Companies Suffocated by Raw Material Inflation and Regulations... "Can't Even Make Investment Plans"

Companies, One in Two Have No Investment Plans
Numerous Domestic and International Adverse Factors Including Macroeconomic Instability

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[Asia Economy Reporter Jin-ho Kim] A, a famous cosmetics manufacturer, planned a domestic facility investment (factory expansion) worth 390 billion KRW but encountered the obstacle of 'COVID-19.' The spread of COVID-19 caused a contraction in demand. To make matters worse, local companies rapidly emerged in China, the largest export market during the same period. As a result, A decided to reduce the investment scale by about 30%. The judgment was influenced by the fact that various internal and external adverse factors forced a comprehensive and conservative revision of the investment plan.

◆ One out of two companies has no investment plan = A survey revealed that one out of two major domestic companies had no investment plan or had not prepared one even after the first quarter. Especially, most companies that had plans intended to maintain or reduce their investment compared to last year. Concerns arise that companies will find it difficult to actively invest due to various internal and external risk factors, including instability in the domestic and international macroeconomic environment.

On the 20th, the Federation of Korean Industries (FKI) commissioned a public opinion research firm, Mono Research, to survey the '2022 domestic investment plans' targeting the top 500 companies by sales. Among the 105 responding companies, more than half (50.5%) answered this way.

Responses indicating no investment plan accounted for 12.4%, and those who had not yet prepared a plan were 38.1%. The proportion of companies that had prepared investment plans was 49.5%, but among them, 50.0% said they would maintain last year's level. Responses indicating a decrease in investment compared to last year were 11.5%. Those expecting an increase in investment compared to last year were 38.5%.

Companies cited unstable domestic and international macroeconomic conditions such as the spread of COVID-19 and rising raw material prices (37.7%) as the main reason why it is difficult to increase investment scale this year, accounting for 4 out of 10. This was followed by deterioration in external financing conditions such as increased loan interest rates and stricter financial institution screening (20.5%), ▲deterioration in business environment such as poor operating performance (15.4%), ▲completion of major investment projects (8.5%), and ▲concerns about the spread of regulatory systems (6.0%).

Not only domestic companies but also foreign-invested companies (foreign-invested enterprises) face similar situations. According to the FKI, 9 out of 10 foreign-invested companies operating in Korea have not prepared investment plans for this year. Especially, only 8.9% of companies have investment plans this year, and among them, only 22.2% plan to increase investment compared to last year, showing significantly lower figures than domestic companies.

◆ Companies hesitate to invest due to macroeconomic instability = By mid-first quarter this year, half of major companies cited macroeconomic instability as the biggest reason for not establishing or hesitating to establish new investment plans. In particular, supply chain instability of raw materials that emerged since last year and the resulting inflationary pressure approached 40%. Amid pessimistic economic outlooks and concerns about stagflation, which means inflation during economic recession, there are even worries that companies' investment and employment are in a 'zero visibility' state.

In resource-poor Korea, most raw materials are imported, but recently, due to Russia's full-scale invasion of Ukraine and other factors, prices of most major raw materials have skyrocketed. For example, the price of 'naphtha,' used as a raw material for plastics and textiles, is at its highest in over 14 years due to rising oil prices.

Monetary tightening by major countries and the resulting economic contraction (19.4%), and the possibility of COVID-19 variants emerging (15.5%) were also identified as factors hindering investment activities. In fact, the United States has clearly indicated that it will operate a long-standing accommodative monetary policy in a tightening manner. The market expects more than ten interest rate hikes over the next two years.

Additionally, disruptions in China's industrial production and economic slowdown (10.7%), intensification of US-China conflicts and reorganization of supply chains centered on their own countries (6.8%) were also analyzed to have considerable impact. Recently, in China, major industrial hub cities have been completely locked down due to the spread of COVID-19, and the industrial sector is reacting extremely sensitively to this situation.

Some express concerns that if the Ukraine crisis prolongs as a vicious cycle of retaliation between the West and Russia, the damage to domestic companies will inevitably increase. Shinhan Financial Investment recently stated in a report, "If the conflict between Russia and Ukraine intensifies and energy prices rise, it is feared that domestic energy prices will also increase," adding, "Due to Korea's high dependence on crude oil and semiconductor supply chain disruptions, the economy will be impacted."

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