Baek Byung-yeul is a journalist at The Korea Times focused on cultural content, including films and cultural events in South Korea. You can contact him at baekby@koreatimes.co.kr to share your insights.
COVID-19 outbreak: lessons for Korean companies
By Kim Young-un
Kim Young-un, assistant professor at the University of Nottingham China
By Baek Byung-yeul
The economic impact of the novel coronavirus outbreak, newly coined COVID-19, is rippling through China's neighboring countries.
South Korea is predicted to be hit hard due to its heavy trade reliance on China, both in terms of exports and imports. This means disruption and revenue losses for South Korean firms.
The degree of the impact on firms will vary depending on industry, internationalization strategy, and supply chain structure. Due to travel restrictions and shut down of stores, China's local consumption has plummeted, meaning South Korean products will likely be unsold and stocked up.
As China is South Korea's largest export market, taking over 25 percent of total exports, this will surely have an impact on South Korean firms' bottom line. From the import side, South Korean firms are highly reliant on China's intermediate manufactured goods as China takes up more than 40 percent of Asia's global supply chain.
Major South Korean manufacturers and their subcontractors have had their supply chain cut off and had to stop production. Although some Chinese based factories are starting to re-operate, many firms are still in shortage of supplies.
What can South Korean firms learn from this epidemic?
First, they may need to diversify their supply chains and lower their reliance on Chinese parts. South Korean automakers are already doing this by seeking suppliers in Southeast Asia for the time being. In the long run, finding alternative suppliers may not be easy and firms will need to weigh the pros and cons of diversifying based on cost, quality and risk.
Second, South Korean firms should further try to diversify export markets. Not only because of this epidemic, but also because political tensions, such as the U.S.-China trade war and Brexit, mean that an over-reliance on one country will be extremely risky. Having a balanced and diversified export market will reduce the risk caused by an event arising from one country.
Third, they need to have financial buffers and think about worst case scenarios. Small- and medium-sized enterprises (SMEs) are particularly vulnerable to cash-flow problems. Although the South Korean government has stepped in to provide financial subsidies and loans to minimize losses, firms should further take an in-depth look at their financials and buffer themselves from surprising external shocks that could be potentially disastrous.
Fourth, firms should have a solid business core and balance short-term and long-term initiatives. Reflecting back on internal business fundamentals while continuing to engage in innovation and seeking new opportunities will help establish a solid foundation in case of an economic crisis.
In sum, this epidemic should serve as a valuable learning lesson for South Korean firms, because the COVID-19 outbreak will pass, but future shocks will surely appear in an ever increasing uncertain environment.
Kim Young-un is an assistant professor of Strategy at the University of Nottingham China.