Conglomerates suffer falling profitability
By Yoon Ja-young
For better or worse, Korea's economic growth has been led by conglomerates in recent decades. These chaebol companies, however, are suffering worsening profitability amid the global financial crisis.
When excluding Samsung Electronics, their performance is even more dismal.
According to data from FN Guide, a corporate financial information provider, the pre-tax net profit of the country's top 10 conglomerates stood at 50.9 trillion won last year, down 14.9 percent from the previous year.
The data included 87 subsidiaries of the chaebol companies that are listed on the bourse and settled their accounts in December.
As their net profit fell, they paid less corporate taxes. The companies shouldered 11.2 trillion won in corporate taxes in 2013, 5.8 percent less from the previous year.
The chaebol companies, excluding Samsung Electronics, earned 26.7 trillion won before tax in 2013, which is 31.7 percent less from the previous year. Their corporate taxes plunged by 42.3 percent to 4.9 trillion won.
Most of the chaebol groups took turns for the worse last year. Even Samsung Group saw pre-tax earnings plunge by 77.4 percent to 2.3 trillion won from 10.3 trillion won, when excluding Samsung Electronics.
As a consequence, Samsung Group's corporate taxes dipped by 82 percent last year when excluding Samsung Electronics ― it paid 400 billion won in taxes last year, which compares with 2.4 trillion won tax in 2012. Samsung Electronics, meanwhile, paid 87.7 percent more taxes compared with 2012, shouldering 6.3 trillion won.
Hyundai Heavy Industries Group saw its earnings fall by 82.2 percent, POSCO by 40.7 percent and Hanwha Group by 34.4 percent.
More firms unable to pay interest
Data from chaebul.com, a research institute on conglomerates, showed that the big players of the Korean economy are suffering. One out of four listed firms with over 1 trillion won in annual sales had an interest coverage ratio below 1.
Interest coverage ratio, which divides the interest cost by operating profit, shows the profitability of a business. A figure below 1 shows that the operating profit was not big enough to handle the interest cost of the company. The chaebul.com data showed that 22.6 percent, or 36 out of 159 companies, had a ratio below 1.
The ratio of such unprofitable businesses among 1-trillion-won companies has been increasing each year, from 17.8 percent in 2011, to 21.5 percent in 2012 and 22.6 percent last year.
Many of the construction companies, as well as shipbuilding and marine companies, recorded operating losses last year.
LG Electronics, which saw 213.9 billion won in operating loss last year, was also among the poor performers.
Analysts say that exporters were hit hard after changes in the global economic structure.
"The global economy has been changing structure after the crisis. While domestic economies are slowly recovering, the trade part isn't picking up," said Lee Geun-tae, a research fellow at LG Economic Research Institute.
"The developed countries are refraining from import to decrease debt, and thus export-led economies like Korea have been hit. That's the major reason for the conglomerates' poor performances," he said.
He added that the companies focusing on the domestic market were not good either, as the domestic economy is continuing the sluggish mood.
Murky outlook
He said the outlook isn't rosy for the Korean companies this year, either.
"While other countries are seeing their currencies weakening, the Korean won is continuing in a strengthening mode. Consumption may start to pick up in the developed countries, but trade won't expand as quickly as the effort continues there to cut back debt. It will be difficult for the Korean economy to show significant turnaround though it may not deteriorate further."
Lee added that the disaster of the sunken ferry Sewol has weighed on the domestic economy.
On top of the negative external factors, Korea Economic Research Institute research fellow Hwang In-hak pointed out that conglomerates couldn't exercise their strengths, such as quick decision-making by group owners, as some of them had to handle legal issues with the prosecution.
"The group owners used to lead the conglomerates to seek breakthrough in times of recession, such as restructuring businesses, but they couldn't come up with timely measures this time," Hwang said.
He added that even if the economic growth reaches its potential this year, it will not be very high when compared with the past.
"The president has been stressing deregulation to boost the economy, but the road to deregulation is way too bumpy. The Korean economy is at a very critical crossroads," he added.
