Korean gov’t to introduce price adjustment system to ease SME burden

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The South Korean government plans to introduce a price adjustment system that allows small and medium-sized enterprises (SMEs) to reflect increases in raw material prices in the purchase payments of large companies and big players that refuse to or avoid introducing the system will be subject to fine and penalties.

The Ministry of SMEs and Startups announced Tuesday that an amendment to the Act on the Promotion of Mutually Beneficial Cooperation Between Large Enterprises and Small and Medium Enterprises will be enforced to launch the price adjustment system.

“This is to prevent a vicious cycle in which SMEs bear the resulting losses alone when material prices rise after entering into a consignment transaction agreement, which leads to supply chain instability,” said an official from the ministry.

Under the price adjustment scheme, companies entering into or renewing consignment transaction contracts that involve major raw materials will be required to negotiate in good faith on the payment adjustment triggered by raw materials price changes and include it in the contract.

Even one-time and one-off transactions with a transaction period exceeding 90 days will be subject to the new system if they involve major raw materials. However, the changes will not be applicable if the purchasing or commissioning company is an SME, the contract is worth less than 100 million won ($73,475.4), or the contract period is short at 90 days or less.

Additionally, if the existing contract is revised and the revision involves essential changes, it must be considered a new contract and details about raw material price adjustment must be re-negotiated.

Once the price adjustment system takes effect, a purchasing company that is found to have issued a contract without including any details of price adjustment may be subject to a fine of 10 million won and 1.5 to 3.1 penalty points depending on the type of sanction imposed. If the company, for example, has engaged in illegal activities such as contract splitting to fraudulently evade the application of price adjustment, it can be fined up to 50 million won and receive 5.1 penalty points.

However, the SMEs Ministry plans to set a guidance period until December 31 and, for the time being, implement the price adjustment system through voluntary correction and guidance instead of sanctions. During the period, the ministry will not conduct any direct inspections into the linkage of raw material prices to delivery prices.

The ministry has been recruiting partner companies to voluntarily implement the price adjustment scheme through a roadshow. As of September 26, 6,533 companies have applied, including 327 consignor companies and 6,206 consignee companies.

Meanwhile, the Fair Trade Commission on Tuesday released a guidebook on the price adjustment system. Frequently asked questions, the standard price adjustment agreement, and the guidebook can be found on the commission’s website.