Samsung's Two Seasons... Mobile & Display 'Spring', Home Appliances & Semiconductors 'Winter'

Despite Record Quarterly Sales, Operating Profit Plummets
Inventory Rise Due to Global Demand Decline
"Next Year Will Also Be Difficult"... Performance Clouded by Ongoing Challenges

Photo by Yonhap News

[Asia Economy reporters Moon Chaeseok and Han Yeju] The reason Samsung Electronics' operating profit in the third quarter dropped by more than 30% compared to the same period last year is due to the global economic downturn freezing consumer demand, which caused a sharp decline in operating profits in the VD (Visual Display) and home appliances divisions as well as the DS (Semiconductor) division. The silver lining is that despite the recession, the MX (Mobile Experience) and Network division, which increased the proportion of highly profitable foldable phones, and the Display division, which boldly restructured the low-profit LCD (Liquid Crystal Display) business, performed relatively well.

The problem lies in the fourth quarter. With the dominant outlook suggesting that dramatic changes such as a sharp reduction in inventory are unlikely at least until the first half of next year, analyses are gaining traction that it will be a long time before the 'dark clouds' over Samsung Electronics' performance clear.

◆ Despite Weakness in Core Home Appliances and Semiconductors, Mobile and Display 'Hold Their Ground' = According to the finalized third-quarter earnings announced by Samsung Electronics on the 27th, the summary is 'Mobile performs well - Display holds steady - Home appliances weak - Semiconductors at their worst.'

Generally, the third quarter is known as the 'promised quarter' in the electronics industry. Large-scale year-end promotional events take place, and this year there were positive 'factors' such as the Qatar World Cup and Black Friday. However, due to the global economic recession causing demand to plummet, the expected 'rebound' did not occur.

By division, the DS division recorded sales of 23.02 trillion KRW, down 19.2% from the previous quarter, and operating profit plunged 47.8% to just 5.12 trillion KRW. The VD and home appliances division saw sales decrease by 0.5% to 14.75 trillion KRW, and operating profit dropped 30.6% to 250 billion KRW. The MX and Network division posted sales of 32.21 trillion KRW (up 9.8%) and operating profit of 3.24 trillion KRW (up 23.7%). The Display division recorded sales of 9.39 trillion KRW (up 21.8%) and operating profit of 1.98 trillion KRW (up 86.8%). The automotive division, Harman, posted sales of 3.63 trillion KRW (up 21.8%) and operating profit of 310 billion KRW (up 210%).

The biggest reason for the overall decline in performance is the increase in inventory caused by reduced demand amid the economic downturn. As major countries' monetary authorities raised interest rates to revive their economies, concerns over recession grew, leading to a drop in demand for sets (finished products) such as PCs and TVs, which was a fatal blow. As consumers tightened their wallets, inventory piled up relentlessly. According to Samsung Electronics' business report, as of June 30, the total inventory assets amounted to about 52 trillion KRW, surpassing 50 trillion KRW for the first time.

◆ MX Riding the Foldable Phone Boom, Operating Profit Up 24% QoQ Shows Resilience = The only business divisions that recorded higher sales than in the second quarter were MX and Network, and Display. In the MX division, the expansion of the foldable phone proportion raised the average selling price (ASP), which is interpreted as having reduced the decline in profitability. Despite the contraction of the global market, foldable smartphone and wearable sales performed relatively well. Samsung Electronics explained, "Due to strong sales of foldable phones, the Galaxy S series, and new wearable models, third-quarter sales increased, and despite the impact of high exchange rates, resource operation efficiency improved, securing solid profitability."

In Display, the decisive suspension of the LCD line helped defend profitability, which positively influenced the third-quarter performance results. Samsung Electronics stated, "Small and medium-sized displays benefited from increased demand due to new flagship smartphone launches such as foldables," but added, "The large display segment could not escape losses due to the weak overall TV and monitor market." They also continued facility investments worth 500 billion KRW in the third quarter and 2.1 trillion KRW cumulatively from the first to third quarters. Samsung Electronics said, "For displays, we plan to focus investments on increasing production capacity (capability) for small and medium-sized flexible products and improving production efficiency of large QD-OLED."

The VD and home appliances division, which faced difficulties due to the 'defective washing machine controversy,' is widely expected not to fully enjoy the 'second-half season' benefits. The positive scenario of increased sales and reduced inventory from big events like the Qatar World Cup and Black Friday is considered limited. Samsung Electronics said, "Although sales improved focusing on 'premium' products, market demand contraction, intensified competition, and burdens from material and logistics costs continued."

◆ Overcoming Crisis with 'Premium Devices' = Samsung Electronics believes that the key to overcoming challenges across MX, VD and home appliances, and DS divisions ultimately depends on the speed of developing 'super-gap technology,' 'premium devices,' and how well new products perform in the market.

In the MX division, the plan is to achieve a 'second Galaxy myth' with foldable phones while overcoming the crisis through new products such as wearable devices. Samsung Electronics stated, "In the fourth quarter, we will steadily increase flagship product sales through various year-end seasonal programs and expand tablet and wearable sales. Next year, we will continue a flagship-centered growth policy, target the wearable market expected to grow over 10%, and respond promptly to major overseas business expansions."

The VD and home appliances division plans to pursue a 'premiumization' strategy by expanding new products like Neo QLED and Micro LED TVs and the Bespoke premium line. Samsung Electronics said, "We will increase sales of Bespoke-centered premium products during the year-end peak season and actively utilize online channels."

Nevertheless, pessimism prevails that external conditions will remain challenging through the fourth quarter and next year. Inflation caused by macroeconomic sluggishness is not expected to subside easily. The industry diagnosis is that there is a significant possibility of a vicious cycle where high value-added sets and components such as mobile and PC fall into consecutive slumps.

A Samsung Electronics official said, "While macroeconomic uncertainties are expected to continue in 2023, some demand recovery is anticipated. The DS division plans to respond to demand for high value-added products and expand advanced processes and new applications, while the DX division will continue to strengthen premium leadership and lineup, and maximize customer experience by continuously expanding multi-device connectivity experiences based on SmartThings across mobile, TV, and home appliances."

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