Purchasing economics in Korea and Asian supply chain profits

Since the beginning of 2004, the Korean won has appreciated 23% against the US dollar and more than 32% against the Japanese yen. In comparison during this same period, the yen has depreciated 15% against the dollar.

This significant appreciation of Korea’s won has made a lot of difference in today’s Korean economy. Korean export companies, especially electronics manufacturers and automobile companies in South Korea, have been burdened with huge financial damages brought on by the won’s appreciation.

As Korean companies export products against the dollar or yen, Korean companies are receiving less won. This translates to selling the same product at a lower average selling price (ASP). Korean exporters have been experiencing significantly reduced earning incomes over the course of the last two years.

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The recent strength of the Korean won makes for an extremely competitive business landscape in Korea for equipment manufacturing companies and material manufacturing companies in South Korea competing against their Japanese counterparts. Korean companies cannot offer competitive pricing compared to Japanese companies when quoting business deals using standard profit calculations for Asian markets — especially in Taiwan and China.

Meanwhile, Korean importers could have experienced a remarkable windfall due to the won’s continued appreciation (a strong won reduces import costs) however, increasing global market prices for raw materials such as crude oil and copper ingot have cancelled out many of these potential financial benefits. Korean manufacturers surely cannot be enjoying this situation very much.

Many market analysts expect greater appreciation of the won for some time to come. Numerous Korean exporting companies are concerned that with the won’s continued rise, damage to the Korean economy will be inevitable with a lot of bankruptcies surfacing in the near future.

Our office, however, is more optimistic about this situation because of similar experiences with Japan’s electronics and automobile industries in the 70s, 80s and first half of the 90s when Japan’s yen appreciated more than 400% against the dollar during a period spanning 22 years.

Following World War II, one dollar equaled 360 Japanese yen. This was primarily due to a fixed exchange rate between the two currencies which lasted until a floating exchange system was introduced in 1973, the year the yen began to continuously appreciate against the dollar (except for the year 1995 marking the end of thin continuous appreciation when one dollar equaled just 80 yen). Looking back, you would think most people asked themselves if Japanese manufacturers would survive during this period of 400% appreciation. Well, yes, they did.

Japanese manufacturers survived because, in part, they implemented continuous cost reductions thereby helping to increase productivity rates which contributed to maintaining reasonably good margins and profits. Today, Japan still exports a considerable volume of electronic goods and automobiles against some of the highest labor costs in the world.

In comparison, both business style and culture among Korean companies can be viewed as somewhat similar to those in Japanese companies during the 70s and 80s. And, because of this, Korean companies will be able to continue exporting if Korean company management learns from the history of Japan’s manufacturers.

Korean company management must be able to distinguish the differences between the negative and positive aspects of Japan’s manufacturing history (and rise) and understand these differences. If so, Korea, in all likelihood, will probably experience some periodic confusion and lack of measurable forward progress such as a temporary slow down in exports and some bankruptcies in the near-term but, for the most part, most manufacturers in South Korea will survive.

Exporting companies in Thailand, meanwhile, have also been experiencing serious appreciation of their currency recently, the Thai Bhat. Thailand’s manufacturers and export businesses are also seeing financial damage brought on by their country’s currency’s appreciation. Unfortunately, we cannot be as optimistic in the case for Thailand or other countries in the greater Pacific Basin region, including Malaysia, primarily because of a predominantly different business culture when compared to Korea or Japan.

VentureOutsource.com