Economic Warmth Fades as Manufacturing Cools; Urgent Need for Business Growth Environmen

A recent survey shows that the performance of Korea’s manufacturing sector has deteriorated to levels worse than during the COVID-19 period. According to a survey by the Korea Chamber of Commerce and Industry, 75 percent of the 2,275 manufacturing firms surveyed nationwide expect this year’s operating profits to fall short of their initial targets. This figure is even higher than during the early stages of the pandemic in 2020. Domestic demand remains weak due to delayed consumption recovery, while exports—excluding semiconductors—continue to decline, draining vitality from the industrial sector as a whole.

Manufacturing remains the backbone of the Korean economy. It accounts for roughly 27 percent of gross domestic product (GDP) and has long driven exports, employment, and technological innovation. The current difficulties, however, resemble not a temporary cyclical slowdown but a structural challenge. Small and medium-sized manufacturers in particular are facing worsening financial conditions and growing difficulties in securing skilled labor. At the same time, the technological gap with China is narrowing rapidly. Whereas Korea once held a clear technological advantage 15 years ago, more than half of assessments now describe Korea and China as being “on par,” with some analyses suggesting that China has already surpassed Korea in production efficiency.

The problem is that the institutional environment is failing to support corporate resilience. Forty-four percent of surveyed firms reported that legal and regulatory burdens have increased this year. Discussions over reduced working hours and the possibility of higher corporate taxes are adding to managerial uncertainty. When such policies are misaligned with on-the-ground realities, they can undermine incentives for production and investment.

Industrial competitiveness ultimately depends on whether firms can operate in a predictable environment. As uncertainty grows, companies tend to prioritize cost-cutting and risk avoidance over investment. When domestic industries become rigid, production bases move overseas and jobs disappear. This is not merely a corporate issue but a structural weakening of the industrial ecosystem. What is needed now is not faster policymaking, but policy direction that is better aligned with economic realities.

Around the world, governments are restructuring to protect and strengthen their manufacturing bases. The United States is pursuing reshoring of key industries, while Japan and Europe are reinforcing competitiveness through the promotion of advanced technology sectors. Korea, too, urgently needs institutional reform to reinforce its manufacturing foundation. Rather than uniform regulation, a flexible approach that reflects industry characteristics and firm size is required. Administrative procedures should be simplified, and conditions should be created that allow firms to innovate independently.

What Korea needs now is not short-term stimulus, but the restoration of its industrial ecosystem. Even emerging industries such as AI and digital technologies can deliver sustained results only when integrated with manufacturing. New industries cannot thrive without a strong foundation in existing ones. To ensure that firms do not hesitate to invest, policy predictability must be enhanced and regulations that obstruct efficiency on the ground must be reformed.

When manufacturing cools, the entire economy cools with it. National competitiveness is built on factory floors. Industrial vitality is not merely a matter of economic indicators; it underpins jobs and quality of life for citizens. The government’s role is not to replace the market, but to create an environment in which firms can grow on their own. The recovery of manufacturing is the recovery of the Korean economy—and the starting point for growth that people can truly feel.

Ho-kyung Lee
Research Fellow, The Center for Free Enterprise

Korean version: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=1&idx=28236