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SOHN Min-Jung

Of Oil and the Won

SOHN Min-Jung

Oct. 19, 2005

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The Corporate Korea is reeling under the blow from the rising oil prices and the strong Won. A central bank report on corporate earnings in the second quarter of 2005 points to a dire situation facing Korea 's domestic manufacturers.

The report, released at the end of September, says exporting companies were the hardest hit. A precipitous fall of 13.3% in the Won-dollar exchange rate (resulting in steep appreciation of the Korean Won) shaved off 2.1% from sales revenues year on year to the second quarter. It was the first negative figure since the third quarter of 2003, when the Bank of Korea began gathering the relevant data. You can note that second quarter sales revenue last year had surged as much as 27.5%. The report said sales rose 9% in US dollar terms in the second quarter. For the first half as a whole, exporters' sales remained unchanged from a year ago.

The sales figure of top 30 exporters fell 3.5% in the second quarter 2005, compared with a 31% increase in the same period in 2004. Companies outside the top 30 list saw revenue growth slowing from 17.3% to a mere 2.4% in the same period. The surging raw material prices and hardening of the Korean won have undermined profitability for large and small-and medium-sized enterprises.

This negative impact has spread to almost all manufacturing companies. Their sales crawled up 1.7% in the second quarter of 2005, marking a dramatic fall from 24.4% year-on-year. Sales from the machinery and electronic goods sector grew 40.6% in the second quarter last year, but in the same period this year, it rose just 7.9%, due to a significant drop in the prices of these goods. The Won's appreciation contributed. In addition to the rising energy prices and value of the Korean Won, the semiconductor factor has also worsened the electronics industry. DRAM prices plunged 47.5% in the second quarter of 2005 over a year ago.

Only in the petrochemical and metal goods sector have earnings performance improved. Under the skyrocketing cost of energy, petrochemical prices rose 11.6% and steel prices rose 10.1%.

Under weak sales, the ratio of ordinary profit to manufacturing firms sales dropped to 8.6% in the second quarter of this year, down 4 percentage points from 12.9% of a year ago. This indicated that Korean manufacturers earned a mere 86 Won for every 1,000 Won worth of sales, a drop of no less than 129 Won from a year earlier, a further deterioration in the balance of domestic manufacturers.

Not all news is bad. Capital structure in the manufacturing sector continued to improve this year, its average debt-to-equity ratio standing at 93% in the second quarter, a slight improvement from 96.7% in the previous quarter. Manufacturers depended less on borrowing this quarter; their borrowing amounted to 175.6 trillion Won at the end of June, down 0.1% from 175.8 trillion Won at the end of March.

The slow business performance looks set to last for some time. For one thing, oil prices show no sign of slowing. And the Won stays strong despite the nuclear standoff with North Korea.

It's time for the government to implement policy steps that will strengthen manufacturers' capability to better manage the current doldrums. Equally crucial, Korea's industries must diversify from their current concentration on the manufacturing sector. A good start of this trend is to nurture high value-added industries such as in service and design areas. Korea's economy has depended much too long on manufacturing. As profitability falls in this sector, we must find new engine of growth. It may lie in the service sector with its enormous potential for growth and spillover effects. The service industry can also buttress the manufacturing sector. In order to cushion the severe impact from high oil cost, there's no better way than to develop energy-efficient industries over a sustained period of time.

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