance system and a temporary tax credit system for investment in industrial technology businesses. In 1986, the government carried out a survey of manufacturing

Ⅳ.Historical Evolution of the Development Policy of the Korean Machinery Industry 33 technology for strategic development. Production in the machinery industry showed spectacular growth, from 6,900 billion KRW in 1982 to 33,900 billion KRW in 1989, equating to an average annual growth rate of 25.6 percent, vastly outpacing the growth rate of the manufacturing industry as a whole of 16.3 percent in the same period. Due technological improvements, the exports of higher value-added products were an enormous boon to the industry, as export growth recorded annual average increases of 20.1 percent. The industry brought in 3.041 billion USD in 1982, but that figured jumped to 10.984 billion USD by 1989. Yet the industry s trade deficit ballooned to 5.368 billion USD by 1989 as the industry remained dependent on foreign sources for core technologies and had yet to resolve the problem. The expansion of the Korean industrial base brought with it a trade deficit with Japan, and the problem came to the fore of the Korean economy. To improve the trade deficit with Japan, a localization policy was established in the machine, parts, and materials sectors in 1986. The rapid development of the national industrial structure necessitated the import of core technology and pieces of infrastructure, bringing with it an adverse balance of trade. 4) Export industrialization period (1990s) Since the 1990s, electronic machinery, smaller machines, and systematization have rapidly spread as mechatronics technology, which includes semiconductors and computers, were integrated into the machinery sector. Beginning in the latter half of the 1980s, factory automation was promoted in earnest around the auto industry, and the domestic market scale of automated facility exceeded 1.180 trillion KRW.

34 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries The Korean machinery industry eventually became an export industry, as technology, skill and productivity became more and more sophisticated. Exports recorded breakneck growth, from 6.102 billion USD in 1986 to 31.855 billion dollars by the 90s. Starting with its The Promotion Plan for the Capital Goods Industry (1995), the government announced various policies to enhance the competitiveness of the machinery industry. The efforts included expanding the customer base of the machinery industry, improving production support, strengthening quality assurance, supporting engineering personnel and collecting information and attracting foreign investment. It also extended capital to businesses for purchasing domestic machinery. The production density of the manufacturing industry was measured at 19.9 percent in 1987; by 1999 that figured stood at 25.6 percent. It represented 1.63 percent of total trade density in the global market. 5) Industrial independence and acceleration (2000s) The foreign exchange crisis of 1998 wrought a great reduction in industrial scale. The government promulgated the Industry Development Act of 1999 to reinvigorate the weakened industrial environment. Development policies were established to augment the industrial structure by strengthening industrial competitiveness and promoting balanced development. To bolster the parts and materials industry, the government enacted the Special Act on Development of Parts and Material Enterprises, mobilizing political support. This official assistance included funds for developing parts and materials, carrying out quality assurance and conducting verification of specialized enterprises. It also promoted

Ⅳ.Historical Evolution of the Development Policy of the Korean Machinery Industry 35 technical development for core parts and materials and carrying out the development of finished products, parts, and materials. Production in the machinery industry was valued at 246 trillion KRW in 2004 while recording exports valued at 68.3 billion USD. Trade in the global market has been continuously expanding. Volumes have also increased in the field of the general machinery, the focus of this report. The production of the general machinery was worth 101 trillion KRW in 2016, almost doubling the 51.7 trillion KRW figure posted in 2004 and the 61.4 trillion KRW number recorded in 2006. Production averaged an annual growth rate of 5.1 percent over the last 10 years. More recently, in order to revitalize the materials and parts industry, the government revisited its Special Act on the Development of Material and Parts Enterprises, redeploying policies that took effect in 2012 and last until 2021. The main difference in the policy language is that while the previous Act focused on machinery, the new version targets the materials industry.

36 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Figure Ⅳ-1. Development process of korean machinery industry The 60 s beginning period Established the development plan Established the Machine Industry Promotion Act Expanded social indirect capital Attempted import substitution and export industrialization Developed demand ability of machine industry The 70 s Development and establishment of production infra Development of Export-led heavy chemical industry Improved industrial structure Promoted heavy chemical industry Adopted and learned foreign technology Built Changwon base The 80 s Establishment of competition base Developed industries by type Balanced safety growth Import-substitution Improved enterprise structure High-tech innovation Improved productivity Strengthened continued overseas competitiveness Developed technology level Established high value added industry The 90 s Internationalization of industrial structure High value added export goods Strengthened national competitiveness Improved foundation technique and expanded supply foundation Strengthened national competitiveness of enterprise 2000 s industrial independence and acceleration Developed export industry in the capital goods industry Source : KOAMI internal article (original in Korean). Improved trade balance; automation of parts/material industry Strengthened developing ability of key parts and production facility Promoted higher value added product by enhancing technology level

Ⅴ Policy Measures for Industrial Development of the Machinery Industry (1) Legislation promoting the machinery industry The development of the Korean machinery industry is largely attributed to the establishment of policies by the Korean government. The implementation of detailed measures to achieve specific ends is also considered to have played an important role. The development of the machinery industry in advanced countries such as Germany and Japan is mainly due to the competitiveness of companies with more than 100 years of experience. However, as mentioned above, Korean firms lacked competitiveness and experience, so the Korean government actively intervened on industry s behalf the 1960s. During the Korean War that lasted until 1953, most existing production facilities capable of fabricating machinery were destroyed, and any remaining factories were obsolete; the country was poorer than North Korea at the time. The basic plan for the promotion of machinery industry, which was announced in 1967, is considered to have been very effective. This is