By Yoon Ja-young
For better or worse, Korea's economic growth has been led by conglomerates in recent decades. These chaebol companies, however, are suffering worsening profitability amid the global financial crisis.
When excluding Samsung Electronics, their performance is even more dismal.
According to data from FN Guide, a corporate financial information provider, the pre-tax net profit of the country's top 10 conglomerates stood at 50.9 trillion won last year, down 14.9 percent from the previous year.
The data included 87 subsidiaries of the chaebol companies that are listed on the bourse and settled their accounts in December.
As their net profit fell, they paid less corporate taxes. The companies shouldered 11.2 trillion won in corporate taxes in 2013, 5.8 percent less from the previous year.
The chaebol companies, excluding Samsung Electronics, earned 26.7 trillion won before tax in 2013, which is 31.7 percent less from the previous year. Their corporate taxes plunged by 42.3 percent to 4.9 trillion won.
Most of the chaebol groups took turns for the worse last year. Even Samsung Group saw pre-tax earnings plunge by 77.4 percent to 2.3 trillion won from 10.3 trillion won, when excluding Samsung Electronics.
As a consequence, Samsung Group's corporate taxes dipped by 82 percent last year when excluding Samsung Electronics ― it paid 400 billion won in taxes last year, which compares with 2.4 trillion won tax in 2012. Samsung Electronics, meanwhile, paid 87.7 percent more taxes compared with 2012, shouldering 6.3 trillion won.
Hyundai Heavy Industries Group saw its earnings fall by 82.2 percent, POSCO by 40.7 percent and Hanwha Group by 34.4 percent.
More firms unable to pay interest
Data from chaebul.com, a research institute on conglomerates, showed that the big players of the Korean economy are suffering. One out of four listed firms with over 1 trillion won in annual sales had an interest coverage ratio below 1.
Interest coverage ratio, which divides the interest cost by operating profit, shows the profitability of a business. A figure below 1 shows that the operating profit was not big enough to handle the interest cost of the company. The chaebul.com data showed that 22.6 percent, or 36 out of 159 companies, had a ratio below 1.
The ratio of such unprofitable businesses among 1-trillion-won companies has been increasing each year, from 17.8 percent in 2011, to 21.5 percent in 2012 and 22.6 percent last year.
Many of the construction companies, as well as shipbuilding and marine companies, recorded operating losses last year.
LG Electronics, which saw 213.9 billion won in operating loss last year, was also among the poor performers.
Analysts say that exporters were hit hard after changes in the global economic structure.
"The global economy has been changing structure after the crisis. While domestic economies are slowly recovering, the trade part isn't picking up," said Lee Geun-tae, a research fellow at LG Economic Research Institute.
"The developed countries are refraining from import to decrease debt, and thus export-led economies like Korea have been hit. That's the major reason for the conglomerates' poor performances," he said.
He added that the companies focusing on the domestic market were not good either, as the domestic economy is continuing the sluggish mood.
Murky outlook
He said the outlook isn't rosy for the Korean companies this year, either.
"While other countries are seeing their currencies weakening, the Korean won is continuing in a strengthening mode. Consumption may start to pick up in the developed countries, but trade won't expand as quickly as the effort continues there to cut back debt. It will be difficult for the Korean economy to show significant turnaround though it may not deteriorate further."
Lee added that the disaster of the sunken ferry Sewol has weighed on the domestic economy.
On top of the negative external factors, Korea Economic Research Institute research fellow Hwang In-hak pointed out that conglomerates couldn't exercise their strengths, such as quick decision-making by group owners, as some of them had to handle legal issues with the prosecution.
"The group owners used to lead the conglomerates to seek breakthrough in times of recession, such as restructuring businesses, but they couldn't come up with timely measures this time," Hwang said.
He added that even if the economic growth reaches its potential this year, it will not be very high when compared with the past.
"The president has been stressing deregulation to boost the economy, but the road to deregulation is way too bumpy. The Korean economy is at a very critical crossroads," he added.
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