Semiconductors are a core sectors both for Samsung and for South Korea as a whole. Photo: AFP / Jung Yeon-je

The world’s largest semiconductor and mobile phone maker today announced operating profits for the first quarter of 2019 of 6.2 trillion won (US$53.5 billion) – a 60% drop, year-on-year. Revenues were also down, at 52.4 trillion won ($451.9 billion) a 13.5% drop from the same period last year.

Quarter-to-quarter results were also markedly down: In the fourth quarter of 2019, Samsung recorded 10.8 trillion won in operating profits and 59.3 trillion won in revenues.

Even so, the weak results had been widely expected, given the cyclical downturn in the global semiconductor sector, Samsung’s core business.

No surprises

Samsung’s results are in line with its earnings guidance released early this month of sales of about 52 trillion won and operating profits of about 6.2 trillion won.

“The semiconductor business suffered from a drop in memory chip prices as inventory adjustments continued at datacenter companies, while demand for high-density memory for mobile phones increased thanks to new flagship smartphones,” Samsung said in a statement. “Earnings improved at the System LSI and Foundry business over the sales of smartphone application processors.”

Samsung recently announced its plan to invest 133 trillion won in non-memory chip sectors such as System LSI, smartphone processors, and foundry business in an attempt to diversify its business spectrum, which is currently concentrated in the volatile memory chip business.

Its display panel business also reported a loss in the first quarter, Samsung said.

The company’s outlook is more mixed at the consumer end, with both positive and negative factors surrounding its latest smartphones.

Memory up

Samsung expects the overall memory chip market to remain sluggish in the second quarter due to weak seasonality. However, a gradual recovery in demand for servers and NAND chips is expected to begin in the second quarter

“For NAND, demand for high-density server Solid State Drives (SSD) is expected to increase,” the company said. “For DRAM, server demand will likely improve among datacenter companies with lower inventory levels, starting from the end of the second quarter. PC demand is seen increasing, while high-density adoption in new smartphone models is set to help demand for mobile DRAM.”

Samsung’s core semiconductor business posted 4.12 trillion won in operating profits among total operating profits of 6.2 trillion won, showing how critical memory chip prices are to its overall business.

The company forecast that its second quarter results will improve slightly as demand for image sensors and recently launched 5G chipsets, as well as DRAM and NAND, is expected to rise.

“Demand for high-density products for servers and mobile products are likely to be solid due to expanded adoption of new CPUs in servers, and trends toward high-density in mobile,” the company noted.

Samsung is not alone in is reliance upon electronic components sales: Chips and displays are core sectors for South Korea as a whole.

“Most experts do not see the recent fall in chip prices lasting long as chip prices are likely to recover in the second half of this year,” Korea Institute for Industrial Economics & Trade, a government-run think, tank wrote in a report issued April 26. “What matters is when inventory adjustments finish, but the price falls will not continue next year.”

Phone uncertainties

Samsung noted that “earnings were weighed down by weakness in memory chips and displays,” but added, ‘”the newly launched Galaxy S10 smartphone logged solid sales.”

The company scored a free public relations boost when its S10 was the first commercially available model to run on Korea’s 5G networks – the first such networks to roll out worldwide.

However, there are clouds hanging over its hugely anticipated foldable model – essentially, a hybrid smartphone and tablet computer.

A fault was found with the Galaxy Fold during pre-launch reviews: When reviewers eliminated a film that covers the foldable display, the display malfunctioned. Samsung said in a conference call that they would find a solution for this problem and re-announce a future launch date.

The phone is not expected to be a major earner: The plan is only to sell 1 million units a year (among the company’s annual phone sales of 300 million units). An industry expert told Asia Times: “The Galaxy fold is more like a symbolic product to boast the company’s technological excellence rather than to boost earnings.”

Even so, at a time when industry leaders like Samsung and Apple are struggling to set themselves apart in an increasingly crowded mobile market, and with lower-cost Chinese brands closing the technology gap, the indefinite delay in the Fold’s roll-out raises questions.

And Samsung is likely to move with prudence, given its recent experience of crises. The company’s mobile arm suffered a global embarrassment in 2016, when it was found that its Galaxy 7 batteries were igniting.

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