Samsung Electronics "The Real Crisis Is in Q2, Cannot Guarantee Semiconductor Performance" (Comprehensive)

[Asia Economy Reporters Changhwan Lee and Jinju Han] Samsung Electronics' first-quarter performance exceeding market expectations was due to solid business results in its core sectors such as semiconductors and smartphones despite challenging management conditions.

However, the second quarter, when the impact of the novel coronavirus disease (COVID-19) fully materializes, is expected to see a decline in performance. As COVID-19 has caused a sharp consumption slump in major markets like the United States and Europe, set businesses including smartphones and TVs are anticipated to suffer significant setbacks.

◆Strong performance surpassing expectations in semiconductors and smartphones= The most notable feature of Samsung Electronics' first-quarter results announced on the 29th is that its core businesses, including semiconductors and smartphones, outperformed market expectations.

The DS (Device Solutions) division, responsible for the semiconductor business, recorded sales of 24.13 trillion KRW and an operating profit of 3.72 trillion KRW in the first quarter. Compared to the previous year, sales and operating profit increased by 17% and 5%, respectively.

The global rise in demand for non-face-to-face services such as remote work, online meetings, and online lectures due to COVID-19 led to increased use of servers and PCs, boosting memory semiconductor sales. The continued upward trend in semiconductor prices also contributed to improved performance.

According to market research firm DRAMeXchange, the fixed transaction price of DDR4 8-gigabit (Gb) DRAM products, mainly used in PCs, averaged $2.94 in March, up 2.1% from February. DRAM prices have been rising for three consecutive months since January.

NH Investment & Securities analyst Doh Hyun-woo explained, "The increase in data center investments driven by rising demand for remote work and online education due to COVID-19 has influenced the growth in semiconductor demand."

The IM (IT & Mobile) division, responsible for smartphones, also performed relatively well. The IM division posted sales of 26 trillion KRW and an operating profit of 2.65 trillion KRW in the first quarter. While sales decreased by 1.2 trillion KRW compared to the same period last year, operating profit increased by 380 billion KRW.

Smartphone sales in the first quarter declined compared to the previous quarter due to COVID-19, but profits increased as marketing expenses were reduced. The drop in first-quarter smartphone sales was largely due to the poor performance of the Galaxy S20. Early sales of the Galaxy S20 reached only 50% of its predecessor (Galaxy S10), or about 80% including unlocked units.

However, home appliances and displays underperformed. The CE (Consumer Electronics) division recorded sales of 10.3 trillion KRW and an operating profit of 450 billion KRW. Compared to the previous year, sales fell by 6% and operating profit by 13%. Sales of home appliances declined due to the off-season and the impact of COVID-19, leading to reduced performance. Nonetheless, sales of new premium home appliances such as the Grande AI (Artificial Intelligence) washing machines and dryers showed strong growth. The Display (DP) division posted an operating loss of 290 billion KRW, heavily affected by decreased sales in China due to COVID-19.

◆The real crisis begins after the second quarter= Despite Samsung Electronics delivering relatively strong first-quarter results amid difficult management conditions, the real crisis is just beginning. Set businesses directly affected by consumption contraction, such as smartphones, TVs, and home appliances, are expected to experience significant downturns.

The financial investment industry estimates second-quarter smartphone sales to drop by more than 15 million units year-on-year to 60 million units. Samsung Electronics plans to release mid-range phones Galaxy A31, A51 5G, and A71 5G domestically in May.

This strategy aims to compensate for flagship sluggishness domestically and internationally with mid-range smartphones featuring key functions such as quad cameras, large screens, and high-capacity batteries. The Galaxy A series will also be launched in the U.S. and Japan, where 5G is commercialized, to increase market share.

Competition among companies to offset poor sales is expected to intensify. The industry forecasts that smartphone sales this year will hit the lowest level in the past decade, with Samsung Electronics' annual smartphone sales expected to be around 250 million units.

TV sales are also predicted to decline inevitably due to consumption contraction caused by COVID-19 and the postponement of major sports events such as the Olympics and Euro 2020.

The semiconductor business is expected to hold up relatively well after the second quarter. Although there is a risk of declining mobile semiconductor demand due to reduced smartphone sales, sustained demand for servers and PCs is expected to maintain overall solid performance.

However, the widening gap with global semiconductor companies Intel and TSMC in the first quarter is a concern. Intel posted an operating profit of $7 billion (8.5 trillion KRW) in the first quarter, twice that of Samsung Electronics' semiconductor division, and TSMC also recorded an operating profit of 128.5 billion Taiwan dollars (5.2 trillion KRW), outperforming Samsung. The prolonged COVID-19 pandemic could negatively impact the semiconductor market, which is another area of concern.

Semiconductor market research firm IC Insights forecasts the global semiconductor market size to shrink by 4% to $345.8 billion this year compared to the previous year, analyzing that ongoing COVID-19 will cause demand weakness in the semiconductor market.

A Samsung Electronics official stated, "Since last month, COVID-19 has spread globally in earnest, causing production halts at some facilities, disruptions in distribution and supply chains, and closures of offline stores, leading to production and sales setbacks and demand contraction. Accordingly, the second quarter is expected to face difficulties centered on the set business, and uncertainty remains high in the second half of the year."

This content was produced with the assistance of AI translation services.