Nearly 40% of Manufacturers on Brink of Insolvency

Nearly 40 percent of smaller manufacturers in Korea are unable to pay interest on their debt, even more than after the 2008 global financial crisis.

The proportion of manufacturers on the brink of insolvency rose from 30.4 percent in 2009 to 39.1 percent last year, according to the Korea Institute for Industrial Economics and Trade.

The number of cash-strapped companies that relied on bank loans and government aid has increased in the coronavirus pandemic, and the proportion who were then unable to service their debt reached 44.8 percent in the fourth quarter of 2020.

The proportion that suffered operating losses surged from 10.3 percent in 2010 to 26.1 percent in the second half of last year.

"Financially weak and unprofitable companies increased sharply since the global financial crisis," the institute pointed out. "That crisis offered a chance to restructure insolvent businesses, but those that survived it are now reliant on public aid again due to the pandemic."

A researcher at the institute said, "Once government support begins, it continues in many cases, leading to a considerable number of businesses surviving as 'zombie companies.' At first, they get one-year loans, but many of them are extended automatically, and some businesses make no money at all but just pocket funding in the name of research and development."

Likewise, bank loans are often only extended to prevent a chain reaction of corporate bankruptcies.