Korean Exporters Win with a Weaker Won

The ailing greenback is dragging down the won. That's good for Hyundai, Samsung, and LG because their Japanese rivals face a stronger yen

As the shock wave from the collapse of the dollar reverberates through Asian markets, executives at South Korea's top exporters are laughing all the way to the bank. As the greenback falls, Korea's won is falling, too. And, even better for the Koreans, the Japanese yen is rising. That means companies such as Hyundai Motor, Samsung Electronics, and LG Electronics that count Japanese companies as their main rivals are set to benefit as their exports become more competitive in the world marketplace. "Earning surprises are in store for these exporters," says Park Kyung Min, chief executive at fund manager Hangaram Investment Management in Seoul.

These Korean giants relying on exports for two-thirds or more of their revenues see a reversal of their fate from the current financial turmoil. Sure, a recession in the U.S. will limit their sales growth in America, but they're hopeful that voracious demand in emerging markets, particularly in resources-rich economies, will more than

offset a slowdown in the U.S. (BusinessWeek.com, 1/30/08). After all, Korea's shipments to the U.S. dropped to 11% of the country's overall exports in January, compared to more than 20% in 2002 and 40% in 1986.

A surging yen is amplifying the effect of a falling won on Korean exporters that compete with Japanese rivals for global market share. Since the start of 2008, the won has lost some 5% of its value against the dollar, bucking the trend of major currencies that have recently appreciated. The yen, on the other hand, is up 11% this year against the dollar. The diverging swing represents a 24% decline for the Korean currency against the yen since last July, making prices of Korean exports that much cheaper against rival products made in Japan. That's a reversal of a 34% gain in the won's strength vs. the yen during an 18-month period ending in mid-2007.

Foreign Investors Dumped Korean Shares

So why is the Korean currency defying the trend of major currencies gaining strength against the dollar? The won's decline was touched off by foreign investors dumping Korean shares and bonds to secure liquidity in the face of a global credit crunch. Economist Lee Yoonsok at Korea Institute of Finance, a Seoul think tank, points out that Korea remains one of the most liquid securities markets among emerging economies, making it an easy target for foreign investors trying to secure cash in a hurry.

Those foreign investors who unloaded Korean shares sold the won to bring dollars back home. Overseas investors sold about $13 billion worth of Korean stocks so far this year, forcing the benchmark Kospi index to slide 12%. A 32% gain in the Kospi last year also allowed foreigners to take profits as they sought to secure cash.

Spurring the won's loss was the unwinding of the yen carry trade, where investors borrowed yen to put the money in higher-yielding countries such as Korea, and the reversal of currency hedging by Korean funds that had built won positions after investing in overseas stocks. As the world's equity markets are sold off, these hedges are also being unwound, according to a Morgan Stanley (MS) research report last week.

Higher Oil Prices Creates Trade Imbalance

Another driver of the won's decline: Korea's worsening current account balance, the broadest measure of trade in goods and services. The Seoul government expects Korea, which depends wholly on imports for its oil needs, to post a current account deficit of $7 billion this year against a surplus of $5.9 billion in 2007. "Given the tumult in the global financial market and high oil and commodity prices, the won won't gain strength any time soon," says Park at Hangaram Investment.

Such a prospect is sweet music to exporters.

Take Hyundai Motor, whose profitability has been heavily influenced by the won's movement. Its profit margin dropped to 9% in 2003, 7.2% in 2004, 5.1% in 2005, and 4.5% in 2006 as the Korean currency steadily gained in value by nearly a third against the dollar between 2002 and 2006. The margin improved to 6% last year as the appreciation in the average annual exchange rate was limited to 2.8% and Hyundai's concerted efforts to address the company's vulnerability to currency changes began to pay off.

Now, industry watchers believe the improvement in the margin is bound to accelerate. That's because the won's weakness follows Hyundai's three-year cost-cutting campaign, which included redesigning parts and sharing platforms and parts among different models. Suh Sung Moon, auto analyst at brokerage Korea Investment & Securities figures Hyundai could expect a rise of $110 million in its annual revenues every time the Korean currency loses value by 10 won to the dollar—the loss in the average exchange rate this year is likely to be between 30 won and 80 won.

Weak Won a Blessing for Kia

"All analysts following Hyundai will have to upwardly revise their forecasts," Suh says. Even before taking into account the weak won, he envisaged a 28% rise in Hyundai's operating profit to $2.3 billion this year and an 8% gain in revenues to $33 billion. "Without unforeseen surprises, the company's margin is now expected to be well over 7%."

At Kia Motors, an affiliate of Hyundai, a weak won is a blessing for management. Kia last year posted an operating loss of $55.4 million on sales of $15.9 billion, but Kia execs are confident the company will turn around in 2008. "The won's weakness will certainly help us achieve our business goal of posting a margin of 3% this year," says Kim Deuk Ju, Kia's finance director. Exports account for three-quarters of Kia's sales. After Kia reported two years of operating losses, Kia President Chung Eui Sun stepped down as a co-CEO (BusinessWeek.com, 3/24/08) at a Mar. 21 shareholders meeting.

The electronics industry is another major beneficiary. Seoul brokerage CJ Investment & Securities reckons Samsung and LG, both leading makers of liquid-crystal displays, cell phones, and TVs, could post a profit jump exceeding 50% this year if the won stays weak. Before the Korean currency's sharp decline in March, CJ had projected a 46% profit rise, to $8.7 billion, for Samsung and a 29% profit increase, to $1.6 billion, for LG this year. "This year may well be a bumper year for Korea's electronics companies," says corporate analyst Kim Ik Sang at CJ.

Inflation Looms on the Horizon

Despite the upbeat mood among exporters, the won's weakness doesn't spell an easy going for the overall Korean economy. Already signs are looming that inflation will pose a major headache for the country. Central bank data last week showed Korea's import prices measured in won terms rose 22.2% in February year over year, the biggest surge in more than nine years.

"Inflationary pressure will soon fuel demand for higher wages, which will make it difficult for Korea to achieve a much needed end to labor strife," says Huh Chan Kook, chief economist at Korea Economic Research Institute, a think tank for Korean conglomerates. "In the long term the weak won could prove a poison, stoking instability." For the short term, however, the major exporters can't stop smiling.

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