38 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Table Ⅴ-1. Major policies by development phase in the korean machinery industry Period Development phase 1962 ~1971 1972 ~1976 1977 ~1986 1987 ~1991 1992 ~1996 1997 ~1998 1999 ~2001 Beginning of machinery industry Stepping forward to dependent growth Advanced by leaps and bounds Prosperity to stable growth Rapid change of economic environment Ordeal of restructuring Entered into market economy Major policy The 1 st 5yrs economic development plan(1962) Established the machinery industry promotion act (1967.3) Declared promotion of heavy chemical industry (1973) Export promotion act on industrial facility (1978) Enacted the industrial development act (1986) Promoted localization on machine parts and material (1986) Promoted high tech industrial development plan (1989) Enacted industrial technology foundation act (1994) Promoted development policy of capital goods industry (1995) IMF emergency funding (1997) Enacted industrial development act (1999) Details and achievement Quality Assurance System (1968) Created the Promotion Association of Korea machinery industry (1969) Built the Changwon machinery industrial complex (1974) Introduction of advance registration system of introduced machinery (1976) Established the Korea Institute of Machinery and Materials (1976) Held the Korea machinery fair (1977) Achieved 1billion dollars of export in the machinery industry (1977) Achieved 10 billion dollars of exports in the machinery industry (1987) Operated industrial development fund (1988) Started special foreign currency loan (1988) Operated industrial development fund (1995) Foreign currency loan for purchase of domestic machine (1996) Promoted big deals on 7 major businesses (1998) (Development facility, railroad car, flight, vessel engine, semiconductor, oil refining petrochemical industry) Abolished import sponsor system (1999) Abolished Diversity of origin (1999) (continuance)

Ⅴ.Policy Measures for Industrial Development of the Machinery Industry 39 Period Development phase 2002 ~2015 Promoting high value added product and parts Source : the author. Major policy Enacted special act on parts/material (2002) Enacted special act on material/parts (2012) Promoted development policy of machinery service sector (2015) Details and achievement Promoted promotion policy on parts/ material industry (2002) Promoted development of next-generation growth power industry (2004) Achieved 10 billion dollars of trade surplus in the machinery industry (2005) Achieved 20 billion dollars of exports in general machinery (2005) Promoted promotion policy on material/parts industry (2012) Promoted development policy of machinery service sector (2015) partly thanks to the Korea Association of Machinery Industry, established in 1969 under the Machinery Industry Promotion Act, which plays a pivotal role to this day. In building the national production base in the 1970s, the government s policies fostering the heavy chemical industry contributed greatly to the development of the machinery industry. The construction of a large-scale machinery industrial complex in Changwon in 1974 was the reason for the rapid growth of the Korean machinery industry. In the 1980s, the Korean machinery industry was faced with restructuring. The industry had experienced significant quantitative growth due to continued demand growth but low levels of technology and low productivity led to rapidly diminishing conditions. So the government actively urged the localization of businesses in the machine, parts, and materials sectors, promoted production automation and project standardization, established a quality assurance system and a temporary tax credit system for investment in industrial technology businesses.

40 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Then in the 1990s, the Korean government prepared measures to cultivate the capital goods industry for export industrialization. By the 2000s, support policies focused on parts and materials rather than on finished products. The machinery industry is a very difficult sector to develop in the short term. It is also not easy to drastically shorten the developmental period. Therefore, it is necessary for developing countries to thoroughly review Korea's policy trends when designing machinery industry policies. (2) Measures for building infrastructure 1) KAMICO case 2) KAMICO was established in 1962 through the cooperation of Korean agricultural machinery and equipment manufacturers with the purpose of contributing to the development of the country s agricultural machinery industry and enhancing the economic status of its trading partners. It has grown steadily over the years. Korea now represents and exports a very wide range of products, including agricultural product processing machinery, transplanting and seeding machinery, livestock machinery, forest machinery, farming equipment, tillage, land preparation and other farming machinery. KAMICO is constantly striving to improve the quality and performance of Korean agricultural machinery and equipment by providing manufacturing partners with guidance for manufacturing standardization, quality control, and quality certification systems. The group has made great 2) abbreviation of Korea Agricultural Machinery Industry Cooperative.

Ⅴ.Policy Measures for Industrial Development of the Machinery Industry 41 Table Ⅴ-2. The history of KAMICO Date 1962. 3. 24 Description Held the inaugural meeting for the Korea Farm Machinery & Tool Industry Cooperative 1962. 4. 24 Approved by the Ministry of Trade & Industry 1963. 6. 22 Construction of the cooperative s hall 1971. 5. 14 Received a prime ministerial official commendation 1996. 4. 30 Changed the name from the Korea Farm Machinery & Tool Industry Cooperative to the Korea Agricultural Machinery Industry Cooperative 2000. 4. 24 Movement of the cooperative office to Jamsil-dong, Seoul 2002. 5. 20 Received a Presidential citation 2009. 2. 27 Designated as a Co-operation Organization for Standards Development Agency (COSD) for technology and standards by Ministry of Knowledge Economy 2010. 4. 05 Recognized by KOLAS (Korea Laboratory Accreditation Scheme) 2015. 1. 20 Construction of korean agricultural machinery global center 2015. 4. 17 Source : http://kamico.or.kr Movement of the cooperative office to korean agricultural machinery global center, cheon-an strides over the years in solidifying Korea s foothold in the international market. Its close relationship with overseas agencies and businesses allows it to act as a bridge for international cooperation, export promotion and overseas investment. KAMICO continues to open new markets for Korean products and to promote the smooth supply of raw materials that enable manufacturing partners to conduct business on a sound basis. Now, under the slogans of cooperative partners and self-supporting cooperation, KAMICO hereby provides the public with our vision of

42 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Table Ⅴ-3. The number of employees and main business Representative Chairman Mr. Shin Gil Kim Number of Employees 20 Number of Departments 5 Number of Union Members 540 Main Business Source : http://kamico.or.kr Management of union member & cooperative sales-purchases Farm mechanization business Research, survey and public information business Public procurement assistance General management of three agricultural machinery exhibitions in Korea Quality assurance Figure Ⅴ-1. Overseas businesses counseling and consulting Aiding developing countries with agricultural machinery Export agency for union member s products Management training for domestic and international customers Management of agricultural machinery exhibitions, domestic and overseas Import agency for raw materials Analysis, research and surveys of international agricultural machinery trends Dispatch of investment research groups to emerging markets overseas Source : http://kamico.or.kr

