The Two Faces of Exchange Rates Hitting SMEs... The Problem Is 'Uncertainty'

For Small and Medium Enterprises, Exchange Rates Are the 'Janus's Face'

Exchange Rate Surge (Photo by Yonhap News)

For small and medium-sized enterprises (SMEs), exchange rates are like the two-faced god Janus. Janus, a guardian deity of doors in Roman mythology, has two faces. A rise in the KRW-USD exchange rate can be beneficial for export-oriented SMEs, but it becomes a burden for companies that need to import raw materials. Conversely, when the Korean won is strong, companies may have to bear foreign exchange losses, but they can expect a reduction in raw material purchasing costs. Like Janus with two faces, exchange rate fluctuations have a dual impact on businesses. The problem lies in the increased uncertainty caused by sudden exchange rate changes. For SMEs with fragile foundations, uncertainty is the greatest risk. This is why the recent sharp rise in the KRW-USD exchange rate has deepened concerns within the SME sector.

Company A, an auto parts manufacturer located in Gyeongbuk, is struggling with rising raw material prices and, on top of that, the recent surge in exchange rates has added to its management difficulties. This company, which generates 70% of its annual sales of 30 billion KRW through supplies to Hyundai and Kia Motors, imports raw materials such as aluminum and copper from China, the United States, and Europe. Due to the recent high exchange rate, the cost of importing these raw materials has significantly increased, but the rise is not immediately reflected in the supply prices, causing cash flow problems. The growing inventory burden is also an issue. Whereas in the past the company could purchase 10 tons of aluminum per month, the current exchange rate increase has led suppliers to demand bulk contracts. A representative from Company A lamented, "Because non-ferrous metals have limited demand, suppliers often want bulk contracts, and SMEs are left to bear the inventory burden." Given this situation, the company is hesitant to invest in the future as the market shifts from internal combustion engine vehicles to eco-friendly electric vehicles.

The cement industry is also facing a double burden with rising prices of thermal coal and increasing exchange rates. Since thermal coal is entirely imported, its price is affected by exchange rates, and profitability is expected to worsen in the second half of the year. A cement industry official said, "The KRW-USD exchange rate has risen about 20% over the past year since last year, increasing the burden of raw material purchasing costs by the same amount," adding, "Export volumes are minimal this year, so it is difficult to expect any positive effects from the exchange rate." Export companies sometimes have to endure losses due to a strong dollar depending on the market. Company R, which sells golf equipment to Japan through Amazon, has been continuously running at a loss recently due to the depreciation of the Japanese yen.

There are companies that benefit from a high exchange rate. However, upon closer examination, the situation where foreign exchange gains can be made is not entirely welcome. Display equipment company C has a high proportion of overseas exports and receives payments in dollars, so its sales converted into Korean won have significantly increased. Startup B, which provides software (SW) services overseas, is 100% based on overseas sales, with 70-80% occurring in North America, so its won-denominated sales have expanded in line with the continuous rise in exchange rates this year.

However, even companies enjoying foreign exchange gains in manufacturing face increased raw material costs due to the high exchange rate, and industry analysis shows that when calculating the numbers, these costs often offset the profits. An SME industry official said, "The current situation is difficult not only because of the weak won but also because the euro, yuan, and yen have all depreciated, causing export companies outside the U.S. market to struggle," adding, "In particular, prolonged won weakness will increase import price burdens and lead to economic instability."

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