EVERY time the Korean won rises against the dollar, Park Yong-gyu winces. Even the smallest gain shaves the margins his company, Daesung Tech, earns on the concrete machinery it ships to Asia, the Middle East and Europe.
"Because the won is so strong, we are having a hard time," laments Mr Park, who employs 20 people at his factory in Kyonggi province, just outside Seoul. "We can't raise the price of our products so our profits have become smaller, and sometimes we have even exported at a loss."
Small and medium exporting companies like Daesung are bearing the brunt of the won's 4.0 per cent rise against the dollar this year alone; the strongest performance since the Asian financial crisis began in 1997.
"If the won hits 950, we will have to increase our prices but that will have a serious impact on our business because we are competing with China and Turkey," Mr Park says.
The currency has been rising partly because of the dollar's weakness but also because of new confidence in the South Korean economy. The government has pledged to achieve economic growth of 5.0 per cent and to create 400,000 new jobs this year.
"The won is strong because the Korean economy is performing well and domestic demand is recovering," said OhSuk-tae, economist at Citigroup in Seoul. "But the won's strength is bad for the Korean economy in general. "
Chaebol companies such as LG Electronics and Hyundai Motors voice concerns about the strong won, but their hedging has cushioned the impact so far.
Few small and medium enterprises have such a buffer yet they account for 85 per cent of employment; half of manufacturing output; and 40 per cent of exports - and transcend almost every sector.
"Large companies have already been preparing for the won appreciation since last year but SMEs are vulnerable to the currency's rise," says Kim Kyung-man of the Korean Federation of Small and Medium Businesses, which represents more than 100,000 mainly manufacturing SMEs.
"According to our recent survey, more than 91 per cent of SMEs are seriously affected, especially exporters," he says.
With limited ability to pass their increased costs on to customers, two-thirds said they would keep exporting even though profits were falling. But 5.0 per cent had stopped taking new orders. The federation's members on average said Won1,031 was a manageable exchange rate, but half expect the won to strengthen further.
Government concern at the strong won is intensifying. Attempts to deter speculators have meant repeated verbal warnings.
"It is difficult to say what the appropriate currency exchange rate is ... but [the won's gains) have been excessive," Han Duck-soo, finance minister, told local radio recently. "We are closely monitoring the movements of the currency market and will take measures, if necessary."
In a report published the other day, the finance ministry said it would act to pre-empt "dangerous factors that may slow economic growth" such as higher oil prices and a volatile exchange rate.
But many economists say the SME sector faces some deep structural problems that need to be addressed.
"Many SMEs are overburdened with debt, saddled with excess capacity and suffering from growing overseas competition," said Kenneth Kang, Seoul representative of the International Monetary Fund (IMF). Bank of Korea data puts SMEs' debtequity ratio at 139 per cent, compared to 92 per cent for large companies.
"Even more worrisome is that SME profitability since 1999 has remained at a low level, while it has improved steadily for large companies," Mr Kang says in the latest Korea Policy Review, a government publication. "While large corporations since the financial crisis have [been able to make] significant progress [towards] restructuring and boosting profitability, SMEs have lagged far behind."
The IMF has urged restructuring in the sector by rolling back the credit guarantees that keep under performing companies afloat while hindering competition. Public credit guarantees in South Korea equal about 6.0 per cent of GDP; more than three times more than in Taiwan and about 30 times more than in the US.
The government plans to halt growth in credit guarantees and to redirect them to start-ups and new technology firms, but some economists also point out that lack of venture capital hinders risk-based lending to SMEs.
SMEs are themselves conscious of the need to restructure if they want to avoid being eclipsed by cheaper countries.
FT Syndication Service