Delivery Price Linkage System to Be Fully Implemented from October Next Year... "Agreement Must Be Signed at Contract"

Mutual Growth Cooperation Act Passed at Cabinet Meeting on the 27th
Expectations to Create Conditions for Fair Payment Between Large and SMEs
Fines Up to 50 Million Won for Violating Companies

[Image source=Yonhap News]

[Asia Economy Reporter Kim Bo-kyung] The amendment to the "Act on the Promotion of Mutual Cooperation between Large and Small-Medium Enterprises (Mutual Cooperation Act)," which includes the introduction of a delivery price linkage system, passed the Cabinet meeting on the 27th.

The amended Mutual Cooperation Act, which passed the Cabinet meeting on this day, will be promulgated on January 3 next year and will be fully enforced from October 4. However, matters related to corporate support, such as designation of excellent companies for delivery price linkage and the establishment of a linkage system expansion support headquarters, will be implemented from July 4 next year.

So far, small and medium enterprises (SMEs) have not been able to properly reflect fluctuations in raw material prices in their delivery prices, resulting in significant decreases in operating profits whenever raw material prices surged, and in severe cases, there have been instances where SMEs considered suspending operations or closing down.

The SME sector has been requesting the legalization of the delivery price linkage system since 2008 to resolve such issues, but it had not been realized until now.

With this legalization, the vicious cycle of repeated management difficulties for SMEs during periods of sharp raw material price increases is expected to be resolved, and conditions will be created for receiving fair prices from large enterprises (consigning companies).

Asia Economy DB

Looking at the main contents of the bill, first, when a consigning company entrusts a subcontracting company with manufacturing, construction, processing, repair, services, or technology development of goods, it is obligated to record matters related to linkage such as major raw materials, adjustment requirements, price indicators, and formulas in the agreement and issue it to the subcontracting company.

'Major raw materials' are defined as raw materials used in the manufacturing of goods whose cost accounts for 10% or more of the delivery price. 'Adjustment requirements' are defined as cases where the price of major raw materials fluctuates beyond a rate agreed upon within 10% between the consigning and subcontracting companies.

However, in cases of △small-value contracts, △short-term contracts, △when the consigning company is a small enterprise, or △when the consigning and subcontracting companies agree not to apply the linkage system, the consigning company is not required to include matters related to delivery price linkage in the agreement. In cases where the consigning and subcontracting companies agree not to apply the linkage system, the purpose and reasons must be explicitly stated in the agreement.

The bill prohibits consigning companies from abusing their transactional position or evading the obligation related to delivery price linkage through false or other fraudulent methods. Violators will be subject to fines of up to 50 million KRW.

Kim Ki-moon, Chairman of the Korea Federation of Small and Medium Business, attended the "Mutual Growth Flower Attachment" event hosted by the Democratic Party's "Committee for Protecting the Working Class" held at the National Assembly on the 12th, and expressed his gratitude to Representative Lee Jae-myung for the passage of the "Delivery Price Linkage System" in the National Assembly. Photo by Yoon Dong-joo doso7@

The Minister of SMEs and Startups will be responsible for drafting and revising the standard agreement on delivery price linkage and encouraging its use. The minister can also select and reward excellent companies in delivery price linkage. A linkage support headquarters may be designated to provide raw material price information, verify linkage performance, and conduct education and consulting projects.

From October next year, consigning companies must negotiate delivery price linkage matters with subcontracting companies, record them in an agreement, and issue it to the subcontracting companies.

After the agreement is made, if the price of major raw materials rises or falls beyond the adjustment rate specified, the delivery price linkage will be adjusted according to the formula recorded in the agreement.

The Ministry of SMEs and Startups plans to actively promote the delivery price linkage system through nationwide roadshows and other publicity activities to establish it as a corporate culture and ensure its implementation on the ground.