Concerns on Strong Won
“Internally, we’re seeing 1,040 as the break-even point. Most of the products are made in the country, so there are no big concerns. However, if the exchange rate for won keeps dropping, it can make people anxious,” said an official at Samsung Electronics.
“80% of automobile industry has to do with exports. If the exchange rate drops 10 won, Hyundai Motors loses 120 billion won and Kia 80 billion. So, 24 hours monitoring is up and running,” said a Hyundai Motors insider.
A Hyundai E&C official said, “In the business plan from earlier this year, the expected exchange rate was 1,100 won. The shipbuilding industry applies up-to-date exchange rates for every order received, so there aren’t big problems. However, if the exchange rate continues to decrease, it will be harder to make profit. Then measures such as cost reduction will be enforced.”
Domestic businesses are becoming more worried about the strong won. Compared to the past when exports were “of the essence,” risks have decreased thanks to hedges. However, for most export-oriented domestic businesses, the dropping exchange rate for the won is still quite critical.
In fact, with the causes of the exchange rate reduction hidden potentially anywhere, it is questionable how automobile and IT businesses will overcome the exchange rate crisis.
Exchange Rate Below Break-Even Point
On November 11, the Federation of Korean Industries (FKI) surveyed 106 of 340 production companies by their amount of sales, from October 29 through November 5. According to the survey, the average break-even point of the exchange rate was 1,066.4 won.
If the exchange rate drops below 1,066 won, businesses will suffer losses despite their sales. FKI believes several industries are already experiencing this problem.
The break-even point for each industry is as follows. For pulp, paper, and furniture, it is 1,105.0 won; foods, 1,091.7 won; machinery and electronic equipment, 1,087.5 won; and petrochemistry 1,081.3 won. These points are still high enough to fight against the dropping exchange rate.
On the other hand, some are already at risk. For industries with fewer imports, such as steel, it is 1,048.3 won, and non-metallic minerals 1,037.5 won, which are relatively low. For industries with high exports, such as fiber, it is 1,062.5 won, for automobile parts 1,055.4 won, and electronic communication devices 1,051.9 won. These have already dropped below the break-even point. Profitable industries to domestic exports, such as electronics and automobiles, have been exposed to risk already.
Also, FKI announced that if the value of the won increased 10%, the amount of domestic production exports will decrease 4.4%. Industries with large gaps in this reduction are in the order of pulp, paper, and furniture, and electronic communication devices at 7.5%; foods at 5.3%; pharmaceuticals at 5.0%; machinery and electric equipment at 4.2%; steel at 3.8%; petrochemistry at 3.5%; and automobile parts at 3.4%.
Businesses to Confront the Exchange Rate Crisis Head On
Concerns are rising for profitable industries for domestic exports, such as electronic communication devices and automobile industries, already at risk of suffering direct impacts of this exchange rate crisis. However, businesses are coming up with internal measures such as cost reduction, increases in hedge product investments, and adjustments to the export rates, to prevent operational performance from worsening due to the dropped exchange rate.
Samsung Electronics and Hyundai Motors have high foreign production percentages, and mostly deal in local currencies, so they are rather free from the limitations of the exchange rate. They are, however, keeping their eyes on the exchange rate changes. An electronics industry associate said, “Because there are many products being produced locally in foreign countries, we are not worried about the exchange rates,” and added, “However, internally, we are looking at 1,040-1,050 won as the break-even point.” Machinery businesses have conservative exchange rates also, not quite suffering an exchange rate crisis yet, but they are also paying close attention to further drops.
On the other hand, the exchange rate today has increased 0.71% since the previous day, closing at 1,072.85 won.