Raw Material Prices Rise, and High Exchange Rates Add Pressure... SMEs Are on the Brink

Domestic Companies Selling Imported Raw Materials
"Emergency Management System Initiated" "Operating Profit Down 87%"
SMBA "Price Increase Factor... Increased Difficulties for Small and Medium Businesses"

[Image source=Yonhap News]

[Asia Economy Reporters Kim Bokyung, Kwak Minjae] High exchange rates are a burden for small and medium-sized home appliance company A. Company A imports raw materials from overseas to manufacture products such as frying pans and pots at domestic factories. Since last year, the prices of raw materials like aluminum have risen, and recently, with the increase in the KRW-USD exchange rate, the cost burden has doubled.

According to the Korea Resource Information Service on the 24th, the 3-month aluminum price traded on the London Metal Exchange (LME) rose from $2,016 per ton on January 4, 2021, to $2,417 per ton just a year and a half later on the 23rd. Although the price has somewhat stabilized compared to the peak of $3,968 on March 7 this year, it is hard to be reassured. The KRW-USD exchange rate has risen by 24% compared to January last year. At that time, the exchange rate had dropped to 1,080 KRW but recently surged to around 1,340 KRW. In a situation where domestic demand is shrinking, the cost burden cannot simply be passed on to sales prices.

The home appliance industry reports that the import price converted into Korean won has more than doubled compared to last year due to the strong dollar effect. This company, which has a factory in a provincial area, recently entered an emergency management system. However, there is no clear solution. There is no more belt to tighten.

Black box specialist manufacturer Company B has grown in size but is running out of stamina. Although sales have increased, operating profit has sharply declined. The biggest difficulty caused by the high exchange rate is the burden of semiconductor imports. This company imports more than 90% of the semiconductors used in its main products, navigation systems and black boxes, from overseas. Despite the challenging external environment including rising raw material prices and inflation, last quarter’s sales increased by 70% to 90 billion KRW, marking the highest sales ever. However, operating profit fell by 87%. The rise in raw material prices and the sharp increase in exchange rates are the main reasons for the steep drop in operating profit.

Hong Unseon, Senior Research Fellow at the Korea Institute for Small and Medium Enterprises and Startups, diagnosed, "Countries like ours, which drive the economy through international trade, inevitably react sensitively to overseas economic fluctuations and exchange rates." He explained, "If the strong dollar continues, it will encourage consumer price increases and prolong economic instability. The difficulties of small and medium-sized manufacturers and small business owners who import raw materials may worsen."

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