Korean Exporters Win with a Weaker Won

(page 2 of 2)

Take Hyundai Motor, whose profitability has been heavily influenced by the won's movement. Its profit margin dropped to 9% in 2003, 7.2% in 2004, 5.1% in 2005, and 4.5% in 2006 as the Korean currency steadily gained in value by nearly a third against the dollar between 2002 and 2006. The margin improved to 6% last year as the appreciation in the average annual exchange rate was limited to 2.8% and Hyundai's concerted efforts to address the company's vulnerability to currency changes began to pay off.

Now, industry watchers believe the improvement in the margin is bound to accelerate. That's because the won's weakness follows Hyundai's three-year cost-cutting campaign, which included redesigning parts and sharing platforms and parts among different models. Suh Sung Moon, auto analyst at brokerage Korea Investment & Securities figures Hyundai could expect a rise of $110 million in its annual revenues every time the Korean currency loses value by 10 won to the dollar—the loss in the average exchange rate this year is likely to be between 30 won and 80 won.

Weak Won a Blessing for Kia

"All analysts following Hyundai will have to upwardly revise their forecasts," Suh says. Even before taking into account the weak won, he envisaged a 28% rise in Hyundai's operating profit to $2.3 billion this year and an 8% gain in revenues to $33 billion. "Without unforeseen surprises, the company's margin is now expected to be well over 7%."

At Kia Motors, an affiliate of Hyundai, a weak won is a blessing for management. Kia last year posted an operating loss of $55.4 million on sales of $15.9 billion, but Kia execs are confident the company will turn around in 2008. "The won's weakness will certainly help us achieve our business goal of posting a margin of 3% this year," says Kim Deuk Ju, Kia's finance director. Exports account for three-quarters of Kia's sales. After Kia reported two years of operating losses, Kia President Chung Eui Sun stepped down as a co-CEO (BusinessWeek.com, 3/24/08) at a Mar. 21 shareholders meeting.

The electronics industry is another major beneficiary. Seoul brokerage CJ Investment & Securities reckons Samsung and LG, both leading makers of liquid-crystal displays, cell phones, and TVs, could post a profit jump exceeding 50% this year if the won stays weak. Before the Korean currency's sharp decline in March, CJ had projected a 46% profit rise, to $8.7 billion, for Samsung and a 29% profit increase, to $1.6 billion, for LG this year. "This year may well be a bumper year for Korea's electronics companies," says corporate analyst Kim Ik Sang at CJ.

Inflation Looms on the Horizon

Despite the upbeat mood among exporters, the won's weakness doesn't spell an easy going for the overall Korean economy. Already signs are looming that inflation will pose a major headache for the country. Central bank data last week showed Korea's import prices measured in won terms rose 22.2% in February year over year, the biggest surge in more than nine years.

"Inflationary pressure will soon fuel demand for higher wages, which will make it difficult for Korea to achieve a much needed end to labor strife," says Huh Chan Kook, chief economist at Korea Economic Research Institute, a think tank for Korean conglomerates. "In the long term the weak won could prove a poison, stoking instability." For the short term, however, the major exporters can't stop smiling.

Moon is BusinessWeek's Seoul bureau chief.