SMEs in Sandwich Position... "Large Corporations Unilaterally Notify Raw Material Price Increases"

Announcement of Survey Results on 'Raw Material Price Fluctuations and Supply Instability'
61.8% of Small and Medium Manufacturing Enterprises Receive Raw Material Price Notifications Without Consultation
Price Increases Not Reflected in Delivery Prices... Need for 'Cost-Linked Pricing System' Introduction

[Asia Economy Reporter Kim Bo-kyung] It has been revealed that 6 out of 10 small and medium-sized manufacturing companies receive price notifications from large raw material producers without any price negotiations. Due to the structure where the increase in raw material prices is difficult to be reflected in the delivery price, the majority of companies suffer helplessly.

The Korea Federation of SMEs announced on the 10th the results of the "Survey on Raw Material Price Fluctuations and Supply Instability" conducted last month targeting 500 small and medium-sized manufacturing companies.

The raw materials mainly used in product manufacturing were most commonly 'steel (34.2%)' and 'non-ferrous metals (39.0%)', followed by 'wood and paper products (12.4%)' and 'petroleum and chemicals (10.4%)'.

Prices of 89.9% of the raw materials mainly used by small and medium-sized manufacturers rose compared to the end of last year, with an average price fluctuation of 33.2%. In particular, the price increase of steel raw materials such as thick plates, cold-rolled steel sheets, and pig iron was prominent compared to other raw materials.

Recently, 87.4% of respondents said that such raw material price fluctuations negatively affect operating profits, while only 11.8% responded that there was 'no impact'.

61.8% of small and medium-sized manufacturing companies answered that they receive unilateral price increase notifications from large raw material producers, followed by 'verbal negotiations (21.0%)' and 'contract drafting (16.6%)'. Regarding the frequency of raw material price changes, 'irregular (76.2%)' was the most common, with annual changes at 16.8%.

However, the negotiation cycle for delivery prices with commissioning companies according to raw material price fluctuations was '1 year (40.4%)' and 'irregular (38.4%)', showing a time lag compared to the raw material price fluctuation cycle.

Regarding whether the increase in raw material prices is reflected in delivery prices, 'partially reflected (43.2%)' and 'not reflected at all (43.0%)' accounted for 86% in total, indicating that it is difficult to reflect price fluctuations in delivery prices.

By industry, cases where price increases were not reflected at all were relatively high in textiles (84.0%), construction (84.6%), food (50.0%), and automobile/transportation/shipbuilding (50.0%).

The main reason for not reflecting the price increase in delivery prices was 'the commissioning company's customary price freeze or reduction (35.0%)', followed by 'cost reduction to secure price competitiveness (31.8%)' and 'cost transfer by the original business operator due to economic recession (23.9%)'.

As countermeasures against raw material price fluctuations and supply instability, the most common and despairing response was 'no countermeasures (71.4%)', followed by 'adjustment of delivery dates (19.6%)' and 'substitution with other raw materials (3.8%)'.

Regarding efforts to realize delivery payment, 'cost-linked pricing system (37.4%)' was considered the most necessary, followed by activation of delivery price adjustment negotiation systems (31.4%) and voluntary win-win intentions of large corporations (22.8%).

Jung Wook-jo, Head of the Innovation Growth Division at the Korea Federation of SMEs, said, "Small and medium-sized manufacturing companies procure raw materials from large corporations, produce intermediate goods, and supply them to large corporations. Recently, they are caught in a sandwich situation between rising raw material prices and non-reflection in delivery prices."

He added, "Due to low bargaining power against large raw material producers, such as sudden irregular price increases and unilateral price notifications, it is difficult to reflect raw material price increases in delivery prices. While it is important to prepare measures to enhance bargaining power with large raw material producers, the voluntary win-win intention of large corporations is more urgently needed than ever."

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