Small and medium-sized enterprise A, a solar structure manufacturer, recently faced an "exchange rate emergency." It sources iron ore materials and supplies overseas through a domestic partner conglomerate, but since Oct. last year the won-dollar exchange rate has surged, and the supplier has been raising the iron ore materials and supplies unit price by 3% to 4% every month. The partner conglomerate has also signaled an additional 3% to 4% price increase in Feb.
However, A has not been able to ask its buyers, which receive its finished products, for a price increase, due to the risk of cutting off the transaction. Some clients are already putting deliveries on hold, citing the possibility of rising costs.
A's CEO said, "If materials prices rise like this, we also have to raise our delivery unit price in line, but doing so could cost us clients," adding, "In the end, there is no option but to endure by reducing margins."
SMEs in Korea are being pushed to the brink by a strong dollar and weak won. A higher exchange rate directly leads to increased import expenses for materials and threatens the financial stability of SMEs with limited liquidity.
On the 5th, the won-dollar exchange rate closed at 1,443.8 won. Last year's annual average won-dollar exchange rate was 1,422 won, 4.3% higher than the 2024 average of 1,363.98 won. On an annual average basis, this exceeds the 1998 foreign exchange crisis level (1,398.9 won), marking a record high.
◇ The 1,400-won range becomes the new normal, burden on SME finances grows
Many Korean SMEs import materials through conglomerates, process them, and then supply finished goods back to conglomerates or distributors. In this structure, a higher exchange rate leads to increased cost burdens and weaker profitability. According to a report released by the Korea Institute for Industrial Economics & Trade (KIET), when the exchange rate rises 10%, conglomerates' operating margins fall by 0.29 percentage points, but for SMEs, even a 1% rise in the exchange rate reduces operating margins by 0.36 percentage points.
SME B, which imports carbon fiber and other inputs from the United States to develop and produce drones, is also facing a heavier management burden due to the strong dollar. B's CEO said, "As the exchange rate rises, unit prices for materials and supplies keep going up," adding, "We can hold out for now, but we don't know what will happen if the rate exceeds 1,500 won." The CEO went on, "This is a time when we need to focus on research and development (R&D) to enhance technological competitiveness, but if the exchange rate burden grows, we could be forced to cut R&D expenses first," expressing concern.
A recent survey by the Korea Federation of Small and Medium Enterprises also found that SMEs are struggling with the strong dollar. In its "survey on exchange-rate fluctuations and SMEs," conducted from Dec. 1 to 19 last year on 635 exporting and importing SMEs, 40.7% of respondents said they suffered damage due to the surge in the exchange rate. They cited rising materials and supplies prices stemming from the higher exchange rate as the biggest challenge. This was followed by increased foreign currency settlement expenses and higher logistics costs.
A bigger problem is that it is not easy to reflect higher costs in selling prices. Among those surveyed SMEs, 55% said they were unable to pass on exchange-rate-driven cost increases to selling prices. When materials prices rise, raising delivery prices becomes inevitable, but most SMEs are in a transaction structure subordinate to conglomerates or prime contractors, limiting their pricing power.
SME groups describe this situation as a "sandwich structure." Conglomerates that import and supply materials reflect exchange rate and materials price increases in the prices they charge SMEs. In contrast, SMEs are in a weak position to ask the conglomerates or distributors that receive their finished goods for price increases. As a result, SMEs end up shouldering the full burden of rising costs and slipping into a structure where profitability deteriorates.
◇ "Make the delivery price indexation system effective"
Experts emphasize "revitalizing the delivery price indexation system" as a first-line measure. The system adjusts delivery payments in line with materials price fluctuations and was introduced under the Act on the Promotion of Win-Win Cooperation between Large and Small and Medium Enterprises, but critics say it is not being properly applied in the field.
Kim Hee-jung, head of economic policy at KBIZ, said, "To ease SMEs' cost burden in a strong-dollar environment, it is urgent to make the delivery price indexation system operate substantively rather than nominally," adding, "If the situation of being sandwiched between conglomerates that import materials and conglomerates that receive product deliveries continues, more SMEs could shut their doors."
Choi Byung-cheol, a professor at Hankuk University of Foreign Studies' business school, said, "Unlike conglomerates, SMEs lack the time and capacity to absorb exchange-rate fluctuations," adding, "Unless financial support that can diversify exchange-rate risk, expansion of exchange-rate insurance, and improvements to delivery structures happen simultaneously, the burden of the strong dollar will inevitably be passed on entirely to SMEs."
Choi added, "With an exchange rate in the 1,400-won range expected to be the new normal, we need to build an institutional safety net that allows SMEs to withstand exchange-rate shocks, rather than short-term fixes."