'Toothless' Subcontract Price Indexation System

"We plan to take measures including an ex officio investigation into the subcontract price indexation system after assessing on-the-ground difficulties centering on the industry."

This was the response from the Ministry of SMEs and Startups (MSS) to a reporter's question about plans to launch an ex officio investigation into the subcontract price indexation system — aimed at preventing damage to small and medium-sized enterprises (SMEs) facing growing raw material cost burdens due to the recent Middle East crisis.

The subcontract price indexation system is a mechanism that allows contracting and subcontracting companies to adjust subcontract prices according to pre-agreed ratios when major raw material prices surge or plunge. When raw material prices spike, as in the current Middle East crisis, the government can conduct ex officio investigations to inspect unfair trade practices and verify whether the indexation system is functioning properly.

However, the government's pace in pursuing an ex officio investigation feels frustratingly slow compared to the urgency on the ground. The MSS already received reports on SME damage at the "Second Middle East Situation SME and Small Business Impact Review Meeting" on the 14th. It is doubtful how much practical help yet another round of industry consultations will provide to SMEs that are already gasping for air.

It is not that I fail to understand concerns that excessive government regulation could undermine the industrial ecosystem through actions such as large corporations switching their supplier networks.

The problem is that the energy supply crisis is expanding to an unprecedented, national disaster-level scale, and damage to SMEs is becoming a reality.

An official in the domestic plastics industry said, "Since the beginning of this month, prices of basic petrochemical materials have surged by 200,000 won per ton due to the sharp rise in oil prices." The official added, "There are reports that some prices have risen by as much as 400,000 won, and fear across the industry has reached its peak."

The ex officio investigation under the indexation system is one of the few policy tools available for the government to ease the burden on SMEs in such extraordinary circumstances. Considering that SMEs with weak bargaining power — vulnerable to supplier switches and other pressures — find it difficult to demand subcontract price adjustments from large corporations on their own, the government's role is more important now than ever.

Implementing an ex officio investigation carries a significant deterrent effect against unfair practices in and of itself, as it signals the government's policy enforcement will and direction to the market. No matter how meticulously designed a system may be, without the policy commitment to back it up, it will amount to nothing more than locking the barn door after the horse has bolted.