'Samsung and LG in the "Recession Swamp": Lowering Operating Rates of Both Sets and Components to Defend Profitability'

Suggesting Production Adjustment Considering Inventory Status
Worst Case Scenario: Product Price Increase → Demand Decrease 'Domino' Concern

[Image source=Yonhap News]

[Asia Economy Reporter Moon Chaeseok] In the third quarter, major companies are struggling to minimize the decline in profitability by lowering factory operating rates to handle the surge in inventory. Due to the prolonged Russia-Ukraine war and the strong protectionism between the US and China, inventories accumulated for supply chain management have sharply increased amid global inflation-driven consumption decline and recession concerns. The downward adjustment of operating rates is spreading like wildfire not only among set (finished product) companies but also among component suppliers.

According to Samsung Electronics' quarterly report submitted to the Financial Supervisory Service on the 16th, as of the end of the third quarter (end of September), Samsung Electronics' inventory assets totaled 57.3198 trillion KRW, a 10% increase from 52.0922 trillion KRW at the end of the first half. This means an increase of over 5 trillion KRW in just three months. The inventory turnover ratio decreased from 4.5 times at the end of last year to 3.8 times at the end of the third quarter this year. This figure is calculated by dividing the cost of goods sold by the average inventory (average of beginning and ending inventory), and a lower number means the speed at which inventory assets turn into sales is slower. The proportion of inventory assets in total assets rose from 9.7% to 12.2% during the same period.

During the same period, LG Electronics' inventory assets increased by 15.7% from 9.6844 trillion KRW at the end of the previous quarter to 11.2071 trillion KRW. The inventory turnover ratio decreased from 6.5 times at the end of last year to 5.8 times at the end of the third quarter, and the inventory proportion slightly expanded from 18.2% to 18.3%. Major component companies of both groups, such as LG Display, Samsung Electro-Mechanics, and LG Innotek, also generally showed an increase in inventory assets and proportions, with a decrease in turnover days. The only notable exception was Samsung Electro-Mechanics, whose inventory proportion slightly decreased from 18.3% at the end of last year to 17.2% at the end of the third quarter.

What is noteworthy is that both Samsung and LG have factory operating rates below 100%, regardless of whether they are set or component companies. An operating rate below 100% means that actual production volume is less than production capacity, which is interpreted as a negative management signal. This indicates that demand for the company's products is low, so they produce less than their capacity. Although component suppliers do not exclusively trade with Samsung and LG set companies, making a perfect match difficult, generally, when set companies raise or lower their operating rates, component suppliers tend to follow suit.

For set companies, operating rates for TVs and mobile phones have significantly declined. Samsung Electronics' DX (Device Experience) division's 'Video Devices' operating rate was 75.4% in the third quarter, slightly higher than 74.4% in the first half but 3.7 percentage points lower than 79.1% in the same period last year. The 'Mobile Devices (HHP)' operating rate was 72.2%, down 3.3 percentage points from 75.5% in the first half and 8.1 percentage points from 80.3% in the third quarter last year.

LG Electronics' HE (Home Entertainment) division's 'Video Devices' operating rate was 81.9% in the third quarter, higher than 80.4% in the first half but 14.5 percentage points lower than 96.4% in the third quarter last year. The H&A (Home Appliance & Air Solution) division showed similar figures. Even excluding seasonal refrigerators and air conditioners, the washing machine operating rate was 88% in the third quarter, down 1.5 percentage points from 89.5% in the first half and 16.5 percentage points from 105% in the third quarter last year.

As the operating rate of set companies' mobile phones declined, component suppliers showed a similar trend. Samsung Electro-Mechanics' component division, which produces major revenue sources such as multilayer ceramic capacitors (MLCC), had an operating rate of 65% in the third quarter, down 9 percentage points from 74% in the first half and 30 percentage points from 95% in the same period last year. LG Innotek's Optical Solutions division, which produces camera modules, showed a similar pattern. It recorded 53.4% in the third quarter, slightly up from 50.9% in the first half but 7.4 percentage points lower than 60.8% in the same period last year.

With both set and component companies accepting the worst performance of 'inventory surge and operating rate plunge' in the third quarter, concerns are rising that the recession has swept across the entire electronics industry. Executives of these companies left unanimous messages of 'conservative management' and 'crisis overcoming' during the third quarter earnings conference calls.

Specifically, they said: ▲ "We will defend profitability as the macroeconomic situation remains difficult in the fourth quarter" (Lee Jeonghee, LG Electronics HE Management Control Executive Director) ▲ "We will boldly adjust production volume in line with inventory reduction and prioritize restoring financial soundness" (Kim Seonghyun, LG Display CFO Executive Director) ▲ "We will expand applications focusing on high-value-added MLCC products in IT and automotive sectors" (Kim Wontaek, Samsung Electro-Mechanics Sales Team Leader Vice President).

There is also a view that in the worst case, a vicious cycle could occur where product prices are pushed up, causing a decrease in consumer demand. Kim Ikwon, LG Electronics H&A Management Control Executive Director, said during the third quarter conference call, "Our company is measuring payment value by comprehensively considering market, demand, and inventory, and plans to continue attempts to raise prices within an appropriate range, focusing on premium home appliances, considering market conditions." He added, "When selecting product groups, regions, and timing for price increases, we primarily measure and implement prices when new designs or functions are applied or upgraded products are launched."

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