Samsung Electronics Faces Growing Deficit Crisis in Q2... Internal Preparations for Losses Underway

Limitations of the Absence of a Control Tower

Samsung Electronics, which has formalized emergency management and started cost-cutting measures, is facing growing concerns that it will post a loss in the second quarter. This would be the first quarterly loss in 15 years since the fourth quarter of 2008, when it recorded an operating loss of 940 billion KRW due to the global financial crisis.

On the 23rd, a sense of crisis spread among senior executives within Samsung Electronics that they must prepare for a loss in the second quarter of this year. One senior executive said, "The atmosphere that a second-quarter loss is a foregone conclusion is spreading." Samsung Electronics began announcing quarterly results in 2000; before that, only annual results were disclosed. Although the company was in the red for the first three years after its establishment in 1969, it turned profitable in 1972 and remained profitable even during the IMF crisis. The only quarterly loss on record is the fourth quarter of 2008.

The company declared an emergency management system at the end of last year and announced guidelines such as refraining from unnecessary business trips and cutting office supplies and consumables expenses by 50%. The signs of tightening the belt are also evident in the first-quarter business report recently released. Advertising expenses in the first quarter were 1.1453 trillion KRW, down 22% from 1.4677 trillion KRW in the same period last year. Sales promotion expenses also decreased by more than 8% to 1.6729 trillion KRW from 1.8233 trillion KRW a year earlier. Donations were reduced by 18% to 73 billion KRW from 89.5 billion KRW a year ago. All costs except for salaries and welfare expenses paid to employees were cut.

With half of the second quarter already passed, external performance forecasts are not optimistic. According to FnGuide, a financial information company, the average consensus (market forecast average) of securities firms that provided Samsung Electronics' second-quarter performance forecasts over the past month is 61.3842 trillion KRW in sales and 254.8 billion KRW in operating profit. However, among the 21 firms that provided forecasts, five predicted losses. BNK Investment & Securities, NH Investment & Securities, and SK Securities expect operating losses ranging from 300 billion to 500 billion KRW. Samsung Securities and Hi Investment & Securities also forecast losses of 28 billion KRW and 144 billion KRW, respectively. This means that more than 20% of the securities firms expect a loss.

The main reason for the expected loss is the continued decline in memory semiconductor prices through the second quarter, making it highly likely that the semiconductor (DS) division will post a loss exceeding 4 trillion KRW. The DS division recorded a 4.6 trillion KRW loss in the first quarter. Market research firm TrendForce predicts that the average selling price (ASP) of DRAM in the second quarter could fall by up to 18% compared to the first quarter. The expected price drop for NAND in the second quarter is between 8% and 13%. Samsung Electronics is pushing for a rapid transition from DDR4 to DDR5, which has a steep price decline, by starting mass production of 16Gb DDR5 DRAM using the cutting-edge 12nm process, but DDR4 still dominates. The price of DDR4 8-gigabit (Gb) used for PCs averaged around $1.80 in the first quarter but plunged 19.89% in April to $1.45.

Moreover, the smartphone division, which played a significant role in overcoming the overall operating loss crisis in the first quarter, has weakened. In the first quarter, high-end smartphones such as the Galaxy S23 Ultra, released in February, sold well, significantly increasing sales. Operating profit was also 3.94 trillion KRW. However, the effect of new product launches has now disappeared. There are no notable new products in the second quarter. The display division is also struggling due to the seasonal off-season in the second quarter.

The problem is that Samsung itself caused the losses. For example, securities firms expect Samsung Electronics to record operating profits of around 3.07 trillion KRW in the third quarter, based on Samsung's official announcement of production cuts in April. The idea is that by producing fewer semiconductors, prices will rise, leading to profits again. However, Samsung Electronics has recently increased market share at the expense of losses. Samsung Electronics' DRAM market share rose by 4.4 percentage points from 40.7% in the third quarter of last year to 45.1% in the fourth quarter (TrendForce statistics).

Semiconductor prices began to plummet in the second half of last year, reaching a level where the more they sold, the greater the losses. The fact that market share increased during that period means that Samsung threw products into the market at a loss amid price crashes. If Samsung had given up expanding market share and started production cuts last year, it would not have faced losses in the second quarter.

In fact, Samsung is a company that can turn a 1 trillion KRW loss into a 1 trillion KRW profit whenever it wants. Last year, Samsung Electronics' capital expenditure was 53 trillion KRW. Simply put, it spends more than 4 trillion KRW every month building factories and purchasing equipment. Delaying the introduction of new machinery or the start of factory construction by just one week reduces quarterly costs by more than 1 trillion KRW.

The issue is whether Samsung Electronics planned the current situation strategically with a big picture in mind or whether it was dragged along by circumstances, resulting in plummeting semiconductor prices and losses. Samsung Electronics insiders say there was internal controversy over the timing, scale, and even the implementation of the recent semiconductor production cuts. In the past, Samsung had an organization that drew such big pictures and coordinated internal disputes?the Future Strategy Office. Internal evaluations suggest that if the Future Strategy Office had existed, Samsung would not have fallen from record profits to the brink of a loss overnight. If a loss occurs in the second quarter, discussions about reviving the group’s control tower are likely to intensify.

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