hankyoreh

May 2007.

By Gwak Jeong-soo

South Korea’s favorable economic ratings despite the difficulties experienced by small and medium-sized companies are due to the relative importance of major corporations like Samsung Electronics and Hyundai Motor. The two companies posted exports last year totaling 74.8 trillion Won ($62.5 billion) and 15.8 trillion Won, respectively. Together, they accounted for 19.2 percent of South Korea’s total exports of 460.9 trillion Won. The two companies’ sales of 121.7 trillion Won also accounted for 11.45 of South Korea’s GDP. The optical illusion caused by the deepening of the economic concentration of large corporations is hiding the seriousness of the polarization between large and small and medium-sized businesses.

There are conflicting answers from large and small to medium-sized businesses as to the reason behind the polarization. Subcontractors claim that the main reason is that major companies do not guarantee optimum returns to them.

“Major factors for subpar returns include not only unreasonably lower delivery unit costs, but also the serious issue that the prices do not properly reflect factors such as the rise in the international prices of raw materials,” said a Mr. Lee, the president of a car parts manufacturer in Incheon.

Others say major corporations do not keep pledges made with the government.

“When we meet with the president at Cheong Wa Dae, the chairmen of major corporations promise to show consideration for small and medium-sized businesses, but the reality is completely different,” said the president of another industrial company. “Primary subcontractors directly dealing with major corporations make about 1 to 2 percent profit, but secondary and tertiary suppliers are running virtually in the red.”

Samsung, however, has a contrasting view of the situation.

“Since the global market price of each part is transparent and open, the reality is that we cannot show preferential treatment to domestic parts producers,” said Ha Joo-ho, a member of Samsung Electronics’ public relations team. “If we buy domestic parts at a higher cost, it will cause arguments over fairness. Samsung, as a global leader, offers its products at prices higher than competing firms, so it has the wherewithal to be a bit more generous with its unit prices for delivered parts.”

Yeon Tae-gyeong of Hyundai Motor’s public relations team found the cause in the business environment, noting that carmakers did so well last year because of good exports and internal demand due to rise in the exchange rate and tax support.

“Out of consideration of the environment, Hyundai recently decided as a group to sign production and fair trade agreements with about 2,700 small and medium-sized businesses, including primary, secondary and tertiary subcontractors and boosted plans to support them,” said Yeon.

The trend in the unit price of delivered goods since the economic crisis lends strength to the claims of small and medium-sized businesses. Since the first half of 2008, the international price of raw materials has skyrocketed, but firms producing finished goods have ignored demands by subcontractors to raise unit prices. When parts producers have strongly protested, threatening to suspend production, the major firms accept only half of the demanded price hike.

As the economic crisis took full root in the second half of the year, however, measures were taken to lower the unit price of parts, canceling out most of the rise of the first half of the year. They have had to bite the bullet at the coercive attitude of auto corporations, who tell subcontractors to quit delivering goods if they do not like the price offered.

“In 2009, carmakers did not lower their parts prices, at least nominally, and the rise in personnel and electricity costs were also not reflected in parts prices,” said Heo Man-yeong of the Korea Foundry Cooperative Association. “Carmakers have said that they will reflect the rising international price of raw materials in their parts quotes, but they calculate the unit price based on major parts producers who procure their goods at relatively low prices, so small to medium-sized businesses have no choice but to incur losses.”

The government has announced a plan to cultivate some 300 rising small and medium-sized companies as “hidden champions” by 2020 to boost employment, but there has been criticism that in the current reality, this is like seeking a fish from a tree.

Yunhan University President Kim Young-ho said small and medium-sized businesses account for 99 percent of all companies and 88 percent of total employment, but make just 2 percent of profits in subcontractor deals with major companies. If this continues, most will die within in three to four years.

Small and medium-sized businesses agree that the rise in raw material prices must be properly reflected in the delivery costs per unit. They also say it is urgent to change the system in which major companies monopolize profits.

Kim Seong-su, president of electronics partsmaker Seoo Telecom, said “Side-by-side development of major and small to medium-sized businesses is urgent for national development, but the current structure is one in which major corporations are monopolizing returns and small to medium-sized companies are virtually working as farmhands.”

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