"SMEs See Delivery Price Linkage System as Their Only Hope"

Raw Material Price Surge Hampers Profits
Yearning for Linked System Introduction... No Confirmation

[Illustration by Osungsoo Oh, Asia Economy]

[Asia Economy Reporter Kim Jong-hwa] Jeong Seok-jun (alias, 47), CEO of company S, which manufactures battery packs for electric vehicles in Gyeonggi-do, said, "Small and medium-sized enterprises (SMEs) are still enduring with patience," adding, "The government's push for a delivery price linkage system is at least a glimmer of hope."

For SMEs dealing with large corporations, times like these?when raw material prices are soaring?are extremely stressful. Even if raw material prices rise significantly, there is no choice but to compromise by cautiously negotiating slight price increases while watching the large corporations' reactions.

CEO Jeong said, "We set a goal to achieve an operating profit margin of 5-8% this year. However, raw material prices surged beyond our expectations, and since this increase has not been properly reflected, we anticipate very poor profitability this year." He added, "If the increase in raw material costs were fully reflected in the price of electric vehicles, battery pack prices would account for half of the current electric vehicle price. Large corporations will neither reflect that price fully, and even if they do, there is a high possibility that we will be excluded from the list of partners next year." In other words, the reality is that the sharp rise in raw material prices is neither reflected in delivery prices nor can it be reflected.

Jeong revealed, "If large corporations say raw material prices have increased by 30%, we have to consider that they have actually increased by 40%. The extra 10% is the burden borne by partner companies like us." Company S has already prepared for a negative operating profit this year. Jeong sighed, saying, "We have always endured, so we can hold on, but if this continues for long, we really don't know what will happen."

The government is not unaware of this reality. On the 12th, Lee Young, Minister of SMEs and Startups, reported to President Yoon Seok-youl, "We plan to prepare a 'standard agreement' in the second half of this year and begin a pilot operation of the delivery price linkage system." He also announced that next year, the application requirements for requesting mediation on delivery price adjustments will be relaxed to "a price increase of 3% or more," and incentives such as additional points on the Win-Win Growth Index will be given to entrusted companies with excellent mediation performance.

An official from the Ministry of SMEs and Startups emphasized, "We will normalize the chronic unfair practices that undermine the growth engine of SMEs," adding, "We will ensure that increases in raw material prices are reflected in delivery prices in transactions between primary contractors and subcontractors."

However, the law is distant, while the reality is close at hand. There is no certainty about whether the system will actually be introduced, and even if it is, it is expected to be implemented only next year. For now, there is no choice but to endure cautiously while watching the situation. The delivery price linkage system was already scrapped in 2008 due to opposition from large corporations during the global financial crisis. In a situation where the introduction of the system is uncertain, SMEs are reluctant to make excessive demands on large corporations for fear of being blacklisted.

This time, the ruling party proposed a subcontracting law amendment bill last month as a party resolution to introduce the delivery price linkage system, and the opposition party also proposed similar amendments to the Win-Win Cooperation Act and subcontracting law, making the possibility of legislation higher than ever. However, SMEs believe there is no need to rush to "bell the cat" first.

A CEO of a small company producing electric two-wheelers shared the SME community's sentiment: "Honestly, it would be good if the delivery price linkage system is implemented, but even if it fails again, we are watching with a resigned attitude." He added, "However, there must be a legal basis to justifiably demand delivery price increases when SMEs face difficulties due to external factors like the recent surge in raw material prices." SMEs do not see the delivery price linkage system as a panacea, but they want to eliminate the precedent that prevents them from making even reasonable demands.

CEO Jeong said, "The problem is that we are in the third quarter now, but we cannot even forecast the upcoming fourth quarter," adding, "We do not expect anything grand from the government, but at least it should play the role of a market guide. We cannot give up on next year either." This is a plea to the government to act as a lighthouse in an uncertain market where even the near future cannot be predicted.

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