Industry Entering the 'Ma-ui Reverse Growth Cycle'

Demand Cliff → Export Decline → Production Halt → Restructuring → Domestic Demand Slump Vicious Cycle

[Asia Economy Reporters Kim Hyewon, Lee Changhwan, Hwang Yoonju] Amid the sharp decline in economic sentiment caused by the shock of the novel coronavirus disease (COVID-19) pandemic, the depth of export sluggishness is deepening following decreases in consumption, production, employment, and investment. Facing a 'demand cliff' in the United States and Europe, the main markets for our export companies, a vicious cycle of export volume decline → factory shutdowns → workforce restructuring such as furloughs and retirements → domestic consumption slump has materialized as a cursed negative growth cycle.

According to the industry on the 13th, domestic automakers, which were the first to be hit directly by COVID-19, have begun entering a second round of shutdowns starting this month. Since overseas demand began to decline significantly from last month, temporary closures became inevitable to adjust export volumes and inventory levels produced at domestic factories.

Following Hyundai Motor Company's suspension of operations on Line 2 of Ulsan Plant 5, which produces the Tucson, Kia Motors is also negotiating with labor unions over wages and allowances to implement temporary shutdowns from the 23rd to the 29th at three factories with large export volumes: Sohari Plants 1 and 2 and Gwangju Plant 2. This is a management decision based on insufficient demand relative to production capacity. It is estimated that the Sohari plant, which produces models such as the K9, Carnival, Pride, and Stonic, faces a demand shortfall exceeding 10,000 units this month alone.

Renault Samsung Motors and GM Korea, which have a high export ratio and mainly import parts from overseas to assemble vehicles, are also expected to face factory shutdown pressures starting this month. Exports from Renault Samsung and GM Korea fell by 57.4% and 20.8%, respectively, in March alone.

As the overseas demand base collapsed, companies artificially began adjusting supply volumes. Posco, affected by the downturn in upstream industries, is preparing its second production cut since its founding, and even the semiconductor sector, which had been the last to support the manufacturing industry, has no choice but to reduce output as exports decline. The non-memory semiconductor market, closely linked to the global economy, has shrunk sharply due to the impact of COVID-19, leading to forecasts of semiconductor negative growth starting this month.

Along with semiconductors, the growth of major electronic products such as LCDs and smartphones is rapidly slowing, making production cuts inevitable. After a continuous rise since the beginning of the year, LCD TV panel prices reversed and declined this month. According to WitsView, the average price of LCD TV panels in the first half of this month was $143, down 0.4% from the latter half of last month. The smartphone market, which affects semiconductor business conditions, has already signaled negative growth. Market research firm Omdia forecasts that global smartphone shipments will decrease by about 13% this year due to the impact of COVID-19.

Although the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC oil-producing countries' coalition, OPEC+, agreed on production cuts after much difficulty, refineries and petrochemical companies, which have seen a sharp drop in demand for petroleum products due to the global economic downturn, are also responding to the crisis with production cuts. The Singapore complex refining margin recorded -$0.7 in the second week of this month. This marks the fourth consecutive week of negative margins, following -$1.9 in the third week of last month, -$1.1 in the fourth week, and -$1.4 in the first week of this month. This is the first time since Reuters began compiling related statistics in 2014 that refining margins have been negative for four consecutive weeks. As refining margins worsen, it is forecasted that the combined operating losses of the four domestic refiners in the first quarter will reach 2.5 trillion won, far exceeding market expectations. An industry insider stated, "With overlapping adverse factors such as negative margins and a sharp drop in demand, trillion-won losses are becoming a foregone conclusion," adding, "It is impossible and meaningless to estimate performance for the second quarter when the global COVID-19 pandemic fully took hold."

As the second shutdown and production cut concerns due to the COVID-19 pandemic materialize, workforce restructuring due to lack of work has accelerated. Starting with aviation, furloughs and layoffs are rapidly spreading not only in distribution but throughout the manufacturing sector. The Consumer Confidence Index (CCSI) and the Business Survey Index (BSI), representative economic sentiment indicators, fell to their lowest levels since the global financial crisis last month. Analysts predict that the domestic demand slump will deepen due to worsening employment conditions.

On this day, the Korea Employers Federation compiled major difficulties and requests by industry caused by COVID-19 and urged the government to strengthen support measures including ▲expanding liquidity supply regardless of company size or industry ▲deferral of existing loan repayments and interest ▲significantly allowing special extended working hours to compensate for production disruptions ▲expanding employment retention support ▲refraining from raising industrial electricity rates ▲temporary revival of the temporary investment tax credit system ▲early execution of public procurement budgets within the first half of the year ▲and guaranteeing safety for business trips abroad.

This content was produced with the assistance of AI translation services.