Ⅴ.Policy Measures for Industrial Development of the Machinery Industry 43 extending joint business, cultivating skilled technical manpower, and enabling practical technical developments. 2) KOMMA case 3) KOMMA has been at the heart of Korea s machine tool industry development, promoting consistent cooperation and collaboration among related shareholders encompassing the government, research institutes, and private sector actors. Looking at the turbulent changes in the global economy with the emerging Fourth Industrial Revolution, KOMMA s role and responsibilities have become deeper, wider and higher. KOMMA, along with its member companies, is prepared to expand convergence and business alliances, emphasizing the value of the new industrial revolution characterized by hyper-connectivity and super-intelligence. Table Ⅴ-4. Major services of KOMMA Market Technology & strategy Others Source : http://www.komma.org Description Creation of new demand of machine tools for members Abroad relationship with overseas organization to exchange information Governmental assignments for developing manufacturing technologies Establish various strategies for machine tool industry Organize committees to share mutual interests Collect the machine tool statistics data and analyze them Publish the monthly magazines covering machine tool industry Organize SIMTOS, the Seoul International Machine Tool Show 3) abbreviation of Korea Machine Tool Manufacturers Association.

44 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Figure Ⅴ-2. KOMMA s business Creating demand and promoting sales for products of member companies Promoting international cooperation and exchange of Information KOMMA`s BUSINESS Promoting the exchange of Information and development of new policies Pursuing localization and improvement of manufacturing technology Technical surveys, PR work and Publications Source : http://www.komma.org Furthermore, KOMMA is the organizer the Seoul International Machine Tool Show (SIMTOS) - now a global market platform in its own right - and intends to transform the biannual exhibition into an avenue of global cooperation, proactively responding to the new global industrial framework. Really, SIMTOS 2018, scheduled for April 3-7 this year, was a landmark event under the slogan Capture the Future: 4th Industrial Revolution, leading to the prosperity of all concerned. 1 Creating demand and promoting member companies products KOMMA organizes the SIMTOS exhibition in Korea and participates in overseas machine tool shows in a bid to promote domestic machine tools both at home and abroad.

Ⅴ.Policy Measures for Industrial Development of the Machinery Industry 45 SIMTOS occurs biennially, in even years. KOMMA also organizes buyer delegations and manages the Korean booth at the following machine tool shows: EMO (Europe) IMTS (U.S.A.) CIMT & CIMES (China) JIMTOF (Japan) TIMTOS (Taiwan) IMTEX (India) METALEX (Thailand) Other international machine tool shows (MTA, BIMU, Intermach) The group also organizes trade missions to enhance cooperation with other countries and export machine tools overseas. 2 Promoting international cooperation and exchange of Information KOMMA creates mutual benefits for its member companies by providing them with research on state-of the-art technologies and management strategies. It also encourages member companies to exchange information and collaborate with major overseas machine tools and industrial robot organizations. 3 Promoting the exchange of information and the development of new policies KOMMA addresses temporary issues by organizing committees in various industrial fields to share ideas and trends with member companies. It organizes eight monthly committee meetings to suggest new policies to relevant organizations and the government.

46 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries 4 Organizing meetings between industries, academics and research institutions KOMMA oversees the following committees that identify current issues in the machine tool industry and at member companies and brainstorm policies to enhance mutual benefits. Marketing Committee Export Committee Technology Committee PRESS Committee - Working - level Committee of sales and technology Robot Committee ISO Committee for Machine tool, Industrial Robot & Physical Device Control Human Resource Development Committee Special Committee for SIMTOS 5 Pursuing localization and improvement of manufacturing technology KOMMA hosts the following seminars on trends and perspectives in the field of machine tools and industrial robots: International seminars on machine tool technologies International Symposium on Machine Tools & Manufacturing Technology co-organized by Korea Society of Machine Tool Engineers Seminars on the perspectives of the machine tool industry Machine Tool Engineering Design Technology Forum Robot Workshop and Robot Technology Seminar Press workshop in which the industries, academic and research institutions can actively participate KOMMA also promotes standardization of machine tools.

Ⅴ.Policy Measures for Industrial Development of the Machinery Industry 47 (3) Regional policies In Korea, every administration formulates a 5-year plan for regional policies. The machinery industry is among those affected by these policies. Table Ⅴ-5. Korea regional development policies Period Background goal Major Policy 1960 ~1970 s 1980 s 1990 s Break vicious circle of poverty Establish self-supporting economy Set Industrialization basis Balance between growth and welfare Decentralization of capital area and balanced development of regions 1st Five-year Economic Plan 1st Comprehensive National Territorial Development Plan(1972~1981) Enactment of Industrial Development Act Construct Industrial complex and Export industrial complex Five-Year Economic and Social Development Plan 2nd Comprehensive National Territorial Development Plan (1982~1991) Enactment of Seoul Metropolitan Area Readjustment Planning Act 1st Seoul Metropolitan Area Readjustment Plan(1984~1996) Establishment of West coast Development Plan Set national territory frame 3rd Comprehensive National Territorial Form productive (1992~2001) and resource saving 2nd Seoul Metropolitan Area Readjustment Plan(1997~2011) national territory Conservation of Balanced Regional Development and national land environmenterprises (1994) Support for Local Small and Medium En- National territory Relocation of 8 major government ministries and 3 agencies to Daejeon preparation for unification (continuance)

