[Physical AI] Korea’s Manufacturing Sector Loses Competitiveness — The Future Hinges on “Physical AI”

Korea’s manufacturing sector — once the beating heart of its economy — is showing signs of stagnation. According to a survey by the Korea Chamber of Commerce and Industry (KCCI) of 2,186 manufacturers nationwide, more than 80% of companies responded that their core products are already in a “red ocean” market. Furthermore, 83.9% said they have “lost or been overtaken in competitive advantage.”

As low birth rates and an aging population erode the pool of skilled labor, Korea’s manufacturing industry—caught between U.S.–China technological rivalry—faces what experts call a “structural dead end.”

The only clear breakthrough, many suggest, lies in Physical AI: a new frontier where artificial intelligence escapes the confines of screens and transforms entire factories into “thinking robots.”

The National Assembly Futures Institute (NAFI) recently released a report titled “Manufacturing Innovation in the Age of Physical AI,” diagnosing the structural crisis of Korea’s manufacturing base and urging the government to act swiftly to secure leadership in a projected USD 50 trillion (₩7,200 quadrillion) global market.

The challenges are multi-layered. Domestically, the industry is suffering from a collapse of the labor force. With a record-low fertility rate of 0.7, younger generations increasingly shun so-called “3D jobs” (dirty, dangerous, and difficult), while baby-boomer master technicians — the backbone of industrialization for the past 40 years — are retiring en masse, leading to severe skills discontinuity. The shipbuilding workforce, for instance, halved from 200,000 in 2014 to 95,000 in 2022.

Externally, geopolitical shifts are no less daunting. The U.S.–China tech rivalry has fractured the once-efficient global production network into polarized, bloc-based systems. Reshoring has become the dominant trend under protectionist policies worldwide, but Korea’s performance has been lackluster. In the past five years, only 108 companies have returned to Korea, compared with 1,844 in the U.S. in 2021 alone.

Adding to the malaise, 57.6% of Korean manufacturers reported no plans for new business ventures, citing funding difficulties (25.8%) and uncertainty about profitability (25.4%). The “fast follower” strategy—once Korea’s hallmark in catching up with advanced economies—has officially run its course.

The NAFI report identifies “Physical AI” as the key to escaping this impasse. Unlike ChatGPT—a “brain in a jar” trapped in digital space—Physical AI refers to a “brain in a body,” capable of acting and interacting directly in the physical world through robotic systems.

NVIDIA CEO Jensen Huang has cited Physical AI as the next great frontier of generative AI, with the potential to revolutionize the physical economy—which makes up 85% of global GDP. The market is expected to reach USD 50 trillion, with as many as 4 billion AI-powered robots operating worldwide by 2050.

Physical AI is transforming the manufacturing paradigm—from robots that simply follow pre-programmed instructions to autonomous production partners that make their own judgments. Humans are being freed from repetitive labor to focus on higher-level strategic oversight.

This shift is already well underway globally. At Xiaomi’s smart factory, production runs 24/7 in a “three-zero” system—no humans, no lighting, and no HVAC. At Japan’s FANUC, robots manufacture other robots, enabling up to 30 days of unmanned operation.

Foxconn, before constructing actual facilities, builds entire digital twin factories in virtual space and runs thousands of simulations, optimized by its in-house “Factory GPT.” Amazon commands over a million logistics robots under its DeepFleet AI system, revolutionizing fulfillment efficiency. Meanwhile, Swiss robotics company ANYbotics deploys its quadruped robot ANYmal in hazardous environments—detecting gas leaks and high-heat risks to prevent industrial accidents.

So where does Korea stand? The report describes the situation as one of “coexisting opportunity and crisis.”

Korea’s strength lies in its extraordinary robot density—1,012 robots per 10,000 workers as of 2023, ranking first globally and nearly seven times the world average (162). The nation also possesses decades of rich manufacturing data, a crucial asset for the AI era.

Yet beneath the surface lies a hollow structure. Korea remains a demand-side player—adept at using robots, but weak in supplying them. Dependency on foreign core components is severe: 70% of precision reducers come from Japan, while servo motors and controllers largely depend on imports from Japan and China. Moreover, most manufacturers fail to utilize their own data. While 60.8% of small and mid-sized firms collect production data, only 0.1% have implemented it in AI systems.

To break this “hollow core” and become a true Physical AI powerhouse, the report proposes four key strategies:

Establish a National Physical AI Integration Framework — Merge fragmented policies under the AI Act, Metaverse Convergence Act, and Robotics Act into a unified roadmap led by a National AI Strategy Council.

Concentrate R&D on Core Technical Challenges — Instead of competing with global giants like Google or Tesla across the board, Korea should target unsolved “core problems” such as precision tactile sensors, high-density batteries, and dynamic balance algorithms.

Prioritize Strategic Sectors — Deploy Physical AI first in industries suffering acute labor shortages (e.g., welding, casting) and in high-risk environments (chemical plants, press operations) where social resistance to automation is minimal.

Build Integrated Training & Data Centers — Take cues from Figure AI’s USD 1.3 billion investment in robot learning data and Shanghai’s “virtual-physical training zone.” Korea should establish shared Physical AI demonstration centers for joint corporate data use—especially to digitize the tacit knowledge of retiring master craftsmen.

Dr. Lee Seung-hwan, Senior Research Fellow at NAFI, warned:

“The era of Physical AI represents both a structural crisis and the final golden opportunity for Korean manufacturing. To overcome the twin threats of labor collapse and technological isolation, Korea must rally national resources around the new driving force of ‘thinking robots.’”