[Public Voices] Misconceptions and Truths About the Delivery Price Linkage System

A Call for Cautious Price Regulation
Balancing Raw Material Cost Fluctuations and Fair Trade Practices

Sejong Kim, Director of InnoBiz Policy Research Institute

Recently, the introduction of the delivery price linkage system has sparked heated debate. The issue has intensified as a government-funded research institute, which had shown little interest in small and medium-sized enterprise (SME) issues until now, has begun to focus on it. In a recent report, the institute pointed out that "linking delivery prices to raw material prices to share risks can be beneficial to both parties in highly uncertain situations; however, if made mandatory, it could hinder efficiency. Furthermore, if the principal company employs strategies to avoid this, the policy's effectiveness cannot be guaranteed and may instead harm the supply-side businesses." The report calls for a cautious approach to price regulation.

When the Subcontracting Act was amended in 2009, the introduction of the delivery price linkage system was also considered, but a delivery price adjustment consultation system was introduced based on negotiation and agreement between the parties involved. Accordingly, the delivery price adjustment consultation system was made mandatory to allow adjustments and consultations according to raw material price fluctuations tailored to the characteristics of each company, but it was not properly observed. The delivery price adjustment consultation system did not impose an obligation to increase delivery prices but only an obligation to consult on adjustments, which itself failed to function effectively.

The problem lies in the difference in bargaining power, making it difficult for subcontractors (SMEs) to request delivery price adjustments from the principal companies (large corporations). Such unfair trading practices do not align with the principles of a market economy.

The main suppliers of raw materials are large corporations. They immediately reflect raw material price changes in their supply prices. This adherence to market principles cannot be blamed. The issue arises in the structure where raw materials are purchased and processed into parts or materials and supplied to large corporations or demand companies. If delivery prices are not adjusted here, SMEs must bear the costs entirely. Due to this irreversibility of risk sharing, SMEs find themselves in an abnormal structure, pressured from both supply and demand sides.

Despite the delivery price adjustment being explicitly stated in contracts between trading parties, the dominant opinion is that actual adjustments are difficult due to the abuse of bargaining power by large corporations. The demand by large corporations to adjust or even reduce delivery prices is not a new issue. It is an open secret in the industry that subcontractors in the subordinate position must be prepared for the termination of business relationships if they request price adjustments from the principals. Although delivery prices should be adjusted according to raw material price fluctuations through voluntary adjustments and consultations, the reality is that this is not well observed on the ground.

The discussion on introducing the delivery price linkage system was triggered by existing unfair trading practices. Contrary to some claims, the government does not decide delivery prices; rather, the delivery price linkage system involves trading parties agreeing to include a delivery price adjustment clause in the contract and predefining the conditions under which adjustments will be made. When such conditions occur according to this special agreement, price adjustments are made. The special agreement stipulates that if key raw material fluctuation rates, fluctuation cycles, or reference indicators change beyond a certain threshold, delivery prices are automatically adjusted according to the contract.

It is desirable to resolve delivery prices through voluntary adjustments and consultations before government intervention. Until now, large corporations have often avoided voluntary adjustments and consultations by emphasizing market principles. The principle that government intervention in price determination should be minimal is not denied. However, the current trading practice of shifting cost fluctuation risks onto SMEs is unfair. Those opposing the delivery price linkage system on the grounds of market principles should propose realistic alternatives to overcome the current situation.

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