Samsung Electronics, Semiconductors Led the Way... IT Demand Uncertain in H2 (Comprehensive 2)

Russia-Ukraine War, Supply Chain, Inflation Amid Major Adversities, Strong Performance
Key Contributor is Semiconductors... Offset Weakness in Phones and Home Appliances
Bleak Outlook for Second Half... Possible Contraction in Memory Semiconductor Market

[Asia Economy Reporters Sunmi Park and Minyoung Cha] The key driver behind Samsung Electronics' record-breaking sales in the second quarter this year was its semiconductor business. While the set divisions such as smartphones and home appliances were hampered by global inflation and economic downturn leading to weakened consumer sentiment, the solid performance of the semiconductor sector offset these challenges.

Despite the record-high performance in the first half of the year, Samsung Electronics' outlook remains cautious. This is due to the bleak forecast that the memory semiconductor market, the company's core business, may experience negative growth starting in the second half. Industry experts say that Samsung's performance this year will largely depend on how well it can manage a high-value-added portfolio within the semiconductor division.

◆Economic Barometer: Weakness in Set Divisions like Smartphones and Home Appliances=According to Samsung Electronics' finalized second-quarter earnings announced on the 28th, among all business units including Visual Display (VD) & Home Appliances, MX (Mobile Experience) & Networks, Semiconductors, and Displays, the semiconductor division was the only one to improve on the record results posted in the first quarter.

The MX & Networks division, which handles the smartphone business, was particularly hard hit. Operating profit in the second quarter dropped nearly 20% year-on-year due to sluggish smartphone sales and increased costs. The division faced a double whammy of rising expenses caused by the Russia-Ukraine war and US interest rate hikes, alongside weakened consumer purchasing power. During the second-quarter earnings conference call, Samsung Electronics disclosed that smartphone sales reached 62 million units, roughly in line with the securities firms' estimate of 60 million units. Typically, the second quarter is an off-season due to the absence of new product launches, compounded this year by a global market downturn. The network division fared somewhat better, supported by the early growth of overseas 5G markets.

In the VD & Home Appliances division, second-quarter sales amounted to 14.83 trillion KRW, a decrease of 640 billion KRW from the first quarter, while operating profit fell to less than half of the 800 billion KRW recorded in the first quarter. Although the global expansion of Bespoke home appliances and the peak air conditioner season helped achieve the highest quarterly sales for the division, rising material and logistics costs worsened profitability. The display division struggled due to the initial costs of QD displays and falling LCD panel prices affecting large panels. Samsung Electronics explained that the set division's weaker performance compared to the first quarter was due to overlapping macroeconomic issues such as increased material and logistics costs and adverse currency effects.

In contrast, the semiconductor division led Samsung Electronics' overall performance by setting new records in both sales and operating profit across all areas. The memory segment improved results compared to the previous quarter and the same period last year through proactive market forecasting to meet steady server demand, maintaining prices with a profitability-focused sales strategy, and benefiting from a strong dollar. The system semiconductor segment saw a 61% increase in profits quarter-on-quarter, driven by expanded sales of mass-market SoCs (System on Chips) and DDIs (Display Driver ICs), as well as the normalization of advanced foundry process yields through increased supply to global customers. Additionally, by the end of June, Samsung achieved the world's first mass production of the 3nm GAA process and supplied 200-megapixel image sensors, further strengthening its technological competitiveness.

◆Continued Uncertainty in Semiconductors in the Second Half=Samsung Electronics expects ongoing uncertainty in the macroeconomic environment in the second half of the year. Particularly for memory semiconductors, even if server demand continues, the segment is likely to be impacted by weak mobile and PC demand due to macroeconomic factors. Market research firm Gartner forecasts that the global semiconductor market revenue will decline by 2.5% next year to $623.087 billion compared to this year.

Jinman Han, Vice President of Samsung Electronics' Semiconductor (Memory Business Unit), stated during the conference call, "Samsung plans to closely monitor demand impacts such as major customers' mobile new product launches as part of its memory market response strategy in the second half, focusing on operating a portfolio centered on high value-added and high-capacity products." Samsung also intends to continuously strengthen its technological competitiveness by expanding mass-market SoC business in the System LSI division and concentrating on developing the second-generation GAA process in the foundry division. Furthermore, the company aims to achieve above-market growth by expanding its base of new global customers.

In the mobile division, due to market and geopolitical instability and economic downturn risks, the outlook for the second half?despite being a peak season?is to maintain performance at around last year's level. To overcome challenges, Samsung plans to leverage global partnerships to provide differentiated consumer experiences, aiming to popularize foldable phones by generating sales exceeding those of the Galaxy Note series. The company also plans to successfully launch new wearable products to expand the Galaxy ecosystem and enhance overall operational efficiency.

For the TV and home appliance divisions, which face uncertainties due to global consumption slowdown, Samsung plans to focus on premium products. In TVs, it will expand sales of Neo QLED, large-size, and lifestyle strategic products to secure the premium market during the peak season. In home appliances, the company will increase premium product sales, strengthen B2B and online channels, and focus on cost reduction to improve profitability.

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