Korean firms on high alert as Russia invades Ukraine

Samsung Electronics Co., Hyundai Motor Co. and other South Korean companies are on high alert as Russia launched a military attack in Ukraine.

They are expected to spend more on raw materials since natural gas and crude oil prices surge, while exports of key products such as automobiles to Russia are predicted to decline. The supply of rare gases such as neon and krypton for semiconductor production is likely to be disrupted. South Korean companies immediately tried to reorganize their supply chains.

Samsung, Hyundai, LG Electronics Inc. and other companies that operate plants in Russia have begun preparing measures to deal with the escalating crisis in Ukraine, according to industry sources on Thursday.

Russia is South Korea’s 10th-largest trading partner, accounting for 1.6% of the Asian country’s exports and 2.8% of imports. About 40 South Korean companies are operating units there.

SURGING RAW MATERIALS COSTS

Soaring raw materials prices are the top concern among South Korean manufacturers. Brent crude futures, the global benchmark, topped the $100 a barrel mark for the first time since 2014.

“Rising prices of natural gas and oil put significant pressure,” said an executive at Samsung. “We are discussing countermeasures with our partners.”

The company is raising production efficiency and reorganizing the supply chain system to minimize increases in product prices. Prices of locally made products usually rise 0.25% when costs of petrochemicals imports increase 10%, according to the Korea International Trade Association.

The supply of some rare items such as noble gases that South Korea heavily relies on Ukraine is predicted to be disrupted. The Asian country last year depended on the Eastern European nation for about 23% of its neon needs and 30.7% of krypton consumption. South Korea also relied on Russia for 31.3% of its xenon needs and Ukraine for 17.8%.

CAR EXPORTS TO BE HIT HARDEST

Tougher sanctions of the US and its allies against Russia are predicted to hit car exports the hardest. Consumer goods are not subjects to the sanctions but financial sanctions are expected to prevent payments of trades, hurting auto exports, analysts said.

South Korea’s passenger car exports to Russia totaled $2.5 billion last year. Passenger cars were South Korea’s top export item to Russia, accounting for more than a quarter of the total shipments to the country.

Hyundai exported 38,161 units, while its affiliate Kia Corp. shipped 51,869 vehicles in 2021.

“Passenger car exports tumbled more than 60% in 2014 when the West imposed sanctions against Russia,” said a senior executive at the South Korean auto industry. “It may be difficult not only to export but also receive money.”

DIFFICULT TO SECURE PARTS

South Korean companies are expected to face difficulty in operating their plants in Russia since they may not be able to obtain parts due to potential bans on exports of high-tech products such as semiconductors to the country.

Hyundai operates a plant with an annual capacity of 230,000 units in St. Petersburg, while Samsung runs a factory for TV and washing machines in Kaluga.

“A war will disturb the logistic system and exports bans are likely to disrupt procurement of core parts for production, troubling plant operations,” said a source at a major South Korean company that runs a factory there.

Companies need to increase stocks of components in preparation for exports bans while diversifying parts suppliers, said a KITA official.

Write to Il-Gue-Kim and Su-Bin Lee at black0419@hankyung.com
Jongwoo Cheon edited this article.