Tech Companies Rise Amid COVID-19, Global Antitrust Regulations Strengthen
Profit Margins Soar, but Cash Holdings Increase Only
Wage Growth Slows... Job Creation Effects Decline
Some Argue Ample Liquidity Prevented Economic Crisis
[Asia Economy Reporter Kim Suhwan] The combined market capitalization of the world's top 50 companies by market cap reached 30% of the global GDP as of last year. Operating profit margins and cash holdings also increased significantly, while the effective tax rate continued to decline. The non-face-to-face society brought about by COVID-19 further accelerated the growth of big tech companies, but there is criticism that the proportion of profits reinvested back into society remains small.
Big Tech Companies Revived by COVID-19
Last year, the increase in market capitalization of the top 50 companies reached $4.5 trillion. The total market capitalization of these companies amounted to $24.5 trillion, accounting for 28% of the global GDP ($84 trillion) last year. Considering that about 30 years ago, the top 50 companies' market capitalization accounted for only 5% of the global GDP, the growth of these large companies is becoming more prominent, and the asset gap with other companies is widening.
Additionally, as social distancing policies were implemented worldwide due to COVID-19 last year, the profitability of big tech companies possessing technologies capable of responding to the non-face-to-face society was greatly enhanced. According to Bloomberg News, the average operating profit margin relative to sales of the top 50 companies by market cap was 7% in 1990, but it surged nearly threefold to 18% last year over 30 years. Video conferencing programs like Google Meet and Microsoft Teams, cloud services such as Amazon Cloud and Apple Online Services, became essential tools connecting people in the non-face-to-face era. Consequently, the market capitalization of Google’s parent company Alphabet, Microsoft, Amazon, and Apple increased by more than $2 trillion last year alone.
In particular, e-commerce companies like Amazon showed remarkable sales growth, with Amazon’s operating profit rising 84% year-on-year last year. According to the U.S. Federal Reserve (Fed), the share of e-commerce companies in total U.S. retail sales increased by 5 percentage points from March to July last year, matching the growth rate of the past five years.
These companies benefited not only from the non-face-to-face trend but also from large-scale quantitative easing policies and low-interest rate environments implemented by governments aiming for economic recovery after the COVID-19 pandemic. On the other hand, support policies targeting small business owners and SMEs mostly consisted of temporary cash assistance, resulting in these businesses not benefiting from economic policies and experiencing deteriorating profitability. Bloomberg News explained that policies aimed at minimizing economic damage widened the gap between large corporations and SMEs.
Biden Draws Antitrust Regulation Sword Amid Big Tech’s Rapid Growth
In response to the issue of asset polarization, the Biden administration has announced plans to raise the corporate tax rate from the current 21% to 28%. This reflects the judgment that pro-business policies such as corporate tax cuts under the previous Donald Trump administration did not produce the desired effects.
In fact, the tax burden borne by large corporations has been steadily decreasing. According to Bloomberg News, the effective tax rate of the top 50 companies by market cap was 35% in 1990 but dropped to 17% last year.
Moreover, the Biden administration plans to crack down firmly on profit-shifting practices, where companies transfer income generated in certain countries to others with lower corporate tax rates to reduce tax payments. According to a 2019 International Monetary Fund (IMF) study, up to 40% of foreign direct investment in a country is so-called ‘phantom investment,’ unrelated to local economic activities. This suggests suspicion that revenues generated in other countries were shifted to reduce taxes.
Rina Khan, Nominee for Commissioner of the U.S. Federal Trade Commission (FTC) [Image source=EPA Yonhap News]
Looking at the cabinet members recently appointed or nominated by President Biden, this policy stance is reaffirmed. The Biden administration previously nominated Lina Khan, a well-known antitrust expert dubbed the ‘Amazon sniper,’ as a commissioner of the U.S. Federal Trade Commission (FTC). In a 2017 report, she strongly criticized Amazon’s anti-competitive behavior, stating that Amazon pursued aggressive low-price policies to eliminate all competitors.
Additionally, President Biden nominated Tim Wu, a Columbia Law School professor, as a member of the National Economic Council (NEC), the key organization advising economic policy at the White House. Wu has also criticized corporate monopolistic behavior and argued that if necessary, companies should be forcibly broken up under U.S. antitrust laws.
Especially, regulators are concerned that big tech companies collect vast amounts of personal data, influencing consumers’ lives in many ways. Currently, the FTC is pushing for the forced breakup of Facebook and Instagram, and the U.S. Department of Justice has filed an antitrust lawsuit against Alphabet, Google’s parent company.
The regulatory stance toward big tech companies is similar in Europe. The European Union (EU) is currently discussing a policy to impose taxes on Amazon, Alphabet, and others based on the location where services are provided rather than where sales revenue is generated. This is interpreted as a strong intention to actively block profit-shifting practices by these companies.
"Big Corporations Grew Rapidly Due to COVID-19 but Reduced Employment Investment" VS "Abundant Liquidity Saved the Economy from Crisis"
It is also noteworthy that the trickle-down effect from companies that rapidly grew benefiting from COVID-19 appears relatively small. Bloomberg News reported that IBM, the top company by market cap in 1990, invested 9% of its sales in capital investments such as hiring new employees, whereas Apple, the top company by market cap last year, invested only 3% in capital expenditures.
Despite lower effective tax rates and higher operating profit margins, investment in employment has decreased, shaking the credibility of claims that tax cuts lead to economic growth and job creation, Bloomberg News analyzed.
While companies’ cash holdings are increasing, they have sufficient capacity to invest in facilities and employment, but this is not translating into actual investments. Last year, the cash holdings of the top 50 companies by market cap reached $1.8 trillion, with a cash-to-capital expenditure ratio of 355%, sharply rising from 120% in 2010.
On the other hand, there is a counterargument that this situation should not be simply viewed as a failure of the trickle-down effect. According to Refinitiv data, investor funds injected into capital markets last year exceeded $11 trillion, the highest ever, which is more than 15 times the $709 billion in 1990.
The Wall Street Journal (WSJ) reported, “Almost all asset classes in the capital markets exploded in growth triggered by COVID-19,” and “It was able to save most companies facing bankruptcy due to sales shocks, such as cruise and tourism industries, aircraft manufacturers, and automobile manufacturers.” This means that abundant liquidity generated by COVID-19 benefited not only big tech companies but also industries severely hit in sales, injecting funds and achieving growth across the economy.
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