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In Crisis Due to Declining Emerging Economies
IMPACT ON KOREAN INDUSTRIES
In Crisis Due to Declining Emerging Economies
  • By matthew
  • September 2, 2013, 08:45
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Automobiles bound for overseas markets are waiting for shipment at the international auto pier of Pyeongtaek-Dangjin Port.
Automobiles bound for overseas markets are waiting for shipment at the international auto pier of Pyeongtaek-Dangjin Port.

 

Economic deterioration of emerging markets is causing alarm among Korean enterprises. With the financial markets in emerging economies in chaos, there is growing concern for those companies that have already made investments or have been exporting to those markets, since they can be hit by rapid decrease in local spending. Domestic exporters have invested heavily in the region in an attempt to lower their dependency on the US and Chinese markets. Their direct investment in India, Indonesia and Brazil for eight and half years from 2005 to June 2013 amounts to 12.8 trillion won (US$11.4631 billion).

Korea’s Auto and Steel Industries Keeping an Eye

​In particular, the Hyundai Motor Company is in trouble since India and Brazil are two major markets in the volatile region. It has a plant in India with 600,000 units of annual production capacity, which makes it the second largest among overseas manufacturing bases. Last year, it completed a factory in Brazil that can produce 150,000 units a year in order to enter the South American market.

In India, Hyundai Motors sold 220,000 units in January-July 2013, 5 percent yearon-year drop. That is still an increase in sales, given that the country’s total auto sales in the same period fell 10% to 1,450,000 units compared with last year. But there is possibility of production cuts in the event that demand is further easing.

This year, the company has seen an increase in sales: Russia with a year-on-year increase of 2.1%, Brazil with 128.3%, and China with 30.4%. And yet, Hyundai is nervous about whether an economic crisis will be expanded to other emerging markets.

Hyundai Motors is less worried about its plant in Brazil, but feeling a sense of crisis. Hyundai’s model named HB20, which is specifically designed for the Brazilian market and introduced at the end of 2012 after opening a new plant in the country, has been so popular that more than 70,000 units were sold until June2013. Nevertheless, the company is still concerned that its auto sales might lose momentum.

Meanwhile, it is difficult for domestic steel makers to export their products to faraway countries, such as Brazil and India. Therefore, steel exporters are experiencing poor sales performance in those nations. The industry is keeping a close watch on the situation in emerging economies because economic slowdown can affect their plan to build production facilities in Brazil and India.

Since 2005, POSCO, the world’s fifthbiggest steelmaker, has been proceeding with a steel mill project in Odisha, India with US$12 billion in investments. But the company has yet to set the start date of the project. In addition, the Korean steelmaker announced in July that it decided to pull out of its second steel mill development in Karnataka. Even though local residents’ opposition was the main reason behind POSCO’s decision, the choice can be interpreted in a way that faltering economy in India is a hindrance to its steel mill project. In other words, the company isin disadvantageous situation because a strong dollar will lead to the increase in raw material prices in the event of a financial crisis in emerging markets. Recently, the company’s direct investments in foreign markets jumped 40%.

But POSCO is not the only company that makes investments in overseas markets. Dongkuk Steel Mill Co., Korea’s third-largest steelmaker, is also investing 5.5 trillion won (US$4.9 billion) in the construction of a steel mill in Brazil.

Korea’s Electronics Industry Likely to Be Affected

The domestic electronics industry also began to keep a close eye on the situation. Samsung Electronics is running seven factories that manufacture TVs, mobile phones and home appliances in Brazil, Mexico, Egypt, and India although the company is exporting massive volumes of its products to those countries. A spokesperson for Samsung Electronics said, “We think that fluctuations in currency can have a negative effect on our export performance. So, we are closely monitoring the situation,” adding, “We anticipate that the rise in raw material prices will eventually happen.”

LG Electronics is in trouble as well. Since 2009, the company has concentrated on the expansion of its brand shops in rapidly growing and volatile economies of some Asian and Latin American countries. LG has been heavily involved in those markets due to the financial crisis in the US and the EU.

For mobile phone makers, the smartphones market in India, one of the world’s major markets together with China and the US, is of concern. According to the latest research from Strategy Analytics (SA), Samsung’s market share in India was 42%, ranking top in the first quarter of this year. Until last year, its annual growth rate for the Indian mobile phone market was 163%, surpassing that of markets in China (86%), Japan (24%), and the US (19%). But the market research firm says that in case of contraction in local demand, it is difficult to expect rapid growth.

Construction, Chemicals, Shipbuilding, Shipping Industries Not Expected to Suffer Heavily

Construction companies, chemical suppliers, and shipping companies in Korea, for which emerging markets are of little importance, are also keeping a close watch over the situation while anxious about the global economic contraction arising from those countries’ currency crisis.

However, the construction sector does not think that they are highly vulnerable to exchange rate fluctuations since they are mostly paid in dollars. An industry source remarked, “We are not heavily affected by exchange rate volatility in that we mostly purchase materials in neighboring countries in dollar. But we think that shrinking economy may cause a slight decrease in demand.”The chemical industry is not feeling the economic pain, either. Exports to certain Asian and Latin American countries are miniscule amounts. Besides, locally made products are consumed by local people.

The shipping sector, like the chemical industry, is not directly hit by economic woes of rapidly growing and volatile economies. Nonetheless, shipping companies consider the possibility of some reduction in commercial traffic caused by economic slowdown. An official in Hyundai Merchant Marine (HMM) pointed out, “The emerging markets account for merely 10% of the total markets. But there is possibility of reduced commercial traffic and a decrease in ocean freight rates. So, we will wait and see what happens next, and prepare for measures if necessary.”

The Korean securities industry also believes that the impact of speculation about emerging economies on the shipping industry is minimal owing to increasing freight rates, as well as expectations that the condition in the shipbuilding industry will improve thanks to economic recovery of the Euro zone. Analyst Lee Kang-rok from Kyobo Securities said, “We are temporarily witnessing the stock price adjustment process for the shipping industry caused by rumors about economic crisis in volatile markets in Southeast Asia. But Korean companies are expected to win more contracts in September when the vacation for European ship-owners is over.”

The situation in some Asian and Latin American countries is affecting our exports at the moment. According to Korea’s export performance from January to July 2013 by the Ministry of Trade, Industry and Energy (MOTIE), the growth of Korean exports to India fell 7.1%from a year ago. Korea also saw a year-on-year decrease of 15.7% and 15.1%in exports to Indonesia and Brazil respectively. Given that Korean exports grew 0.5%so far this year, exporters find themselves floundering in those markets for seven months.

But Cho Hak-hee, representative from the Washington Center of the Korea International Trade Association (KITA), commented, “The possibility that all emerging markets will experience economic crisis at the same time is low. So, I think that Korean companies will be able to overcome the situation because each country is in different circumstances.”

Korea does not rely heavily on India and Indonesia as its markets for exports. In the first quarter of this year, the growth rate of exports to those countries stood at 2.08% and 2.18% each. And yet, the government is closely watching situation in the region since the economic crisis can be contagious.

Kwon Pyung-oh, deputy minister for the Office of International Trade and Investment at the Ministry of Trade, Industry and Energy (MOTIE), said, “We are carefully monitoring Federal Reserve’ next move to end its quantitative easing program, and the ongoing situation in emerging markets.”