ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailPositive ArrowIcon PrintIcon Twitter

Samsung falls victim to China slowdown, following Apple

Headwinds slam memory chip and smartphone segments

A mobile phone store in Hefei, China. Apple and Samsung have both issued earnings warnings due to weakness in the Chinese economy.   © Reuters

SEOUL -- Samsung Electronics' disappointing fourth-quarter earnings report comes less than a week after Apple cut its revenue estimate, underlining the global repercussions of the Chinese economic slowdown.

Both of the South Korean company's core businesses -- memory chips and smartphones -- are facing downturns this year. With no other growth business to fill the hole, Samsung finds itself scrambling to trim the fat.

Samsung said on Jan. 8 that operating profit plunged 29% in the three months ended in December, to 10.8 trillion won ($9.6 billion). The preliminary guidance represents the company's worst quarter since July-September 2016, with the drop exceeding analyst expectations by 2 trillion won to 3 trillion won.

Sales slid 11% to 59 trillion won. In the July-September quarter, nearly 60% of operating profit came from DRAM memory chips, shipments of which have fallen off of late. Samsung said on Jan. 8 that demand has shrunk significantly due in part to clients adjusting inventory.

SK Securities, a South Korean brokerage, points the finger at the U.S.-China trade war, saying that Chinese tech leaders such as Alibaba Group Holding and Tencent Holdings have pulled back on investment. The brokerage believes that Alibaba, China's biggest e-commerce provider, has shown less of an appetite for DRAM chips for the data centers the group builds and operates.

Compounding the woes is Samsung's ailing smartphone segment. "Stiff competition has taken a toll on earnings," said a Samsung insider. Samsung's share of China's smartphone market in terms of unit shipments has dwindled to less than 1% over the past year or so. Some say the operating profit earned by Samsung's smartphone segment has sunk to a level not seen since the third quarter of 2016, when the company had to recall the fire-prone Galaxy Note 7.

Samsung has driven Japanese electronics rivals into a corner thanks to its quick capital spending decisions. In recent years, Samsung's strength has been its flexible portfolio in which the top-earning business changes year by year.

The segment generating the most profit at Samsung has changed three times between 2009 and 2016. Many analysts predict that semiconductors and smartphones are both expected to face headwinds this year.

Annual consolidated sales rose 2% to 243.51 trillion won in 2018, according to the announcement, with operating profit growing 10% to a record 58.89 trillion won. However, Nomura Securities' South Korean arm predicts the black ink will shrink to around 44 trillion won this year. Other analysts say operating profit will fall by roughly 20% due to dwindling earnings from semiconductors.

Vice Chairman Lee Jae-yong, Samsung's de facto leader, has poured resources into artificial intelligence and 5G communications. Samsung has inked 5G base station deals with three major American telecommunications companies. Sales of more than 4 trillion won are expected in 2019, or double the 2017 figure.

But neither AI nor 5G is anywhere near the scale of Samsung's semiconductor and mobile phone businesses. Samsung is looking to make up lost ground in the AI game by launching the Galaxy Home smart speaker system, but critics say its features lag behind those of Google Home.

AI and 5G are among the four future growth segments Samsung identified in 2018, but their contribution to earnings so far is limited. For that reason, the focus this year will be on cost cutting.

The company's oldest DRAM production line, at a plant in Hwaseong, may be shut down this year. Samsung could repurpose the line to make semiconductors used in 5G technology.

In 2017 and 2018, Samsung converted old lines in the plant to image sensor production. Meanwhile, the company started up a plant in the neighboring city of Pyeongtaek this past fall. When the state-of-the-art DRAM lines there enter into full operation, costs will drop further.

At the Samsung Advanced Institute of Technology, which acts as the company's global research and development hub, the battery development segment will be drastically downsized. Of roughly 150 battery development technicians, over half of those responsible for lithium-ion batteries and next-generation solid-state batteries will be moved to battery maker Samsung SDI and other group companies.

Battery development at the institute will be limited to metal air batteries, a next-generation concept after solid-state batteries, so that overlap between the institute and Samsung SDI is eliminated.

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this monthThis is your last free article this month

Stay ahead with our exclusives on Asia;
the most dynamic market in the world.

Stay ahead with our exclusives on Asia

Get trusted insights from experts within Asia itself.

Get trusted insights from experts
within Asia itself.

Try 1 month for $0.99

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this month

This is your last free article this month

Stay ahead with our exclusives on Asia; the most
dynamic market in the world

Get trusted insights from experts
within Asia itself.

Try 3 months for $9

Offer ends January 31st

Your trial period has expired

You need a subscription to...

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers and subscribe

Your full access to Nikkei Asia has expired

You need a subscription to:

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers
NAR on print phone, device, and tablet media

Nikkei Asian Review, now known as Nikkei Asia, will be the voice of the Asian Century.

Celebrate our next chapter
Free access for everyone - Sep. 30

Find out more