Large Corporations Face 'Critical Alert' Over Excessive Inventory... Lowering Operating Rates to Protect Profitability (Comprehensive)

Demand Decline and Price Drop Double Whammy
Struggling with Reduced Production and Investment

Experts: "Even After Inventory Depletion, Product Value Falls Below Manufacturing Cost... Profit Margin Decline Inevitable"

Samsung Electronics Seocho Building, Seocho-gu, Seoul. (Image source=Yonhap News)

[Asia Economy Reporter Moon Chaeseok] Due to consumption contraction caused by concerns over economic recession and inflation (rising prices), Samsung Electronics, SK Hynix, and LG Electronics have reportedly buried inventory assets exceeding 83 trillion won in their warehouses through the third quarter of this year.

With the combined effects of global demand decline and price drops, companies are making desperate efforts to reduce 'bad inventory' that does not sell by cutting production and investment. However, there are concerns that if companies raise product prices to cover losses, it could suppress consumption again and lead to a vicious cycle of economic contraction.

Inventory Assets Increase and Sales Reflection Delay

According to the quarterly reports submitted to the Financial Supervisory Service on the 16th, the total inventory assets of Samsung Electronics, SK Hynix, and LG Electronics at the end of the third quarter reached 83.1919 trillion won.

Samsung Electronics recorded 57.3198 trillion won, a 10.0% increase compared to the first half of the year (end of June). In particular, inventory in the semiconductor division (DS) rose by 22.6% to 26.3652 trillion won during the same period. SK Hynix increased by 23.5% to 14.665 trillion won, and LG Electronics rose by 15.7% to 11.2071 trillion won.

As inventory levels rose, the inventory turnover days also decreased. A lower inventory turnover days figure means it takes longer for inventory to convert into sales.

Samsung Electronics’ inventory turnover was 3.8 times at the end of the third quarter, down 0.7 times from 4.5 times at the end of last year. During the same period, SK Hynix decreased from 3.2 to 2.4 times, and LG Electronics from 6.5 to 6.1 times. The proportion of inventory assets in total assets also rose: Samsung Electronics from 9.7% at the end of last year to 12.2% in the third quarter, up 2.5 percentage points; SK Hynix from 9.3% to 13.4%, up 4.1 percentage points; and LG Electronics from 18.2% to 18.3%, up 0.1 percentage points.

Complex Crisis in Sets and Components... Struggling to Defend Profit Margins

Major companies are striving to reduce the sharp increase in 'bad inventory' in the third quarter by lowering factory operating rates to minimize the decline in profitability. The inventory risk caused by demand slowdown could become a trigger that determines this year's performance. Although they are making all-out efforts such as reducing production and investment, finding a solution is not easy. As inventory levels of key products directly linked to profits worsened in the fourth quarter, concerns are rising that the business environment for companies next year could deteriorate more than expected.

The major set and component companies of the three major groups?Samsung Electronics, SK Hynix, and LG Electronics?received the worst management indicators as of the third quarter: 'increased inventory assets and proportion - decreased inventory turnover days.' Except for Samsung Electro-Mechanics, which slightly reduced its inventory proportion from 18.3% at the end of last year to 17.2% at the end of the third quarter, no positive indicators stand out.

In particular, the dramatic drop in factory operating rates shows how desperately companies are managing inventory and defending profitability. Most business divisions have factory operating rates below 100%, meaning actual production volume is less than production capacity, which is interpreted as a negative management signal. Although component suppliers do not exclusively trade with Samsung and LG’s set companies, 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 decreased. 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 dropped to 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. This is the lowest level since the first disclosure in 2010. 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.

Component suppliers are also struggling. Samsung Electro-Mechanics’ component (MLCC and others) division’s operating rate was 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 and is a major revenue source, also saw a similar trend. Its operating rate was 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.

Semiconductors with '100% Operating Rate' Also in Crisis... "Difficult Until First Half of Next Year"

SK Hynix, which maintains a '100% operating rate,' is not free from the bad inventory problem. Semiconductor companies are not exempt from the risk of demand decline in 'mobile' and 'PC' products, which is also a concern for set companies. There are reports that customers have started adjusting inventory of high-value server memory, which continues to pressure market conditions and prices. While Samsung Electronics declared "no artificial production cuts" and there is some expectation that it may have plans to increase market dominance based on high cost competitiveness, SK Hynix has announced plans to reduce investment and has yet to find clear momentum.

With both set and component companies receiving the worst results of 'inventory surge and operating rate plunge' in the third quarter, concerns are growing that the recession has swept across the entire electronics industry. Seo Byunghoon, Vice President and Head of IR at Samsung Electronics, said during the recent third-quarter earnings conference call, "Global IT demand weakness and memory (semiconductor) market downturn are expected to continue in the fourth quarter," adding, "The DX division (including home appliances) will continue efforts to secure profitability."

Experts believe that even if companies try to clear inventory after economic recovery, it will be difficult to fully realize profits as the value of products may fall below the manufacturing cost set at the time of production.

Professor Kim Yongjin of Sogang University’s Department of Business Administration said, "If technology advances while accumulated inventory is being sold, causing the product value to fall below the manufacturing cost at the time of production, companies’ profit margins could significantly decrease," adding, "Since the U.S. Federal Reserve (Fed) is expected to raise interest rates once or twice around the first half of next year, the risk of economic recession is likely to continue, making it difficult for companies to overcome the inventory management crisis through their own efforts alone at least until then."

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