On average, global leaders in each industry have a net income margin 2.5 times higher than leading Korean companies
EBIT Margin: Top global companies 19.2% > Top Korean companies 9.5% (2x)
- Main reason: Burden of SG&A and R&D expenses
Net Income Margin: Top global companies 15.4% > Top Korean companies 6.3% (2.5x)
Main reason: Burden of interest expense and corporate tax expense
Semiconductors Net Income Margin: Top global company 36.2% > Top Korean company 5.0% (7.3x higher, largest gap among major industries)
The Federation of Korean Industries (FKI) analyzed the business performance of the top Korean companies and the top global companies in each industry and found that the average net income margin of the global companies with the largest market capitalization (15.4%) was 2.5 times that of the top Korean companies (6.3%).
Top global firm’s EBIT margin (19.2%), 2 times that of top Korean firm’s (9.5%)
When analyzing profitability (profit as a percentage of revenue), the gap between the top global firms and the top Korean firms was mainly seen in terms of EBIT margin (earnings before interest and taxes). The average gross margin of the global leaders (44.7%) was 1.1 times that of the Korean leaders (40.6%), while the average EBIT margin of the global leaders (19.2%) was 2 times that of the Korean leaders (9.5%).
Given that EBIT is a metric that subtracts operating expenses such as SG&A and R&D expenses from gross profit, FKI deducted that the gap in profitability between the top global firms and the top Korean firms is mainly due to these expenses.
The average net income margin of the top global companies was 15.4% in 2022, compared to 6.3% of the top Korean companies, a difference of 2.5 times. In particular, the average net income margin of the top global companies in 2012 (10.5%) increased by 4.9 percentage points over 10 years, while the average net income margin of the top Korean companies in 2012 (5.8%) increased by 0.5 percentage points over 10 years, widening the net income margin gap from 1.8 times in 2012 to 2.5 times in 2022.
Given that net income margin is a metric of EBIT minus interest expense and tax expense, FKI estimates that the interest and tax burden of the top Korean companies has increased over the past decade compared to the top global companies.
When looking at stability (the ratio of leverage to assets), the top global companies had an average debt-to-equity (D/E) ratio 1.6 times that of the top Korean companies and an average current ratio 0.8 times that of the Korean companies, indicating that the top global companies utilize more short- and long-term leverage. In terms of liquidity (the speed at which assets are converted to cash), the global leading companies had an average accounts receivable turnover ratio 0.9 times that of the Korean leading companies and an average inventory turnover ratio 1.0 times that of the Korean companies, indicating that the speed at which inventory is converted to cash is relatively similar.
Compared to in 2012, the short- and long-term solvency of top Korean companies relative to top global companies had increased in 2022. The average debt-to-equity ratio of the top Korean companies in 2022 had decreased by 12.4 percentage points from 2012 (68.6% to 56.2%), while the top global companies’ debt-to-equity had decreased by only 2.5 percentage points (91.4% to 88.9%), indicating that the top Korean companies are less reliant on other sources of capital. In addition, the average liquidity ratio of the top Korean firms had increased by 10.2 percentage points (185.9% to 196.1%), while the average liquidity ratio of the top global firms had decreased by 6.8 percentage points (171.3% to 164.5%), indicating a relative increase in the short-term solvency of the top Korean firms.
Leading companies in the semiconductor industry had the largest net income margin gap (7.3 times)
The industrials, materials, and energy sectors1 showed lower profitability than other sectors, as the top Korean companies in these industries had larger expenses compared to revenue than the top global companies.
In the industrials sector, the gap was large in terms of the average net income margin (3.4 times), which is estimated to be due to the relatively high corporate tax and interest expense burden for the top Korean company, according to the FKI. In the materials sector, the gap in the average gross margin (2.3 times) was large, indicating that the burden of COGS, which is related to gross profit (revenue - COGS), is relatively high in Korea. In the case of the energy sector, the average gross margin (3.6x), EBIT margin (3.7x), and net income margin (3.7x) all showed a large gap, indicating that the overall cost burden was large for the top Korean company.
Based on a one-to-one comparison of the top global companies and the top Korean companies in Korea's major industries2, it was found that profitability is low in major industries such as semiconductors, electronics, home appliances, automobiles, and petroleum products. In particular, in semiconductors, the net income margin of the top global company (36.2%) was 7.3 times that of the top Korean company (5.0%), indicating that the corporate tax and interest expense burden of the top Korean company is relatively high.
Need to introduce measures for increasing profitability to compete in the global market
"It is difficult for Korean companies to compete, as can be seen when the top companies in Korea are less than half as profitable as the top companies in the world," said Sang-ho Lee, Vice President of the FKI’s Economic and Industrial Research Department. "Support measures such as corporate tax reductions and investment and R&D incentives need to be increased to help Korean companies secure profitability and gain an edge over global companies."
[Attached] Global Industry Classification Standard (GICS) Overview
