[Skyrocketing Production Costs] ③ Additional Expenses Rise Amid US-China Conflict and Supply Chain Crisis

'Poor Performance as Production Costs Soar' Becomes Reality
Logistics Costs Surge and External Debt Rises

[Image source=Yonhap News]

[Asia Economy Reporter Oh Hyung-gil] American automaker Ford recently announced that it will incur an additional cost of $1 billion (approximately 1.4 trillion KRW) in the third quarter due to inflation and supply chain issues. With parts supply problems unresolved, the combined increase in raw material prices and labor costs has led to unexpectedly higher production expenses. Following this news, Ford's stock price fell about 5% in after-hours trading.

Domestic companies are also experiencing declining profitability and rapidly increasing debt due to rising raw material prices. According to the Bank of Korea's corporate management analysis, the operating profit margin of domestic companies in the second quarter was 7.1%, down from 7.4% in the second quarter of last year. The debt ratio rose from 88.1% in the previous quarter to 91.2%, reaching the highest level in about six years since the third quarter of 2016. Short-term borrowings increased, pushing the debt dependency ratio from 23.9% in the previous quarter to 24.5%.

Concerns over poor corporate performance due to rising production costs are becoming a reality. Amid the 'three highs' phenomenon of high inflation, high interest rates, and high exchange rates, combined with US-China conflicts and supply chain crises, cost burdens are expected to increase further. There are calls for active support to improve corporate productivity and reform of wage systems.

According to industry sources on the 23rd, logistics costs for companies have surged recently due to significant increases in raw material prices.

Looking at last month's export-import container sea freight costs, the sea freight for a 2TEU container (one 40-foot standard container) from Korea to the US West Coast was 14.3 million KRW, up 32.3% compared to the same month last year. The average sea freight cost for a 2TEU export container to the European Union (EU) also rose 38.5% from last year to 12.63 million KRW.

US air import transportation costs reached 6,033 KRW per kilogram, soaring 140.6% compared to the same period last year. EU air import transportation costs increased 36.1% year-on-year to 6,696 KRW. From the perspective of companies that rely on exports, rising logistics costs will ultimately lead to higher product prices, resulting in reduced competitiveness.

[Image source=Yonhap News]

Foreign currency debt, which domestic companies have increased to promote overseas investments, is also eroding profitability as exchange rates rise.

As of the first half of the year, the total external debt of domestic companies reached a record high of $149.1107 billion (207.71 trillion KRW). By company, SK Hynix (25.4352 trillion KRW), SK Innovation (13.6503 trillion KRW), LG Energy Solution (9.3642 trillion KRW), and Korean Air (6.7623 trillion KRW) have the largest foreign currency debt. Semiconductor and battery companies, which have recently made large-scale investments, are carrying dollar-denominated debt.

Due to the US-China conflict and legislation such as the Inflation Reduction Act (IRA) and the Chips and Science Act (CSA), semiconductor, automobile, and battery companies are putting their lives on overseas investments. To secure new raw material supply chains, additional costs are inevitable, which ultimately means production costs will increase further.

A battery industry official said, "To receive benefits from the US government, it is necessary to secure new supply chains to replace the China-centered supply chains established so far, which requires considerable time, effort, and cost," adding, "Diversification of import sources and improvement of core raw material distribution structures are urgently needed to secure cost competitiveness."