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Large Companies Stepping Up `Cost Discount` Pressure

Posted January. 05, 2010 09:05,   


With cost-cutting measures rising amid the global economic crisis, more small and medium-size businesses are suffering from “cost discount pressure” from large companies.

According to a survey released by a Seoul National University research team yesterday, 44.7 percent of small and mid-size companies have suffered pressure to discount from large companies. If the number of respondents who complained of “unbearable difficulty” is included, 53.1 percent of smaller companies reported suffering from discount pressure.

Conducted in November last year, the study surveyed 1,000 small and medium-size companies on transactions among subcontractors in the auto and electric industries.

Generally, large companies and suppliers implicitly set the supplier ratio of operating profit-to-revenue, and even 57.5 percent said the profit-to-revenue ratio is less than five percent per year, or the annual interest rate of term deposits.

The head of a small company said, “We negotiate with contractors over the prices of product supply almost every year. If large companies keep asking for discounts based on the data from the previous year, we have no choice but to accept.”

The share of small and medium-size businesses with an operating profit rate of less than five percent was far greater in cars (72.1 percent) than in electronics (38.7 percent).

An auto expert said, “This is partly due to increased competition as the number of domestic suppliers increased from 3,083 in 1997 to 4,557 in 2007, but also because of Hyundai Motor’s strategy to foster suppliers under its affiliates.”

Hyundai Motor gives orders mostly to group affiliates such as Hyundai Mobis and Hyundai Wia, forcing small and medium-size businesses to lower prices to survive.

The Korea Institute for Industrial Economics and Trade said the average operating profit rate at 11 parts suppliers, which are Hyundai Motor affiliates, increased from 7.7 percent in 1999 to 9.3 percent in the first half of last year. The rate at 31 non-Hyundai suppliers dropped from 4.6 percent to two percent over the same period.

Suppliers claim that domestic auto manufacturers are shifting the burden of price increases, such as higher labor costs and commodity prices, to suppliers to maintain competitiveness.

A source at a parts supplier said, “Hyundai Motor’s decision to give the largest bonus in its history (16 million won or 13,880 U.S. dollars per person) to its employees last month will eventually become the burden of suppliers.”

In response, the automaker said, “Cost-cutting is inevitable amid the sharply falling demand for cars in the wake of the global economic crisis.”

The company also blamed the high debt ratios of suppliers on increased investment in response to the global strategies of their parent companies.

“Something that shouldn’t be overlooked is that total revenues of suppliers increased a lot as Hyundai Motor increased its global production scale,” the carmaker said.

Hyundai Motor apparently sees the need to build a hierarchical structure to ensure a stable supply of parts to cope with increased overseas sales and global production capacity.

Experts are urging government measures to narrow the gap between large and smaller businesses to have a sound industry structure take root.

Lee Hang-goo, head of the machinery industry team at the Korea Institute for Industrial Economics and Trade, said, “In the name of cost-cutting amid the global economic crisis, large companies have grown more aggressive in putting discount pressure on their contractors. The government must monitor this more strictly while fostering a few select suppliers to help them grow and specialize in their sector.”

sukim@donga.com tesomiom@donga.com