"If the Won Value Drops by 10%, Manufacturing Operating Profit Margin Rises by 1.3%p"

[Asia Economy Reporter Su-yeon Woo] Amid the recent sharp rise in the won-dollar exchange rate, an analysis has emerged that the depreciation of the Korean won (weakening of the won) generally brings positive effects on the profitability of our manufacturing industry. However, these effects varied by sector.

According to the report titled 'The Impact of Won Exchange Rate Fluctuations on Our Economy and Manufacturing Profitability' released on the 22nd by the Korea International Trade Association's International Trade and Commerce Research Institute, the value of the won and the operating profit margin of Korea's manufacturing industry move in opposite directions. During the past period of won appreciation (2010?2014), the manufacturing operating profit margin fell by 2.5 percentage points, whereas during the recent period of won depreciation (2014?2018), it rose by 3.1 percentage points.

Analysis using the 2019 input-output table also showed that a 10% depreciation of the won increased the manufacturing operating profit margin by 1.3 percentage points. This is because when the won depreciates by 10%, exports increase, raising the operating profit margin by 3.4%, but at the same time, the cost of imported raw materials rises, reducing the operating profit margin by 2.1%.

Changes in Operating Profit Margins by Industry Due to a 10% Depreciation of the Won (2019)
(Data = Korea International Trade Association, Institute for International Trade and Commerce)

The sectors that benefited most from the won depreciation in 2019 were machinery and equipment (operating profit margin up 3.5 percentage points), computer, electronic and optical equipment (2.5 percentage points), transportation equipment (2.4 percentage points), chemicals (1.4 percentage points), and electrical equipment (1.3 percentage points), in that order. Conversely, coal and petroleum (-2.4 percentage points), food and beverages (-0.6 percentage points), wood, paper and printing (-0.4 percentage points), and primary metals (-0.2 percentage points) saw declines in operating profit margins despite the won depreciation.

The report classified the impact of won depreciation on industries into four categories?▲concentrated beneficiaries ▲partial beneficiaries ▲partial sufferers ▲concentrated sufferers?considering the industry's ability to adjust export prices.

First, the concentrated beneficiary category, which experiences increased operating profits from won depreciation and finds it difficult to adjust export prices downward due to industry characteristics, includes electrical equipment, transportation equipment, machinery and equipment, and computer, electronic and optical equipment sectors. The chemical products sector was selected as a partial beneficiary, where export prices decrease due to won depreciation but the increase in operating profits from depreciation is greater.

On the other hand, coal and petroleum, wood and paper, and primary metals were classified as concentrated sufferers, where operating profits decline due to won depreciation and damage from export price reductions may expand. It is expected that these sectors will require focused foreign exchange risk management.

Meanwhile, not only manufacturing operating profit margins but also prices were found to move inversely to won value fluctuations. As of 2019, a 10% depreciation of the won is estimated to increase the producer price index by 2.5% across all industries on average, and by 3.4% when limited to manufacturing.

Regarding the input-output structure of the input-output table, the net export exposure (the export ratio in total output minus the import ratio of intermediate goods), which is the part exposed to exchange rate fluctuations, steadily declined in manufacturing from 14.6% in 2016 to 13.0% in 2019. This indicates that our economy is less affected by exchange rate fluctuations than before.

Senior Researcher Nae-young Kang of the Korea International Trade Association said, "Recently, the won has depreciated rapidly against major currencies such as the dollar, euro, and yuan, positively affecting the export competitiveness of our companies," adding, "Profitability is expected to improve mainly in manufacturing sectors with high export ratios, low raw material import ratios, and strong exchange rate fluctuation responsiveness."

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