48 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Period Background goal Major Policy National integration by balanced development of regions Participatory Innovation-driven government development (2003~2008) Multipolar dispersion development Expand related system Lee Myungbak government (2008~2013) Enhancing region competitive power and quality of life Invigorate wide area augmentation and connective cooperation Accelerate specialized development and decentralization Raise policy effectiveness on local residents Park Geunhye Guarantee equal opportunity of government happy life (2013~2017) Promote voluntary participation and cooperation Source : the author. Enactment of Special Act on Balanced National Development Establishment of Five-year national balanced development plan(2004~2008) Operation of Special Account for Balanced National Development Operation of National Balanced Development Committee and Regional Innovation Council 4th Comprehensive National Territorial Plan (2000~2020) and Revised plan(2006~2020) Multifunctional Administrative City, Innovation town, Corporate city Revision of Special Act on Balanced National Development Established five-year Regional Development Plan (2009~2013) Operation of Special Account for development of metropolitan city and regions Composition of Regional Development Committee and Regional Economic Development Committee Revised fourth comprehensive national territorial plan(2011~2020) Metropolitan economic sphere, sphere of basic life, sphere of pan-regional living Revision of Special Act on Balanced National Development(2014) Established five-year Regional Development Plan (2014~2018) Operation of Regional Development Special Account Operation of Regional Development Committee, negotiating committee for Regional Development Introduction of sphere of local bliss and Economic cooperation sphere Expand Regional Autonomy including expansion of comprehensive subsidy

Ⅴ.Policy Measures for Industrial Development of the Machinery Industry 49 Table Ⅴ-6. The 5-year plan for regional policies Organization ㆍThe Overview of the 5-year Plan General ; Background & Significance Informationㆍ The Objective & Vision of the 5-year Plan ㆍThe Basic Strategy of the 5-year Plan ㆍThe Mid-to-long-term Direction & Enforcement System Plan by Area ㆍ The Balanced National Development Plan of the Central Government ㆍ The Central Government s Policy by Key Project Regional Innovation Development Plan ㆍ The General Plan by City & Province ㆍ Regional Innovation Development Plan by City & Province The Mid-to-Long-term Balanced National Development Strategy The 5-year Plan The 1st Plan(2004~2008) The 2nd Plan(2009~2013) The 3rd Plan(2014~2018) Objective Create and Expand Innovation Establishment of Innovation Advanced Innovation Enforcement Strategy Set up a regional innovation system Promote an innovation cluster Transfer public institutions to local areas Construct innovative cities Promote the next generation growth engine industry as a key sector Move into the world class innovative cluster Construct a new administrative capital complex Enhance the regional innovation system. Compete with world calss clusters Maximize the national growth potential The Key Information on the 1st 5-year Plan Plan by Area Policy Establish an innovation-oriented development framework Set up a framework for self-reliance of underdeveloped regions Promote the metropolitan area in quality Form a network-based territory structure Key Projects Set up RIS, Increase regional innovation capabilities, Reinforce the network between universities and industries, Promote innovative clusters by area Develop underdeveloped regions, Establish RIS for farming/ fishing/mountain areas, Strengthen the local economy Transfer the functions of the metropolitan area to local regions, Manage the metropolitan area, based on plans, Enhance the competitiveness of the metropolitan area Set up an - shape national network, Complete a horizontal main-road network, Establish a stronghold for the outside world Plan by Region Regional Innovation Development Plans Source : http://balance.go.kr/index.do Set up a regional innovation system, Promote strategic industries, Develop local universities and human resources, Reinforce innovative capabilities in science and technology, Enhance the capabilities of innovative entities and set up a network, Expand regional innovation infrastructure

50 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Figure Ⅴ-3. The vision and objective of balanced national development Vision The national economy will leap forward again through innovation-oriented balanced development Objective Implemen independent localization through regional innovation Regional Strategic Industry Innovation Cluster Projects Regional Development for Coexistence of Urban/Rural Areas Establishment of Regional Innovation System Cooperation Between Universities and Industries Transfer of Public Institutions to Local Areas Development in Quality of the Metropolitan Area Institutional Framework The 1st 5-year Plan for Balanced National development The Special Accounting for Balanced National Development The Special Act for Balanced National Development Source : http://balance.go.kr/index.do (4) Measures for technological development and value-addition to the value chain The machinery industry is being reorganized into a growth-driven and export-led industry, led mainly by Germany Japan and the United States. The developed countries are promoting intelligentization and service industrialization. In order to upgrade the exports of the machinery industry, the United States is in the process of harmonizing its industries with each other. In this respect it is slightly ahead of Germany and Japan, while Italy lags behind. Japan is expanding its market by technology-driven cooperation with its domestic suppliers to supply package products at the system level or to package and sell the controller, main axis and servo motor, the core

Ⅴ.Policy Measures for Industrial Development of the Machinery Industry 51 module of the intelligent processing system. The EU and Japan lead technology-productization in intelligent production systems, by supporting businesses at the level of production systems connected with IT specialists rather than equipment-oriented development. In the past, the U.S. led in next-generation processing system technology, such as RMT and RMS project technology. It has recently overcome a technology gap with Japan and Germany with a strategy of supplying customized equipment based on IT technology competitiveness. The Korean government will promote the manufacturing innovation with the goal of hosting the world's fifth-largest machinery industry by 2020. Ten thousand smart factories in 13 industries (parts assembly, PCB, Figure Ⅴ-4. The vision of the korean machinery industry by 2020 Jump to The world s five largest Machinery industry Production 210 Trillion 102 Won Trillion Won Export $49.4 Billion $1,250 Billion Employment 0.304 Million 0.36 Million 2012 2020 2013 2020 2012 2020 Technical Development Support Improving Global Marketing ability Promoting servitization of Machinery industry Fostering Global Companies Establishment of human resource supply base Development of source technology for industrial convergence Localization of research equipment Fostering the machinery element industry Overseas market research and pioneering activities Support marketing activities Hold export consultation Activation of machinery trading Financial activation support Activation of knowledge services Promotion of Manufacturing Innovation Movement 3.0 Support for mutual growth Fostering medium sized companies Training design and production manpower Diffusion of work and learning dual systems Community training Source : Korea Association of Machinery Industry (KOAMI), Machinery Industry Status and Challenges, 2015 (Korean).

