[Hard for SMEs to Survive]② "Giving Up a 20-Year Client"... Do You Understand the Sentiment?

Rising Raw Material Prices and Logistics Costs Cause 'Wails'
Maritime Freight Index More Than Doubles Compared to a Year Ago
Finding Ships 'Like Catching Stars in the Sky'... Vulnerable to Logistics Crisis
"Logistics Crisis to Last 1 Year" 87.6% Respondents

[Asia Economy Reporters Kim Bo-kyung and Lee Jun-hyung] #Display manufacturer Company A, located in Incheon, has been holding executive meetings related to export logistics once a week since the beginning of this year. This is because the company’s export ratio reaches 98%, making it a direct victim of the logistics crisis. The shortage of semiconductors necessary for display production has not been resolved, and securing export vessels is also difficult, causing recent finished product inventory to double compared to usual. The CEO of Company A stated, "Semiconductor prices have increased 10 to 30 times depending on the type," adding, "The logistics situation continues to worsen, so companies with limited capacity may soon reach their limits."

#Root company B, located in Siheung, Gyeonggi Province, recently requested 25 primary contractors to raise delivery prices by 10%. This is because the price of platinum, B’s main raw material, has risen more than 40% compared to the second half of last year. Platinum accounts for 65% of the product cost supplied by Company B. However, only two primary contractors accepted B’s price increase proposal. The CEO of Company B lamented, "We need to raise prices by 25% to maintain a proper margin," and added, "Many are delivering at a loss, and some surrounding companies have even given up supplying their clients."

With the prolonged rise in freight costs and raw material prices, small and medium-sized enterprises (SMEs) are suffering from a double burden. Cases of ‘reverse margin,’ where losses occur the more products are delivered, are increasing, and companies are also giving up exports due to failure to secure vessels. Supply chain instability is expected to continue into next year, raising concerns that many SMEs may reach their breaking point.

Securing Vessels Becomes ‘Like Catching Stars in the Sky’ Amid Freight Cost Surge

According to the industry on the 23rd, the Shanghai Containerized Freight Index (SCFI), a global maritime freight indicator, stood at 4555.21 as of the 19th, more than double compared to a year ago. The Trans-Pacific Air Cargo Index (TAC), a global air freight transport index, also continued to rise. The TAC for the Hong Kong-North America route surpassed $10 per kilogram in September, more than tripling from $3.14 in January last year, just before the COVID-19 outbreak. While global trade volume is increasing due to economic recovery, the logistics crisis caused by the Suez Canal incident and the closure of China’s Yantian Port continues to have an impact.

[Image source=Yonhap News]

The burden of freight costs on export companies is intensifying. Solar power equipment manufacturer Company C, located in Seongju, Gyeongbuk Province, failed to export products worth 2 billion KRW this year alone. Considering the company’s sales last year were 7 billion KRW, this is a significant amount. The company must ship to its main client in Canada, but maritime freight costs, which were about 3 million KRW for 25 tons before COVID-19, recently surged to around 23 million KRW. The CEO of Company C said, "When freight costs rose to about 8 million KRW earlier this year, we could manage, but they have tripled again in the past year," adding, "Since exports account for 90% of our business, we are very worried."

The problem is that even paying the full price, securing vessels is ‘like catching stars in the sky.’ Industry insiders say, "Forget about freight costs; just getting a vessel booking is a relief." The CEO of Company A explained, "Even when bookings are made, departure schedules are frequently delayed," adding, "China is absorbing vessel logistics, and the number of ships bypassing South Korea entirely is increasing." Unlike large corporations, SMEs often sign short-term transport contracts with shipping companies, making them vulnerable to the logistics crisis.

SME Industry Expects Prolonged Supply Chain Risks

The situation is similar for raw materials. According to the Bank of Korea, the CRB index, an international raw material price index, rose 6.5% in October compared to the previous month. An industry official said, "Iridium, a key material for secondary batteries, has risen more than 400% compared to last year," explaining, "This is due to the surge in demand for secondary batteries and the spread of COVID-19 variants in South Africa, where iridium mines are concentrated."

The industry expects the logistics crisis and supply chain disruptions to continue into next year. According to a recent survey by the Korea Federation of SMEs targeting 500 export-import SMEs, 57.6% responded that the shipping logistics crisis will last until the second half of next year. Responses expecting it to last until the first half of 2023 accounted for 21.4%, the second half of 2023 6.0%, and beyond 2024 2.6%, totaling 87.6% who believe the logistics crisis will persist for more than a year.

The Small and Medium Business Corporation proposed mid- to long-term solutions to the logistics crisis, including △establishing logistics complexes dedicated to SMEs △reforming systems to encourage long-term and fair contracts △building a digital integrated logistics platform to share logistics information such as vessel schedules and terminal status.

In the National Assembly, voices have been raised that the government should improve the reality where companies cannot negotiate delivery prices or raw material costs despite soaring raw material prices. Kim Kyung-man, a member of the Democratic Party of Korea, said, "To create a fair trading environment, the negotiation power of SMEs must be strengthened." He argued that collective bargaining rights should be granted to SME associations to negotiate trading conditions with large corporations on behalf of their member SMEs, and a delivery price linkage system should be introduced to institutionalize price adjustments when raw material prices surge.