Korea’s business sentiment mixed among large companies, SMEs

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South Korea’s business sentiment is divided among large companies and small- and mid-size enterprises (SMEs) amid a gradual improvement in key export industries such as semiconductors and automobiles.

According to an analysis of the Bank of Korea’s business survey index (BSI) for the manufacturing industry by Maeil Business Newspaper on Tuesday, the assessments of business conditions by large corporations and SMEs are mixed in September.

The BSI for large companies increased to 71 in September from 66 in January while for SMEs, the index decreased to 63 from 66 during the same period.

The manufacturing BSI is an indicator based on monthly surveys on 1,607 companies, inquiring about their views on overall business conditions, production, inventory, and investment. A higher figure indicates a more positive economic outlook.

According to data from Statistics Korea, industrial production in August increased by 2.2 percent from a month ago on the back of semiconductor output amid growing demand for high-performance products. It was the biggest gain in 30 months.

The operating rate in manufacturing also reached its highest level in a year at 73.4 percent. Chip exports in September were at their highest level in 11 months, leading to a trade surplus for a fourth straight month.

SMEs, however, still struggle.

Reports of bankruptcies are increasing among these businesses, and financially distressed companies are expanding from small businesses to middle-market businesses.

According to the BOK data, the total amount of defaulted bills for the first eight months of this year reached 3.6 trillion won ($2.7 billion), the highest since 2015.

This is even higher than the levels during the Covid-19 pandemic in 2021, which stood at 1.90 trillion won, or during the recent Lego Land default scandal last year, at 2.25 trillion won. “The default amount increased as the maturity approached for the primary collateralized bond obligations (P-CBOs) guaranteed by the Korea Credit Guarantee Fund during 2020 when corporate financing wasn’t liquid due to the pandemic,” said an unnamed BOK official.

While the default amount has surged, the number of bankrupt companies stood at 126 as of August, which is about the average level since the pandemic. This indicates that the bankruptcy size per company has increased.

The middle-market Dayou Winia Group’s Winia Co. went bankrupt earlier this month after failing to repay 3.6 billion won in matured bills, signaling a potential series of workforce reductions among home appliance SMEs.

SMEs in advanced technology sectors, including artificial intelligence (AI) and healthcare, are also facing challenges.

Companies like Vuno Inc., an AI-based cardiac arrest prediction technology firm, and JLK Inc., which holds AI diagnostic technology for brain diseases, have undergone restructuring this year.

Deepnoid Inc., which provides AI solutions in healthcare, industrial security, and smart factories, is also reportedly considering workforce reductions.

With the return of the repayment period for loans that were eased during the pandemic period, financial pressure is expected to intensify.

“When interest rates rise, companies find it difficult to issue corporate bonds, and there is no choice but to increase demand for bills and loans,” said Professor Jun Sung-in from Hongik University. “In such a scenario, small business owners will be pushed to a lower priority in the funding market, often leading to an increase in non-performing loans among self-employed business owners and delinquency rates.”

According to the BOK, the financial loan balance for self-employed business owners in the second quarter of this year reached an all-time high of 1,043 trillion won, increasing by 9.5 trillion won in three months.

Concerning the government’s role, expert opinions diverge.

Professor Kang Sung-jin from Korea University raised the necessity to “reduce interest rates for self-employed business owners on a selective basis to prevent domino bankruptcies among SMEs.”

Professor Shin Se-don from Sookmyung Women’s University underlines the need for the government to assess financially distressed companies “case by case” amid an economic downturn, rather than offering assistance to companies lacking the capability to recover.

Professor Seok Byoung-hoon from Ewha Womans University also notes that defaults among low productivity companies are not necessarily undesirable, although adding that there is a necessity for government support through policy banks for “companies with capabilities but facing short-term challenges.”