52 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries casting, mold, press, injection molding and others) will be built by 2020. In Korea research is being done by industry, academia and government on the development of IT convergence machine products in various fields. The machine tools, production systems, construction equipment and energy equipment industries are among the actors involved. Research in the machine tools and production equipment division revolves around the creation of a real-time global production sector that might eventually realize a comfortable and convenient manufacturing environment for workers, with embedded IT content, CNC, and so forth. In the production processes and systems field, research subjects include state monitoring and real-time control, real-time facility maintenance systems, and logistics monitoring and optimization between production processes. Research in the construction equipment industry centers on autonomous driving, work efficiency improvements, unmanned operation, work position and altitude recognition using gyro sensors and GPS technology, terrain recognition using load and position sensor technology and power optimization integrated controls. Factories might one day automate production process optimization according to demand, unmanned technology, virtual reality technology, and embedded S/W platform technology. Ongoing research in the energy machines industry might by 2030 result in machines that are used to reduce energy consumption and respond to human sensitivities with highly efficient environmental sensor technologies, USN and wireless network communication technology using renewable and environmentally friendly energy. It is important for any policies directed toward the machinery industry to consider that it is possible to create value through convenience, safety,

Ⅴ.Policy Measures for Industrial Development of the Machinery Industry 53 Figure Ⅴ-5. IT convergence case of a production process machine To-Be Model Optimized dynamic response model of machining process Thermal deformation/chatter vibration Real-time compensation system Vibration reduction system through forced vibration Automatic processing origin recognizable Machine Vision Suitable for various processing conditions Rotating tool wireless cutting level monitoring system As-Is Model Static response model Source : the author. Suitable for fixed processing conditions service improvement and cost reductions by intelligentizing machinery and creating new functions through ICT convergence. In order to improve profitability and customer satisfaction, ICT utilization policy is being promoted through product fusion that integrates ICT with parts modules. These policies seek to expand performance and function, incorporate ICT into machine manufacturing processes, automate production processes to increase productivity and efficiency through unmanned operation and make sales projections.

54 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries ICT convergence not only improves technical efficiency but also contributes to supply chain efficiency through information sharing and knowledge management. (5) Measures for attracting investment in specific sectors The mainline machinery sectors in Korea are the refrigeration and air conditioning, construction equipment and machine tool industries. Of these, the machine tool sector has reached a late-stage growth phase, while the refrigeration and air conditioning and construction machine industries have reached an initial stage of maturity, having passed through early growth periods. Regarding trade, despite being dependent on imports for numerical control (NC) devices, the sector achieve a trade balance as exports of NC lathes and machining centers grew. The construction heavy equipment and refrigerating and air conditioning equipment industries are already export-oriented. However, the refrigerating and air conditioning equipment, construction machine, and machine tool industries will all soon enter latter-stage growth phases, and become increasingly reliant on exports to achieve profits. Promising technologies in these industries, such as intelligent manufacturing systems, high functioning green facilities, and nextgeneration high precision molds are in their gestation phases and will enter growth periods by 2020. The field of intelligent production systems has been identified as promising because manufacturing equipment is rapidly evolving from single machines to entire systems. High-performance eco-friendly facilities are emphasizing the importance of the environment at home and abroad.

Ⅴ.Policy Measures for Industrial Development of the Machinery Industry 55 High precision molds have also been highlighted as a promising field because its competitiveness is influenced primarily by the precision of the final products. 4) Table Ⅴ-7. 2020 development prospects in the korean machinery industry Manufacturing Trade Introductory period Growth period Maturity Decline phase Import substitution Balance of trade Export -oriented period (non-competitive period btw developing countries) Export-oriented period (Competitive period btw developing countries) Change of developing country Current main manufacturing field Construction machine Machine tool Promising field Intelligent manufacturing system High-functional green facility Next generation high precision mold All related industries Source : the author. Note : Current development phase is indicated with, development phase in 2020 is indicated with. 4) In order to select promising sectors, a Delphi survey was conducted for experts from Korea Institute of Machinery & Materials and Korea Institute of Industrial Technology.

56 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries The refrigerating and air conditioning equipment and construction machine will meet the decline phase after 2020 as competitiveness of latecomers is improved and market share is expanded; also, the trade could be possibly transferred in and around developing countries. (6) Measures for quality assurance The Korean government has tried to improve the quality of domestic machinery and parts which are developed and produced mainly by small and medium-sized companies. Here, we will look at the only machinery and parts reliability certification body designated by the Korean government. The Reliability Assessment Center at the Korea Institute of Machinery and Materials (KIMM) has worked to improve the quality of machinery and mechatronics parts by establishing a world-class reliability assessment system, which evaluates performance, environment, safety and durability, Figure Ⅴ-6. Reliability assessment center at KIMM Source : http://kimm.re.kr/test_check

Ⅴ.Policy Measures for Industrial Development of the Machinery Industry 57 and providing technical support. For the past 15 years, the institute has dedicated itself to propagating reliability technologies to domestic companies based on accumulated technology, knowledge and know-how stemming from the use of state of the art assessment equipment and the utilization of experts. To help solve reliability problems, the Center provides total solution packages including tests and certification. KIMM has been conducting steadily more evaluations yearly. In 2004 it conducted just two assessments, but in 2009 performed 35 such tests. In 2014, the number of test cases expanded to 107, and the number of trial evaluations in 2017 was 122. The increase in the number of evaluations by year is due to the expansion of test equipment and the increased confidence in the Reliability Figure Ⅴ-7. Total quality assurance solutions by KIMM Improvement of the Reliability of Machinery Parts and International Competitiveness C Mutual Source : KIMM Reliability Assessment Center internal data (in Korean).

