Korean Exporters' Won Advantage

Seoul—Samsung, LG, and Hyundai Motor are all recording strong earnings this fall. Their products are winners, but the companies are getting a nice lift from the Korean currency as well. Although the won has strengthened a great deal against the greenback since March, it remains 20% below its level at yearend 2007. The current rate still makes many Korean exports look like bargains, especially against Japanese products, since the yen is trading at near all-time highs.

Why is the won staying so weak if Korea's brand-name companies are booming? Many exporters are benefiting from the misfortunes of the country's shipbuilders. "Had the huge level of shipbuilding orders in 2007 been maintained, the won would be much stronger," says central bank economist Cho Sok Pang. He says the won was extraordinarily high that year largely because of a shipbuilding boom.

In recent years ships replaced chips as the No. 1 export item from Korea, home of the world's six largest shipbuilders, including leader Hyundai Heavy Industries. Korean yards landed more than $70 billion in orders in 2007 and $48 billion last year. This year they may get one-tenth 2008's orders, the Korean Shipbuilders' Assn. reckons.

Shipping lines pay in dollars for the ships they order. As dollars flooded their coffers in 2007, the builders exchanged the greenbacks for won, which became increasingly scarce and expensive. The builders also bought won on the futures market, pressing the currency to rise further. When ship orders dried up, though, the industry's need for won rapidly declined.

Then the Lehman Brothers collapse triggered a global panic, and foreign investors retreated pell-mell from the Korean markets. The won, weakened already by the shipbuilders' woes, dropped 40% from its peak, one of the biggest crashes of any major currency.

Foreign investors have started buying Korean securities again, restoring some of the demand for won. But with the shipbuilders' once-gargantuan appetite for the currency all but gone, it's unlikely the won will reach its 2007 levels anytime soon. So Korea's exporters will continue to enjoy a won advantage, while Korean policymakers struggle to create a far less volatile currency.

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