"How Should We Pay Employee Salaries?"... The 'Triple Burden' Squeezing Korean SMEs

Exporting SMEs Face Crisis... 1.1% Decline in Total Industrial Production in April

Due to the recent increase in global cargo volume and the impact of the Suez Canal accident, maritime freight rates have surged, exacerbating the difficulties faced by export-oriented small and medium-sized enterprises amid rising raw material costs and the prolonged COVID-19 pandemic. Photo by HMM

[Asia Economy Reporter Kim Heeyoon] A second-tier auto parts supplier in Siheung, Gyeonggi Province operated its factory only 3 to 4 days a week throughout May. This was due to a sharp drop in orders from clients caused by the prolonged COVID-19 crisis and the global semiconductor supply shortage. It is difficult to guarantee normal operations even in June. Additionally, the price of LCD panels, a key component in this company's main products, has doubled, making it hard to meet delivery prices. The company's CEO, Mr. Lee, said, "With the prolonged COVID-19 situation, recovering sales is difficult, and with raw material prices rising, I am worried about paying employees' salaries next month."

The prolonged COVID-19 crisis and rising raw material costs have pushed export-oriented small and medium enterprises (SMEs) to the brink of collapse. While large corporations have entered a recovery phase in exports thanks to the COVID-19 base effect, SMEs are halting production lines due to supply instability caused by rising raw material prices, inflationary pressures, and a sharp decline in orders. According to the April industrial activity trends released by Statistics Korea on the 31st, total industrial production last month decreased by 1.1% compared to the previous month. Due to sluggishness in the two major export items, automobiles and semiconductors, manufacturing shipments fell by 0.9%, and the manufacturing operating rate index also dropped by 1.1% from the previous month to 73.8%.

The simultaneous surge in raw material prices is also tightening the noose on SMEs struggling for over a year due to COVID-19. The sharp rise in the price of corrugated cardboard raw material, corrugating medium, has prevented box manufacturers from fully benefiting from the industry's boom. Price increases in steel scrap and petrochemical products are pushing the foundry and plastic industries to the edge. These companies are appealing for price increases from large corporations, but due to industry structure, swift reflection of these increases is difficult.

In particular, inflation caused by rising raw material prices appears to be pushing up producer prices as well. A report titled "Analysis of International Raw Material Price Fluctuations and Their Impact on Our Exports," released by the Korea International Trade Association on the 30th, predicted that when the price of imported raw material-related items rises by 10%, producer prices increase by an average of 0.43% annually. Kang Naeyeong, senior researcher at the Trade Association, pointed out, "Domestic export SMEs may suffer more due to cost inelasticity," and added, "Efforts at the government level to diversify resource supply are necessary to offset raw material risks."

Shanghai Containerized Freight Index (SCFI) Trend. Source = Shanghai Shipping Exchange (SSE)

Rising Shipping Costs Increase Burden on Export SMEs

Soaring shipping costs are also bad news for export SMEs. A small home appliance company A in Gyeongsangnam-do recently had to pay double the freight charges to urgently secure a ship from another shipping company at a nearby port because it could not find a vessel to bring in Chinese OEM products. A company official lamented, "Global container ships departing from China and passing through Busan to the U.S. often skip Busan and head directly to the U.S. as Chinese cargo volume has increased recently."

The Shanghai Containerized Freight Index (SCFI), which indicates the level of freight rates on maritime shipping routes, hit a record high of 3,495.76 on the 28th of last month. This is nearly four times higher than the same period last year. As a result, SMEs that mainly sign short-term (spot) contracts with shipping companies have no choice but to bear the full burden of rising freight costs, worsening their difficulties. An industry insider said, "Maritime freight rates keep breaking records daily, and even if you accept this and book a ship, you can only load cargo about a month later," adding, "Demand is increasing, congestion at major ports continues, and freight rates are expected to remain high through the third quarter. It’s unclear how long we can endure this." In fact, Maersk, the world's largest shipping company, announced it will not increase its fleet despite rising global cargo volumes, so the trend of soaring freight rates is expected to continue for the time being.

In response, the Ministry of SMEs and Startups has newly introduced international transportation services in its export voucher program to support logistics costs for export SMEs. Additionally, the Small and Medium Business Corporation is providing logistics cost support to export SMEs affected by rising air and sea freight rates, but there are calls for more fundamental measures.

Joo Won, head of the Economic Research Office at Hyundai Research Institute, said, "SMEs lack the ability to hedge against external factors such as rising raw material prices, so the government should consider establishing a system to reduce risks," and added, "With the recent won appreciation hitting a three-month low in exchange rates, the government needs to establish broad support measures to prevent SMEs from facing quadruple hardships."

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