[Editorial] Strengthening won

Hyundai Heavy Industries Co. is taking applications for early retirement ― the first since it started as the shipbuilding division of Hyundai Engineering and Construction Co. in 1970. POSCO has dropped out of the vaunted club of corporate behemoths with 1 trillion won or more in quarterly operating profits.

The two companies are among the top Korean business conglomerates that are taking a beating from the deepening global slump of European origin. But it appears that the worst is yet to come. With no end to the European debt crisis in sight, the shipbuilder and the steelmaker are faced with yet another serious setback in their businesses ― the strengthening Korean currency, which will jack up their export prices at a time when overseas demand is softening.

Cutting the payroll looks inevitable for Hyundai Heavy Industries, whose September backlog was cut to less than one third of the September 2008 peak. Moreover, the nation’s No. 1 shipbuilder took $8.2 billion in new orders during the first nine months of this year, a mere 34.2 percent of the 2012 target.

Against this gloomy backdrop, Hyundai Heavy Industries plans to cut more than 2,000 jobs this year, or 10 percent of the payroll, offering incentives for those applying for early retirement. It is yet to be seen whether or not other similarly distressed Korean shipbuilders will follow suit.

The sharp decline in shipbuilding orders is cutting back on the demand for steel products. Another setback for the steelmaking industry is a drop in building permits. No wonder POSCO’s operating profits in the third quarter plummeted 24.7 percent ― to 819 billion won on 8.91 trillion won in sales. Worse still, Standard & Poor’s, citing the fall in the demand for steel products, lowered POSCO’s credit ratings from “A-” to “BBB+” on Monday.

It is not Hyundai Heavy Industries and POSCO alone that are taking a drubbing. Other manufacturers are witnessing their shipments abroad declining, albeit not as fast as steel products.

Continuing monthly trade surpluses are pushing up the won’s value. These surpluses are widening, despite falling exports, because imports are decreasing at a faster pace. Moreover, the United States is weakening the dollar as it prints money in the name of quantitative easing.

The Korean won rose to a 13-month high when it was quoted at 1,098.2 against the U.S. dollar on Thursday. It had gained 7 percent since the year low of 1,186 against the dollar on May 25.

Now that the barrier of 1,100 won per dollar has been broken, the won will probably grow more quickly, further dampening Korean exports, says the Hyundai Research Institute, a leading private economic think tank. Quite a few experts say it should not come as a surprise if it drops to 1,050 won per dollar early next year.

Still, Korean exporters should not give themselves false hope that the government will come to their rescue, as it has so often done in the past. The government has good reason not to intervene this time. A stronger won will lower the prices of imports to the benefit of consumers. Why would it antagonize consumers ahead of the upcoming presidential election?

Indeed, Finance Minister Bahk Jae-wan recently reminded the advocates of government intervention that the exchange rate hovered around 1,070 won per dollar when the administration was submitting its 2012 budget request to the National Assembly in September last year. If the won strengthens beyond the level of 1,070 won per dollar, Korean exporters will still have to fend for themselves.

As the Korea Chamber of Commerce and Industry claims, profitability may be wiped out for many Korean exporters when the dollar begins to be traded for 1,050 won or less. Even so, they do not have much room to maneuver. To survive they should adapt to a stronger won by making themselves slimmer and fitter, as Hyundai Heavy Industries is doing, and taking other cost-cutting measures. They can hardly afford to sit idly by and lament over the market changes brought by the strengthening won.