Manufacturing in Crisis
According to industry sources on Feb. 10, Korean leading manufacturing companies, such as Samsung Electronics, LG Electronics and POSCO, are suffering from a continuous rise in labor costs, despite poor sales results. In particular, most manufacturing companies saw a rapid drop in sales while seeing the steady increase in payroll costs. Accordingly, labor costs have a higher share in sales.
First of all, LG Electronics posted 2.07 trillion won (US$1.73 billion) in the total amount of money paid in wages on a cumulative basis at the end of the third quarter last year. The ratio of labor costs to sales stood at 4.95 percent, up 0.52 percent point from 4.43 percent in 2014. Its net profit dropped from 707 billion won (US$590.4 million) in 2014 to 389.5 billion won (US$325.26 million) on a cumulative basis at the end of third quarter last year. It means that its payroll costs are five times higher than its net profits. Since LG Group’s affiliates has higher domestic productions than its competitors, they should pay higher costs in labor and management.
Samsung Electronics recorded 5.83 trillion won (US$4.87 billion) of total payroll costs at the end of the third quarter last year, showing a decrease of 160 billion won (133.61 million) from the same period a year earlier. However, the figure is similar to that of the previous year considering the fact that the total number of employees dropped by 1,000 from a year ago. Instead, its sales significantly decreased and the ratio of labor costs to sales slightly increased to 3.96 percent as of the end of the third quarter last year from the previous year, showing no effects from restructuring. Given the fact that Samsung Electronics generally spends the similar amount of payroll costs in the third quarter for that of the fourth quarter, the company is highly likely to spend over 10 trillion won (US$8.35 billion) for payroll costs alone last year.
An official from the electronics industry said, “The reason why Samsung Electronics has a lower ratio of labor costs to sales than LG Electronics is that Samsung has continuously increased productions in other countries, including Vietnam, and it carried out a large-scale restructuring last year, as well as the two companies’ different business results and structures.”
The situation is also similar in other companies. POSCO saw a decrease in sales and the number of its employees by 4 trillion won (US$3.34 billion) and 600, respectively. However, the total payroll costs grew rather than declining. As of the end of the third quarter last year, the ratio of labor costs to sales stood at 2.42 percent, up 0.23 percent point from a year earlier.
During the same period, sales of LG Chem fell by 2 trillion won (US$1.67 billion), while its payroll costs grew by 100 billion won (US$83.51 million). Accordingly, its ratio of labor costs to sales recorded at 5.55 percent, seeing an increase of 1.15 percent point on-year.
Hyundai Motor is also showing a growth of payroll costs every year. As the company has been hiring 2,000 new employees every year from 2013, it spent 3.62 trillion won (US$3.02 billion) of labor costs at the end of the third quarter last year. In contrast, its sales dropped by more than 1 trillion won (US$835.07 million), so the ratio of labor costs to total sales increased 0.44 percent point year on year to 5.64 percent. Securities industry sources forecast that the total payroll costs of Hyundai Motor last year would reach 6.5 trillion won to 7 trillion won (US$5.43 billion to 5.85 billion).
Business industry sources say that the increase in the share of labor costs to sales of nation’s leading companies can weaken the cost competitiveness of products, which is a main factor that makes them less competitive than Chinese companies in the global market. They also say that the sectors, which need reform in production costs, should raise overseas productions and carry out drastic restructuring for efficiency.