[Exchange Rate 1400 Won] Auto Industry "Margins Increase, but Raw Material Costs Burden"

"Exchange Rate Rises 10%, Margin Improves by 3.3 Percentage Points"
"If Raw Material Prices Increase, Parts Suppliers May Face Greater Difficulties"

On the 22nd, when the won-dollar exchange rate surpassed 1,400 won for the first time in 13 years and 6 months, dealers were working in the dealing room of Hana Bank in Euljiro, Seoul. Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Seong Giho] As the won-dollar exchange rate surpassed 1,400 won for the first time in 13 years and 6 months, the automotive industry appears to be struggling to devise countermeasures for future impacts. Generally, an increase in the exchange rate can help improve the performance of the automotive industry, but in the long term, it may be affected by rising raw material prices.

According to the foreign exchange market and completed car industry on the 22nd, the won-dollar exchange rate in the Seoul foreign exchange market started at 1,398.0 won, up 3.8 won from the previous trading day (1,394.2 won), and surpassed 1,400 won shortly after the market opened. This is the first time the exchange rate has recorded the 1,400 won level since March 31, 2009 (high of 1,422.0 won) during the financial crisis.

Generally, industries that earn dollars such as semiconductors, automobiles, and shipbuilding benefit from an increase in the exchange rate. Among them, completed car manufacturers have recently been reaping significant benefits from the exchange rate.

Hyundai Motor recorded an operating profit of 2.9798 trillion won on a consolidated basis in the second quarter of this year. Seo Ganghyun, Vice President and Head of Hyundai Motor’s Planning and Finance Division, said at the second-quarter earnings conference call, "Due to improvements in sales mix, reduction in incentives, and a favorable exchange rate environment, both sales and operating profit showed a significant increase compared to the same period last year."

Hyundai Motor and Kia’s stock prices have risen by 1.5% and 0.2%, respectively, since the beginning of this month. Compared to the KOSPI index, which fell by 1.9% during the same period, this is a relatively strong performance.

This is because they export completed cars produced domestically overseas, allowing them to expect an increase in operating profit due to the rising exchange rate. According to the industry, when the exchange rate rises by 10%, the margin in the automotive sector is known to improve by 3.3 percentage points.

Labor Gil, a researcher at Shinhan Financial Investment, said, "When the exchange rate rises by 10%, margins in automobiles, auto parts, and shipbuilding have increased by 3.3 percentage points. Especially, the 12-month forward sales of automobiles and shipbuilding increased by 25% and 52%, respectively, compared to early last year, and with the exchange rate effect added, the performance improvement trend will be more pronounced."

In fact, Hyundai Motor estimated that a 5% increase in the won-dollar exchange rate (depreciation of the won) in the second quarter would affect net profit by 31.1 billion won, and Kia estimated 311.5 billion won for a 10% change. In the second quarter, which recorded actual strong performance, Hyundai Motor saw about 600 billion won and Kia about 509 billion won in exchange rate effects.

However, the rise in raw material prices due to the exchange rate is a concern. The rise in raw material prices and exchange rates has also increased companies’ production costs. Production costs due to changes in raw material prices and exchange rates rose by 8.8% compared to the previous year. Especially, most raw materials imported by South Korea are paid for in dollars. When the won-dollar exchange rate rises, companies’ actual import prices inevitably increase, which can also affect car prices.

An official from the automotive industry pointed out, "When the exchange rate rises, price competitiveness may temporarily increase, but for parts suppliers, raw material prices also rise with the exchange rate, so manufacturing costs and supply prices may increase further."