58 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Figure Ⅴ-8. Future direction of the reliability assessment center at KIMM Source : http://kimm.re.kr/test_check Assessment Center. In addition, when evaluating reliability, the Center performs a comprehensive quality assurance test that is a combination of a durability test and an environmental test, not a mere quality certification test. Reliability is the probability that an item performs its intended functions without failure under normal use conditions for a specified period. In other words, it is a quantitative expression of how long an item can be used to perform its designated functions. Figure Ⅴ-9. Comprehensive quality assurance system Conceptual Design Performance Tests Preliminary Design Detailed Design Design Engineering Prediction Trial Normal use conditions Reproduction Test Engineering Prediction Environmental Tests Life Tests Optimal Design Safety Tests Quality Assurance Source : KIMM Reliability Assessment Center internal data (in Korean).

Ⅴ.Policy Measures for Industrial Development of the Machinery Industry 59 Figure Ⅴ-10. Reliability certification procedure by KIMM Apply for reliability assessment Develop reliability standards Design and develop assessment equipment Reliability assessment Review by technical committee Search for related standards Analyze normal use conditions and failure cases Validate assessment standards - Working group meeting - Expert technical committee Performance tests Environmental tests Safety tests (Accelerated) life tests Export support Obtain prestigious international certification marks Source : KIMM Reliability Assessment Center internal data (in Korean). A reliability assessment is the main component of a comprehensive quality assurance system. It thoroughly assesses the required performance, environmental impact, durability (life) and safety of a product. Based on the test results, it is possible to improve the design and performance of an item by analyzing its failures and durability problems and provide a reliability certification. A list of the types of equipment capable of being tested for durability and performance, environmental impact, analysis and instrumentation are attached. (7) Measures for market expansion The overseas market size of the machinery industry was 1,419 billion USD in 2015 and is expected to grow to 1,890 billion USD by 2020. The global machinery market, which had grown at a rate of 6.5 percent

60 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries anually from 2000 to 2015, is expected to continue steady growth at an annual average rate of 5.9 percent. Concurrent with the growth of developing countries has been the emergence of middle market 5) and volume zone 6) consumers. This trend stimulates emerging market expansion from existing advanced markets. Demand for construction machinery and machine tools is expected to continue growing in emerging markets. Table Ⅴ-8. Worldwide general machinery market size Year 2000 2015 2020 (f) Units : billion USD, % Annual growth rate 2000~2015 2015~2020 Total 551 1,419 1,890 6.5 5.9 Source : UN Comtrade, KIET forecasts. Table Ⅴ-9. Prospects for general machinery imports in emerging markets and promising export items Units: billion USD, % Sorting 2000 2015 2020 (f) Annual growth rate (2015~2020) Export Promising Items China 24 110 157.9 7.5 Russia 4 28 33.1 3.4 India 3 25 40.3 10.0 Brazil 7 22 29.3 5.9 Source : UN Comtrade, KIET forecasts. Construction Equipment Machine tool Construction Equipment Machine tool Construction Equipment Mold machine Construction Equipment Textile machinery 5) Middle Market: The middle-class consumer is the main consumer. Intermediate quality and price products are competitive 6) Volume Zone: Asia middle class with disposable income of $ 5,000 to $ 35,000 per household

Ⅴ.Policy Measures for Industrial Development of the Machinery Industry 61 Demand from major consumers of Korean machinery, including the U.S. and China, continues to slump. The composite leading indicators in the U.S. and China continue to fall below the standard level of 100. America s composite leading indicator in January 2016: 99.0 February 98.9 March 98.9 April 98.9 China s composite leading indicator in January 2016: 98.4 February 98.4 March 98.4 April 98.4 China s general machine-to-global imports are also steadily falling due to the decline in facility investment and demand for machinery equipment that has followed the slowdown in the Chinese economy. China s general machinery imports from the world : (16.1) 20.4 (16.2) 17.8 (16.3) 8.4 (16.4) 17.1 (16.5) 8.3 The energy-related machinery industry is expanding due to intensifying competition in energy supremacy and the expansion of related investment. The boom in U.S. shale gas has stimulated demand for energy machinery amid the implementation of re-shoring strategies. There are numerous business opportunities for the machinery industry in the shale gas value chain in the supply of various equipment, components and water treatment devices. Demand for replacement machinery in Europe is expected to rise due to severe facilities aging, long-term recession, lending regulations and rising manufacturing utilization rates in major countries. The direct impact of the Brexit on the export of the machinery industry appears to be limited, but as external uncertainties increase, continuous monitoring is needed. The automotive machinery industry, a sector with high export volumes, is expected to be influenced by the burgeoning protectionist

62 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries trends represented by both Brexit and Trumpnomics. As uncertainties in the UK and European markets increase, the machine tool sector, where the European market accounts for more than 20 percent of domestic manufacturing sales, is expected to be affected Donald Trump has pledged to renegotiate the Korean-U.S. free trade agreement (FTA) to defend U.S. manufacturing interests, and any revisions are expected to hit the automotive, steel, and petrochemical sectors. Finally, Brexit and Trumpnomics are expected result in a stronger yen, which may be beneficial to Korean machinery industry manufacturers due to weaker price competitiveness of Japanese machinery products. (8) Measures for environmental sustainability Environmental indicators, safety regulations and certification systems being strengthened as increasing emphasis is placed on harmony between industry and the environment. Recently, emphasis on the coexistence trend of industry and environment has made machinery technology that can solve problems caused by previous stages of industrialization important. Also at the fore of recent concerns are legal liability for producers, safety regulation of machinery and equipment and the strengthening of certification systems. European CE *, U.S. UL **, and China s CCC *** certification are mandatory and all models are regulated to ensure safety in accordance with ISO regulations. * CE (Comunaute Europeenne) : A mandatory mark acknowledging that products in circulation within the territory of the European Union are in conformity with the EU common standards for the protection of consumers health, hygiene, safety and the environment.

