Korea's equipment investment
is drawing broad attention,
thanks to the recent high growth rates
on the back of improvements in certain industries
including semiconductors.
However, the average capacity utilization rate
of manufacturing sectors
remains on a downward trajectory
since the 2008 global financial crisis,
raising concerns that this could hinder
equipment investment.
As such,
this study analyzes the relationship
between equipment investment
and the manufacturing utilization rate
to draw on the implications of
future trends.
Let us start by examining the utilization rate
by sector.
An examination into the distribution
of the utilization rate
among the top 10 manufacturing sectors
uncovers a sizable gap.
From 2010 to 2016, those at the bottom of
the spectrum posted steep declines
in their utilization rate,
from approximately 76% to just 40%.
This, in turn, has acted to drag down
the overall average utilization rate
in the manufacturing industry.
Exacerbating the problem is that
certain sectors at the bottom,
including other transport equipment,
for example shipbuilding,
and electronic parts expanded their capacity
despite the decline in production.
And it was found that
the share of zombie firms,
i.e. those receiving financial support and
are potentially insolvent, in these sectors
is growing.
This suggests an ongoing need
for restructuring,
because a large share of zombie firms
indicates excess capacity.
So,
how does low utilization rates
affect equipment investment?
An empirical analysis reveals that
on a 1%p improvement in operating profits,
the investment rate will increase by 0.24%.
However, this does not hold true for those
with a utilization rate of below 60%.
Ultimately, what this implies is that,
because sectors with a low utilization rate
have a high tendency to withhold investment,
the recent improvement trend
in equipment invest will not expand across all sectors.
Next,
an analysis was conducted
on the source of the falling average
utilization rate, from a macroeconomic
perspective.
The results show that
projections for demand have a meaningful
impact on the average utilization rate
of manufacturing sectors.
For example,
positive projections for private consumption
and exports increases production,
and therefore, the utilization rate
while the opposite lowers
the utilization rate
and impedes equipment investment.
Indeed, the results suggest that,
as expectations for exports and private consumption
declined following the global financial crisis,
demand conditions worsened,
which drove down the average utilization rate
in the manufacturing industry.
In addition,
a regression analysis found that
on a 1%p drop in the average
utilization rate, the growth rate
in equipment investment will fall
by 1.26%p during the following quarter.
In sum,
the outcome of this study confirms that
if internal and external demand conditions
do not improve in the near future,
the average utilization rate
in the manufacturing industry will continue
to remain low for the time being,
limiting equipment investment.
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