Rising production costs slammed firms in first half

Production costs in the first half of the year soared at the fastest pace in 13 years, according to a report by the Sustainable Growth Initiative (SGI), a think tank under the Korea Chamber of Commerce and Industry (KCCI).

During the Jan-June period, production costs rose 8.7 percent on year, the fastest rate since 10.8 percent in 2009, according to the SGI report released Wednesday.

It was around five times higher than the average rate of 1.9 percent over the past decade.

Wage rate increase, rising raw material prices and depreciation of the won were the three big contributing factors, according to the report, in that order.

By sectors, manufacturing recorded a rise of 10.6 percent, higher than services’ 6.6 percent.

Costs in the petroleum refining industry surged by 28.8 percent, and in chemicals by 10.5 percent.

“International oil prices and the currency heavily affect manufacturing because a great amount of imported raw material is needed during production,” said Kim Cheon-koo, a research fellow at SGI.

“The currency rise in companies’ production cost is mostly based on macro economical changes, so it is difficult for companies to respond to the situation individually.”

Low value-added services such as retail saw rising production costs as well.

"These sectors are easy to enter and highly competitive, so it's difficult [for companies] to pass along costs increases to customers," said Kim.

“Small business owners are likely to respond to higher labor costs with layoffs or even closing their businesses.”

The SGI report suggested that the companies need to find stable supplies of raw materials or go into businesses that are less affected by changes in energy prices. In the case of manufacturing, which is heavily affected by the prices of imports, they have to work on supply chains and flexible sources or materials, according to the think tank.

For low value-added services, financial support from the government was recommended, including reducing interest rates on loans for small merchants and business owners.

Other sorts of government support, such as support for increasing productivity and responding to energy price changes, were mentioned.

“Investment in non-tangible assets such as software and research and development should be increased,” said Kim.

“In terms of energy, local industries should be converted to carbon-neutral and energy-reducing business structures and promote the expansion of energy reduction technology through collaborations between public and private companies.”

BY KO SUK-HYUN [cho.jungwoo1@joongang.co.kr]