Ⅴ.Policy Measures for Industrial Development of the Machinery Industry 63 ** UL : Underwriters Laboratories InsUL is an independent nonprofit organization that conducts tests on materials, apparatus, products, devices, structures, methods and systems that are relevant to the danger of life and property. Therefore, it is mandatory standard required for export to the U.S. *** CCC (China Compulsory Certification) : The mandatory safety certification system announced by China s General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ). (9) Other relevant measures Doosan Infracore s Vertical Machining Center, a Korean machinery firm, developed an intelligent machining center (the DNM series, in 2009) that enhances user convenience, minimizes downtime, and facilitates maintenance. Promoting policies to provide an easier working environment for Figure Ⅴ-11. DNM series control system OP PANEL Servo Amp Liner Motor Vision640iT CNC Torque Command Spindle Drive Encoder Linear Scale Spindle Motor LAN Device Position Detection Conversion Source : http://www.doosanmachinetools.com/kr/main.do

64 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries domestic and overseas customers from the viewpoint of users is also doing. ICT convergence in the machinery industry has contributed greatly to strengthening innovation capabilities and increasing added value in the industry. Convergence has led to the creation of service business lines and productivity improvement in business processes. In addition to the manufacture of automobiles, ships and machinery, ICT convergence policies are being actively pursued in view of the wide Table Ⅴ-10. ICT convergence in major manufacturing, defense and service industries in Korea Industry Automotive Shipbuilding Defense Medical Construction Energy (Green IT) Source : the author. ICT Convergence Case Vehicle sensor, ECU and control algorithm technology, peripherals information and pedestrian information recognition, real time traffic information, automatic parking system, voice / situation recognition, IP broadcasting, etc. IT-based intelligent ship, IT-based vessel design and construction system, mobile satellite communication, wireless navigation radar, etc. Military satellite communications, defense RFID / USN, military communications devices and apparatus, underwater communications, embedded Software, image processing, unmanned technology, communication network, etc. Tele-hospital, medical robots and advanced medical equipment, aged disease monitoring, home medical care, silver care, early diagnosis of life disease, adult disease prevention management, biosensors and chips IT-based design, construction, operation and maintenance, and development of active social infrastructure (intelligent monitoring, self -control and response) etc. System of Chip(SoC), Network-based system integrated management control, convergence of IT products and components, convergence of IT services, etc.

Ⅴ.Policy Measures for Industrial Development of the Machinery Industry 65 range of applications in the defense, medical, construction, and energy fields. Average R&D investment in the domestic machinery industry is higher than the manufacturing industry as a whole, but in terms of researcher headcount lags behind somewhat. Investments in the machinery industry amounted to is 2.84 trillion KRW as of 2014, accounting for 6.4 percent of all R&D spending in the manufacturing industry. The R&D investment to sales ratio in the machinery sector increased to 3.75 percent in 2014 from 2.5 percent in 2005, exceeding the average of the manufacturing industry. The total number of researchers in the machinery industry accounts for 10 percent of all researchers of the manufacturing sector, and the research and development cost per researcher is lower than that of employees. This seems to be attributable to the characteristics of the general machinery industry, which has a low concentration of large enterprises and a high proportion of SMEs. In terms of the number of companies, small and medium-sized enterprises account for more than 95 percent of the total number of general machinery companies in Korea, but large firms dominate production, Table Ⅴ-11. R&D investment status of machinery industry Industry R&D expenses (one billion won) Number of researchers (persons) R&D cost of sales (%) Number of researchers per thousand employees (persons) R&D expenses per researcher (one million won) 2005 848 8,285 2.5 9.29 102.32 2014 2,824 23,738 3.75 121.0(2013) 119.0 Manufacturing (2014) 44,328 236,429 3.63 130.2(2013) 187.5 Source : Ministry of Science and ICT / KISTEP, R&D activities research report (2012, 2014).

66 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Table Ⅴ-12. Major companies in the domestic machinery industry Field Company product Machine tools, Machine tool parts, Production equipment Mold Construction machinery, Construction machinery parts Doosan Infracore Hyundai-WIA Hwacheon Yes emk Nexturn Woojin plaimm SIMPAC SMCK Samick THK TPC YG-1 Iljin Diamond Grinding Attach solution Nara MND Kishin Doosan Infracore HHI Soosan Everdigm Jinsung TEC DY Heungkuk Woorim gear Dongil metal Freems Samwon-tech Machine tools, Construction machinery Machine tools, Automation parts Machine tools (CNC machines, machining centers) Machine tools (CNC machines, WIA OEM) Machine tool related parts (CNC machines) Plastic injection machine Press Logistics automation equipment LMS Pneumatic equipment, LMS Cutting tools (end mill, tap, drill) Cutting tools (industrial diamonds) Cutting tools (grinding abrasives) Large mold Precision mold Mold base Machine tools, Construction machinery Construction machinery, Industrial robots Construction machinery, special equipment, parts Construction machinery, special equipment, parts Construction heavy equipment, substructure, rollers Hydraulic cylinders, automation parts, automatic car washes Construction machinery parts Construction machinery parts Construction machinery parts Construction machinery parts(power line) Construction machinery parts(hydraulic fittings) Source : Korea Association of Machinery Industry (KOAMI), Annual Membership Directory (in Korean). Note : Refer to Miraeassetdaewoo posts by FSS, KISLINE, etc. Some differences exist depending on the recent situation such as corporate restructuring.

Ⅴ.Policy Measures for Industrial Development of the Machinery Industry 67 exports and technology development. Foreign direct investment (FDI) is also concentrated in a handful of large companies such as Doosan Infracore and Hyundai Heavy Industries. SMEs typically do not conduct proprietary overseas investment, but rather supply parts and materials for large companies that then enter overseas markets. The table Ⅴ-12 summarizes the major domestic machinery makers.

Ⅵ Implications for Developing Countries Machinery Industries The machinery industry grows through the steady accumulation of technology and experience, as it tends to rely on an implicit knowledge base. That is why it is difficult for developing countries to target for Figure Ⅵ-1. Corporate history and structural changes at DMG MORI Source : DMG MORI Annual Report 2015.

