Korean chip equipment SMEs’ cost structure at risk

[Photo by MK DB]

Alarm bells are ringing for the cost structures of small and medium-sized enterprises (SMEs) in the semiconductor equipment sector, a vital component of the South Korean economy. An analysis by the Maeil Business Newspaper and the Maekyung Cost Reduction Center reveals that 25 percent of the 324 surveyed semiconductor equipment manufacturers urgently need to improve their cost structures. These companies are classified under the Korea Standard Industry Code (KSIC) and are required to undergo external audits.

The Corporate Efficiency Index (CEI), developed by the Maekyung Cost Reduction Center, evaluates companies based on four cost indicators: operating expenses, non-operating expenses, research and development expenses, and borrowing costs. These indicators are benchmarked against the top 10 percent of companies in the industry, with a standard score of 100. Scores below 100 are categorized as ‘A (very good)’ or ‘B (good)’, while scores above 100 are classified as ‘C (moderate)’, ‘D (poor)’, and ‘F (very poor)’. The analysis revealed that 19.4 percent of the surveyed companies were rated ‘D’ and 5.3 percent were rated ‘F’.

Sector leaders, including Nextin, Nanotech, and Daeil Systems, have an average cost-to-revenue ratio of 53.1 percent. In contrast, ‘C’ grade companies have a ratio of 74.1 percent, ‘D’ grade companies 84 percent, and ‘F’ grade companies 109 percent. This indicates that companies in the ‘D’ and ‘F’ categories have cost ratios that are around 50 percent higher than their competitors, which underscores the urgent need for cost management.

“Companies rated ‘C’ to ‘F’ on the CEI have many areas for improvement compared to the top 10 percent in terms of operating profit margin. Even companies rated ‘B’ can find opportunities for cost reduction,” according to the Maekyung Cost Reduction Center. “The CEI not only helps us identify whether costs are well managed but also pinpoints specific areas where improvements are needed.”

A similar analysis of SMEs in the display machinery manufacturing industry showed comparable results. Among the 80 companies surveyed, 76.3 percent were rated ‘C’, 3.8 percent ‘D’, and 12.5 percent ‘F’. The cost item analysis results were also similar to those of semiconductor equipment manufacturers.

Many companies have significantly improved their competitiveness via cost reduction. An SME in the electronic components industry, referred to as Company B, spent 3.2 billion won annually on PVC boxes to protect sensitive power parts. After undergoing cost reduction consulting, the company managed to reduce this expense by about 5 percent. “We were able to effectively increase profitability by reducing costs, which was especially important during an economic downturn. We realized that unexpected cost waste could significantly impact corporate performance,” a company official said.

The Maeil Business Newspaper and the Maekyung Cost Reduction Center plan to publish CEI reports for various industries on a regular basis. They will also provide cost efficiency analysis reports to help companies systematically manage their cost structures.

The Maekyung Cost Reduction Center was established in 2015 in collaboration with the Maeil Business Newspaper and cost-cutting consultancy Cost Zero to support SMEs and mid-sized companies that lack efficient cost management know-how.