SME Export Hits Record High? ... The Hidden Side of the All-Time Best Performance

[Asia Economy Reporter Choi Dong-hyun] A red light has been lit for small and medium-sized enterprises (SMEs) exports. After achieving record-high performance from last year through the first half of this year, exports entered a stagnation phase from the third quarter despite the 'exchange rate effect.' Experts expressed concerns that the export competitiveness of SMEs may decline in the future due to sluggishness in the Chinese market and moves to strengthen regulations in the U.S. market.

The export performance of SMEs in the third quarter of this year, announced last week by the Ministry of SMEs and Startups, was $28.41 billion (approximately 40.37 trillion KRW), rising only 0.02% compared to the same period last year. Compared to exports of $25.5 billion and $28.4 billion in 2020 and 2021, which increased by 3.6% and 11.5% year-on-year respectively, the export growth momentum has come to a sudden halt.

The concern over the third quarter export performance lies in the fact that the environment was relatively favorable for exports due to the COVID-19 endemic phase and high exchange rates. Although the export amount in the third quarter of this year is the highest ever for the third quarter, this is understood to be due to the increase in product prices caused by global inflation and export growth in some sectors due to the high exchange rate.

Looking at the major export items of SMEs in the third quarter, automobile and automobile parts exports reached $900 million and $1.1 billion respectively, surging 29.3% and 13.7% year-on-year. The automobile export amount is the highest quarterly performance since the second quarter of 2012 ($760 million). A Ministry of SMEs and Startups official explained, "In the case of automobiles, exports of used cars to Russia and neighboring regions increased," and "automobile parts exports increased to the U.S., Mexico, and Vietnam due to the improvement in vehicle semiconductor supply and the favorable condition of the finished car industry." In addition, exports of mechanical components (13.2%), semiconductor manufacturing equipment (9.1%), and electronic application devices (5.5%) also increased year-on-year, showing resilience.

On the other hand, plastic and cosmetics, the first and second largest export items of SMEs in the third quarter by export amount, decreased by 7.3% and 1.6% year-on-year to $1.3 billion and $1.1 billion respectively. Plastic and cosmetics have been key items driving SME exports by gaining popularity in the Chinese market. However, due to China's COVID-19 lockdown policies and product self-sufficiency policies, their export shares have recently sharply declined. In fact, looking at plastic export performance by country, exports to China were $240 million, down 19% year-on-year. Cosmetics exports to China dropped sharply by 24.2% to $330 million.

Voices of company executives complaining about difficulties in doing business in China have been heard in many places recently. According to the 'Survey on the Business Conditions of Korean Companies Entering China' recently released by the Korea Institute for Industrial Economics and Trade, the business survey index (BSI) for sales of Korean companies operating in China in the third quarter was 74, down from 76 in the previous quarter. The BSI is based on 100, with values closer to 200 indicating sales increase (improvement) and values near 0 indicating sales decrease (deterioration). Companies expect the sales BSI for the fourth quarter to drop by 18 points to 95 compared to the previous quarter. A representative of Company A, which exports cosmetics to China and the U.S., said, "There is a patriotic consumption movement in China, so domestic cosmetics do not sell as well as before," adding, "Also, with the Japanese yen being weak recently, Japanese products are winning in price competition."

Our key industry, semiconductors, is also struggling. SME semiconductor exports in the third quarter were $830 million, down 5.5% year-on-year. System semiconductors increased by 9.1%, but memory semiconductors sharply declined by 33.8% due to price and demand decreases, breaking the eight consecutive quarters of export growth. Especially, exports decreased significantly in Asian regions such as China (-16.4%), Hong Kong (-20.4%), Taiwan (-24.9%), and Vietnam (-16.8%).

Experts predict that the situation will not improve in the fourth quarter. There are concerns that export sluggishness and margin reductions will occur simultaneously due to global economic recession, rising raw material prices, and interest rate hikes. Han Chang-yong, head of the Policy Statistics Analysis Team at the Korea Institute for SMEs and Startups, said, "This SME export performance is somewhat overestimated compared to the actual quantity sold due to the exchange rate increase," adding, "If SMEs do not respond well to changes in the Chinese market environment and the U.S. Inflation Reduction Act (IRA), their export competitiveness will significantly deteriorate."

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