Ⅵ.Implications for Developing Countries Machinery Industries 69 development. Let s take a look at DMG MORI, which is the most competitive firm in the machinery sector. DMG MORI is a merger of the German firm DMG and Japanese company MORI Seiki. DMG itself was also formed as the result of a previous between DECKEL, MAHO and Gildemeister in Germany, as shown in Figure Ⅵ-1. Among these, Gildemeister was founded in 1870 and is still in its current state. Mori Seiki in Japan was founded in 1948 and has a 70-year history. Many Japanese machinery companies have a history of more than 100 years. The current iteration of Doosan Machine Tools, a leading Korean machinery company, was established in 1976. Among machinery firms, It is comparatively young at just 40 years old. Its growth in a relatively short period of time is largely due to policy support, which was described in Chapter 5. Doosan is a prime example as to why countries need to take a good look at the various policies that Korea has pursued to develop the machinery industry and compete with Japan and Germany. Here we will look at the main factors that the underdeveloped countries should consider to cultivate their machinery industries. This section might also serve as a reference point for latecomers, as it points out some problems in the Korean machinery industry that require constant attention. Importance of machinery reliability at the design or engineering stage As you see in the figure below illustrating economic loss by product development stage, it is very important to maximize reliability of

70 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Figure Ⅵ-2. Economic loss by stage 1000 Customer Stage Economic Loss due to Poor reliability 1 Design Stage Production Stage 100 10 Engineering Stage Source : Reliability Assessment Center at KIMM internal data (in Korean). machinery in the preliminary design and engineering phases in the product development cycle, as reliability failures in the latter stages are extremely costly. Economic losses suffered in the production stage due to poor reliability are ten times greater than losses incurred in the engineering stage and 100 times greater compared to the design stage. Policy of gradual technological development, from replication to independent design and manufacture The machinery industry is typical of other industrial fields, requiring investment as well as skilled technical personnel. But unlike other industries, it is common for firms in developing countries to begin independently designing products after becoming an OEM through the emulation of existing products. South Korea underwent a similar process and has since progressed to its current stage of maturity.

Ⅵ.Implications for Developing Countries Machinery Industries 71 Figure Ⅵ-3. Technical status & potential for korean machine tools Technology Copy Manual Machines, Simple-Purpose M/T Technical Importation/ OEM Indonesia etc. China Taiwan CNC Lathes, CNC Milling Machines, General-Purpose Grinder, Simple-Purpose CNC M/T Multi-Tasking Machines, Multi-Axis Machines, Large-Scale Machines Self-Design Leading Technology Korea Machines Center, Tuning Center, Tapping Center, High-Precision CNC Grinder Japan Germany Multi-Tasking Machines, Multi-Axis Machines, (Ultra)Large-Scale Machines, Ultra-Precision Grinder, Hybrid Machining System 05 10 15 20 25 30 35 40 Source : the author. Years Figure Ⅵ-4. Distribution of the korean machine tools industry by region (2016) Source : the author.

72 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries Developing countries that are interested in fostering their machinery industries, such as Indonesia, will also undergo this gradual development process when pursuing technology policy. Regional Development Policy for Machinery in Developing Countries When promoting the machinery industry development policy, regional distribution needs to be considered. In addition, it is important to consider major demand industries such as automotive as well as municipal conditions. Machinery products are usually heavy, and traffic infrastructure is also a factor to consider when pursuing future export industrialization. Minimize government failures It is also important for governments to minimize the risk of policy failures. The half-price supply policy for Korean agricultural machinery promulgated in the 1990s is a representative example. This policy caused an oversupply problem from 1993 to 1997. And even as the Korean government provided a huge amount of support for agricultural machinery manufacturers with half-price subsidy projects, the beneficiary firms have neglected to invest in technological development. Investments in high-quality manpower have also been lacking, and neglecting to invest in technology and R&D during times of profitability causes problems to this day.

Ⅵ.Implications for Developing Countries Machinery Industries 73 Table Ⅵ-1. The production of general machinery in Korea year 2006 2012 2013 2014 2015 2016 Unit : Trillion KRW, % annual growth rate (2006~2016) Production 61.4 102.1 99.6 102.4 100.4 101.1 5.1 Source : Statistics Korea, KOSIS (DB). The Korean machinery industry is also making a breakthrough Over the last 10 years, the general machinery sector in Korea recorded a 5.1 percent average annual growth rate in production, as mentioned earlier. However, if we look at just the last five years, production growth slows to nearly a standstill. The table Ⅵ-1 demonstrates this trend. Production of general machinery in 2012 was valued at 102.1 trillion KRW; in 2016 this figure was 101 trillion KRW. In order for the Korean machinery industry to continue to grow in the future, a new breakthrough is needed. Latecomers such as China are catching up rapidly, and Japanese and German machinery makers are making efforts to further bolster their competitiveness. It remains as necessary as ever to strengthen the competitive base of core intermediates, even in Korea Among Korean machinery, the competitive base of final goods is relatively stable, usually controlling market share amounting to sixth or seventh place in the world. Korean firms control 5.2 percent of the global market for construction machinery, good for sixth in the world (2016). Meanwhile Korean companies maintain a 4.2 percent market share of

74 The Development Experience of the Korean Machinery Industry and Its Implications for Developing Countries global market for refrigeration machinery, seventh in the world (2016). Firms in the machine tools industry, which are the core of manufacturing facilities, are in the top eight in the world. In addition, Korean firms producing intermediate pumps, which have a very wide range of uses, occupy ninth place in the world with a market share of only 3.2 percent. Korean machinery also needs core intermediaries to strengthen their competitiveness. For the areas where competition is relatively weak, such Figure Ⅵ-5. Korea s world position and share of market by major items in 2016 Construction machinery(6 th, 5.2%) Refrigerating and air conditioning equipment(7 th, 4.2%) Machine tool(8 th, 4.4%) Air pump/ Compressor(9 th, 3.2%) Source : the author. Internal combustion engine/ Trubine(14 th, 2.1%)