Korea’s Small Export Firms Suffering

A printing machine manufacturer in Gimhae, Gyeongnam Province thinks its days are numbered like a terminally-ill patient. Having stopped production this June, now the company only provides after-sale service on the products they have sold.

Founded in 1981, this company was on the solid business ground, achieving annual sales of eight billion won and five billion of net profits. However, it faced with the crisis in doing business as the domestic market went depressed since 2004.

When the domestic demand showed no signs of recovery, the company gave it up and depended on export to Japan. However, it received the finishing blow as the yen has dropped against the won to a rate of 850 won. Their deficit grew by as much as they exported. All the employees, which once reached 40 in number, now scattered, and only the president and two employees remain with this company.

As sharp falls in the Yen exchange rate against the Won continued for long, small businesses, which heavily depend on exports to Japan, are collapsing.

A decline in the exchange rate weakens price competitiveness of domestic goods, resulting in low profitability that consequently leads to failing of small export enterprises.

Sales decreases by 20 to 60 percent on the same period last year-

According to our report on eight companies that had exported goods to Japan until last year but none this year, it is confirmed that a flattish exporter and a coil manufacturer are closed in addition to the printing machine manufacturer.

Among the other five, four companies that accepted the interview said the sales has decreased 20 to 60 percent compared to the same period last year due to poor results in exports to Japan.

The Korea International Trade Association (KITA) assumed thousands of small companies exporting to Japan suffer from severe difficulties in running a business.

“Small companies like those who don’t have a broad range of export markets, mostly depend on the domestic and Japanese market. With the domestic demand sluggish for years, obstacles in exporting to Japan drove many small companies out of business,” said Shin Seung-kwan, a researcher of the KITA.

Crawling won-yen exchange rate-

The reason why it is difficult for small companies to export against Japan is due to the stronger won against the yen, compared to other currencies such as the U.S. dollar.

While the exchange rate of the won against the U.S. dollar decreased 8.8 percent from 1035.3 per dollar on January 3, 2005 to 944.30 on September 21, the rate of the won against the yen plunged 20.1 percent from 1,009.01 per 100 yen to 806.30. If the export price of a certain goods is 100 yen, the revenues are falling from 1,009 won to 806. Therefore, running of a business inevitably falls in trouble.

Pyo Han-hyeong, a researcher of Hyundai Research Institute, said, “The exchange rate of the won against the yen dropped further because the capital revenue of Korea is exceedingly bigger than that of Japan. The foreign exchanges authorities need to intervene in the market in some degree to keep the exchange rate from going down any more.”

buddy@donga.com