EWC BULLETIN

Sept. 2000

Published by East West Consulting

2nd Fl. Hanil Bldg, Dogok-Dong, Kangnam Ku Seoul, Korea 135-280  

Tel: (82) 02-579-9550

e-mail: ewc@ewc-consulting

Fax: (82) 02-529-7561      


1. Current Economic Movement

KOREA'S ECONOMIC CRISIS:
WHAT DOES IT MEAN FOR U.S. BUSINESS

Over the medium and long term, the Korean economy should emerge stronger than ever as a result of changes occurring under the IMF program in Korea. This will be good news for U.S. business, which has extensive trading and investment relations with Korean business. However, in the short term, the ramifications of the economic crisis for American business are less clear, though it appears likely that there will be both opportunities and difficulties. Following is information gathered from trade associations, U.S. businesses, and Korean importers - all of which provide some guidance for U.S. firms in their continued dealings with Korea.

With the continuing instability of the won and the lack of trade financing throughout the economy, U.S. companies are experiencing delays in receiving payments from Korean importers. Some of those delays are also coming from Korean government agencies and banks, which, like everyone else, are delaying payment in the hopes that the won to dollar rate will return to more normal levels. These delays are occurring despite the terms of contracts and LCs, because credit is not available at this time to fulfill commitments made even a month ago.

In the case of new imports, Letters of Credit simply are not available for the moment from either Korean or foreign banks in Seoul, making it impossible for importers to provide guaranteed methods of payment to American exporters. While our advice has been to use not only LCs, but confirmed LCs, this is clearly not possible for the time being. To illustrate, the Korea International Trade Association reports that as of December 23, Korean banks were refusing 70.1 percent of all LC requests, with 100 percent denial in the consumer products area. Banks were also refusing to negotiate export documents in 63.6 percent of the cases. If the exchange market and financial situation stabilize over the next few weeks, it may be possible to request confirmed LCs once again. In the meantime, U.S. exporters should be extremely cautious about extending credit on open account or time drafts, since the ability of Korean business, of all sizes, to pay is uncertain because of the credit crunch.

There are dollars available among importers, some of whom hold accounts offshore or dollars outside the normal banking system. However, at this time, it is difficult for importers to utilize these dollars without drawing attention to themselves. In addition, given the volatility of the exchange rate, importers tell us that they are losing money on every sale, since replacement inventory will cost more than inventory now in place. Therefore, in the very short term, importers are reluctant to push sales until the won/dollar rate stabilizes.

During the recent visit of the Pennsylvania trade mission of 15 small and medium sized business in the high tech and environmental fields, we encountered considerable difficulty in recruiting Korean companies for meetings. In the end, we had over 100 appointments with no cancellations, and several PA companies have or are close to signing deals. So the business is there, but it is much harder to effect than before.

In trying to execute Agent Distributor Searches and Gold Keys, our Korean contacts are saying that this is a bad time. They ask that we hold off 2-3 months until the economic situation is clearer. Our local calls to trade specialists are down 70-80 percent the past two weeks, which probably reflects the worst of the situation as the crisis deepened in the run-up to the Presidential elections on December 18.

As we weigh our trade event schedule over the next year, we are currently advising U.S. firms that they will need to stay engaged in the Korean marketplace, in anticipation of a much stronger economy emerging over the next 1-2 years. So far, nearly all of our Study USA exhibitors for the March show remain committed to participating. Since the won/dollar rate may end up much more favorable than anticipated, it will be cheaper for American firms to participate in trade shows than before, easing somewhat the decision to remain committed.

We are seeing a number of stateside and local American visitors who want to discuss their particular projects underway in Korea. One large hotel group has expressed concern about a major project underway, as have a number of defense contractors. At this time, it’s just too early to judge which projects are likely to move forward and which will not. Obviously, those involving large Korean companies are subject to reduced investment plans of 30 percent or more being announced by all the major players here. That still leaves a number of projects which will move forward over the coming year.

The opportunities

Though we expect to see a severe cutback in construction, including that related to SOC projects, the Ministry of Construction and Transportation (MOCT) forecast that the impact on imports of architectural /engineering /design and construction /management / supervision will be minimal. MOCT officials reason that there will be ongoing requirements for high quality services and expert technology by domestic firms. They note also that local firms will be seeking joint ventures or consortia for their projects in Korea and overseas, in order to obtain additional sources of financing and to enhance credibility with foreign governments.

While there will certainly be a slowdown in U.S. exports of capital equipment and luxury goods, it is important to remember that much of what Korea exports consists of raw materials and semi-processed goods. With the won devaluation, Korean exports should boom next year, boding well for a continuation of a large portion of imports from the United States. Sectors which reportedly will do well include automobiles, semi-conductors, ship building, petrochemicals, computers, and telecommunications. Sectors not expected to benefit as much from exports, partly because of a weakening prices in the world market or slumping demand in the domestic market, include steel, machine tools, home electronics, construction, and textiles.

Likewise, as Korean conglomerates (chaebol) restructure and refocus, technology transfer will be extremely important. Korean companies will continue to need the latest technology in order to move up the value-added chain, much of which can come from the United States. Of course, technology with favorable financing terms will be critical to such sales.

Real estate companies, including foreign franchisees, are bullish on the prospects for business. They reason that the chaebols are putting prime real estate on the market for sale in order to generate cash flow and rents for prime locations should drop. They also expect the government to make it easier for foreign investors to acquire land, and adding impetus to the market.

Law firms and those firms specializing in mergers and acquisitions (M and A’s) also see prospects for increased business. They expect that as the government eases the rules for friendly M and A’s, and considers allowing hostile M and A’s, a number of firm companies will show increased interest in investing in Korea.

The financial area may present the most opportunity to foreign firms. In recent days, the Korean government has greatly liberalized the financial sector, from the bond and stock markets to the banking sector where foreign firms may now be able to acquire local bank operations. These changes are taking place way ahead of commitments made by Korea to the OECD or in the WTO and are likely to change the face of doing business in Korea. U.S. banks, insurance companies, funs, and investment houses will have major new opportunities to explore once the current crisis stabilizes. Korea seems to be undergoing a similar sea change in the foreign investment field - not only in permitting M and A’s, as mentioned above, but in welcoming foreign investment in a way never seen before in Korea. With a number of American firms successfully manufacturing already in Korea, we may see considerable expansion over the next couple of years. We are already seeing interest reported in the press by P and G, Bowater, and Dow Corning among others.

Extracted this from the information written by the U.S. Embassy in Seoul, Korea.

2. Fluctuation of Exchange Rate and Stock Market during March, 1998