[The Editors' Verdict] Surviving as an SME CEO in 2022

Monthly interest rises with rate hikes...
Labor shortage and wages more worrisome than high interest rates

He became the CEO of a small-to-medium enterprise (SME) seven years ago. He majored in ‘wood’ at university and his first job was also with a furniture company. Although he changed companies several times, they were all furniture companies. The foundation for his startup was laid when he moved to a large furniture company’s partner firm and served as the factory manager there.

He had been planning to start a business for 10 years and finally took the plunge after several attempts. He said the toughest period since starting his business is these days. Like many SME CEOs, he is in debt to banks. He borrowed about 3.5 billion won when he built a new factory five years ago and took out additional loans for operating funds afterward. Last spring, the monthly interest on his bank loans was about 11 million won, but last month it rose to 16 million won, an increase of about 5 million won per month. This is because the loan interest rate jumped from the 3% range to the 5% range. Since most of the funds were borrowed with variable interest rates, the loan interest rate will rise to the 6% range if he is lucky, or to the 7% range otherwise, by early next year. He said he is prepared for this. He believes that as long as liquidity is secured, he can endure.

The proportion of SME loans with interest rates above 5% reaches 40.6%. This is based on September data (Bank of Korea Economic Statistics System). A year ago, that proportion was 3.1%. When the October figures are released, the share of loans with interest rates above 5% will exceed half of the total. The Bank of Korea’s Monetary Policy Committee will decide on interest rate hikes on the 24th. There is a high possibility of another big step (a 0.5 percentage point increase).

More than the high interest rates, his biggest worries are labor shortages and labor costs. Furniture factories are part of the 3D industries (dirty, difficult, and dangerous sectors). He suffers from chronic labor shortages. Skilled technicians are also scarce. One-third of his roughly 20 employees are foreign workers. He provides them with dormitories and meals, and their monthly salary, including overtime pay for 8 hours a week, is about 2.7 to 2.8 million won. Still, it is difficult to find workers, so he employs a few undocumented workers as well. They are simple laborers. Next year, the minimum wage will increase by 5% to 9,620 won per hour. He expects next year’s monthly wages to exceed 3 million won.

If the wages of simple laborers rise, the pay for skilled workers will increase even more. Without differentiation, the labor shortage will worsen. The burden of labor costs will grow.

He understands that workers need to be paid at least the minimum wage to live and deserve a life with evenings off, but the reality for SME CEOs is not easy. When the reporter called, he was operating machines on site. One employee quit, so starting next week, he will have to work overtime himself. Unable to bear the rising cost of raw materials, he increased the proportion of subcontracting, which has drastically reduced the scale of his business compared to the past. Since furniture construction projects are won through minimum bid auctions, there is hardly any profit these days. Still, he has to maintain the appearance of financial statements to extend loans and continue the business. He said a bicycle with two wheels will fall over soon if you don’t keep pedaling. That’s why he cannot stop.

He probably did not start his business out of a sense of mission to contribute to economic development or humanitarianism. Borrowing money to invest and build a business likely stemmed from a stronger desire to live well than ordinary people. The rewards of success are the price paid for taking risks. However, their desires act as a virtuous cycle in capitalism.

The number of discouraged CEOs is increasing. The fact that more CEOs are holding on by selling their factories to salvage whatever they can is evidence that the future is growing darker.