[Initial Insight] Small Giants and Yachts, Entrepreneurs Leaving the Market

[Asia Economy Kim Daeseop, Deputy Director of the Ministry of SMEs and Startups] A small business owner I recently met half-jokingly, half-seriously asked me, "Is it right to keep running the company in this situation?" He expressed his feelings amid increasingly difficult business conditions due to the economic recession, the spread of COVID-19, and the minimum wage increase.

This small business owner has been running a fuel-related company for over 20 years. Based on accumulated technology and excellent quality, he has grown it into a strong small and medium-sized enterprise (SME) with sales exceeding 10 billion KRW. However, recently, the recommendations from acquaintances have been bothering him.

He shared that one of his acquaintances, a businessperson, sold their business to an overseas company. The reason was that they no longer wanted to continue their business under the increasingly restrictive environment. This acquaintance is now enjoying new experiences by traveling to various regions on a luxury yacht purchased with the sale proceeds. Another entrepreneur acquaintance also wound up their business for the same reason. They are now living their second act of life with the money earned from years of hard work.

The acquaintances are encouraging this small business owner to boldly close the business and start a new life comfortably. Even this strong SME owner, who has contributed to national industrial development and job creation by focusing on one field for decades, is shaken by the recommendations amid this emergency situation. If he continues to endure in an increasingly difficult business environment, even the business he has successfully grown so far could be shaken.

Looking at indicators related to SMEs, one can sense the anxiety of small business owners. According to a survey conducted this year by the Korea Federation of SMEs and the Korea Employers Federation targeting 600 SMEs, 76.7% responded that their current business situation has 'worsened' compared to the previous year.

As the spread of COVID-19 continues, small business owners still feel uneasy about economic recovery. More than half responded that even after the COVID-19 situation ends, it will take more than six months for business conditions to recover.

Our economy is so serious that negative growth is expected. According to the Korea Federation of SMEs, the average operating rate of small and medium-sized manufacturers in May this year was 66.2%, down 7.8 percentage points from the same month last year. This is the lowest level since March 2009 (65.5%), right after the global financial crisis.

In June this year, the main business difficulties faced by SMEs (multiple responses allowed) were 'domestic demand slump (74.4%)', 'excessive competition among companies (37.4%)', 'rising labor costs (35.0%)', and 'delayed collection of sales proceeds (22.3%)'. The 'business outlook economic outlook index' in July was 68.0, down 14.0 points from the same month last year.

A more serious issue for small business owners is that the minimum wage for next year may increase compared to this year despite the COVID-19 situation. Rising labor costs are a major business difficulty for SMEs. The plenary meetings of the Minimum Wage Commission, which decides next year's minimum wage, have been held recently one after another. However, the gap between the employer representatives, who represent management, and the worker representatives, who represent labor, has not narrowed.

In particular, the Korean Confederation of Trade Unions insists that next year's minimum wage should be increased by 25.4% compared to this year. This can only be seen as a decision that does not consider the difficulties of business owners in this emergency situation at all. Improving workers' wage levels and working conditions is also an important task. However, if companies cannot endure financial burdens and sales declines and eventually close their factories, the workplaces where workers can work will also disappear.

Businesses must survive to protect jobs. Our economy and business environment are in a very severe situation. Social consensus is needed so that small business owners do not feel anxiety and disappointment about Korea's business environment and close their businesses. It is desirable that next year's minimum wage be at least frozen. I do not want to see even successful strong SMEs winding up their businesses and sailing yachts on the seas of Korea.