Tuesday, August 26, 2014

Korea Commentary: the Won

So what’s all this concern over a strong Won?

Well, frankly, similar to what Korea facing business experienced in the mid 2000’s, today, Korean-made products are more expensive in other currencies as the Won continues to strengthen. As a result, US Dollar profits repatriated back to Korea are worth less in Won.

Attributed to the strong Won… 
1. The strength and stability of the Won compared to other nations’ currencies is driven by sound economic fundamentals in the Korean economy.

2. There is an improved overall global perception for Korea Inc. and their brands. Today there is high demand for products from leading Korea exporters: Samsung, Hyundai, Kia Motors and LG. Korean brands are now seen as market leaders in quality, design and value. The brands also capitalized on a weak Won between the global financial crisis of 2007 and 2012. This allowed South Korea brands to offer greater value and lower price points than the competition and in turn dramatically increased their market share globally.

3. Global investors searching for yield have bought South Korea assets this year.

The Impact of the Yen…
Many countries, including Japan and China, have engineered weaker currencies to help make their goods more competitive.

South Korean carmakers fared well between 2007 and 2011 as the Won fell as much as 50% against the Yen. That trend reversed in the middle of 2012, and the Won's climb accelerated after Japanese Prime Minister Shinzo Abe came to office, backing a new wave of monetary easing that depressed the Yen.

South Korean companies are looking for ways to address the Won crisis, including moving more business overseas, just as Japanese companies did during years of Yen strength.  Additionally, for component and parts used in overseas plants they are planning to increase local sourcing vs. exporting Korean parts to the manufacturing facilities.

Meanwhile, in an attempt to reverse a slowdown in growth, policy makers are pumping up the economy through all possible means.  For example, the Bank of Korea issued its first rate cut in over a year, lifting South Korea stock prices.

Long Term
There are both long term solutions and challenges to Korea’s economy enduring a cycle of weak and strong Won.  First, there needs to be a move to high worth and margin exports (like Apple iPhones, for example) that are less price sensitive.  Cost driven value goods with low margins are highly impacted by fluctuations in currency when consumers buy product based on the lower price points.

 Second, as noted above, many Korea companies have moved key manufacturing overseas but still export substantial parts they produce in Korea.  These operations, too, need to be permanently relocated in the local markets.  The challenge here is that the domestic Korean economy would suffer from the loss of jobs and industry.

All Said
As in 2006, I feel that most Korean firms approach to the Strong Won will be to push the company to reduce cost and "boost productivity." That means " work harder."


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