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Samsung's profit drops 60% on slump in panels and chips

Analysts divided on whether worst is over semiconductor market

Samsung's office in Seoul: Falling memory chip prices have hurt the world's largest supplier of the component.   © Reuters

SEOUL -- Samsung Electronics' earnings plunged more than 60% in the first quarter from a year ago, as sinking prices for display panels and memory chips dealt a blow to the global supplier.

Operating profit tumbled 60.4% to 6.2 trillion won ($5.5 billion) for the January-March quarter, the South Korean company said on Friday, a far larger drop than market estimates of 7.8 trillion won. Revenue slid 14.1% to 52 trillion won.

Full earnings data by segment is due to be released later this month.

The announcement came one week after Samsung, which is both a supplier and competitor to smartphone rival Apple, issued an unusual profit warning, saying that first-quarter results would fall short of the market consensus.

Prices for liquid crystal display panels fell more than expected as Chinese makers produced a glut by increasing capacity. Samsung also suffered from low demand for organic light-emitting diode panels from Apple as the American company's iPhone sales have fallen.

Memory chip prices also are sinking more than anticipated. Analysts say the trend may persist, further hampering earnings for the world's largest memory chip maker.

"Falling prices and weak demand will likely continue through the third quarter of 2019," IHS Markit said in a statement. "Most memory chip manufacturers are taking measures to manage supply output and inventory levels, to address softening demand."

IHS Markit projected that global demand for dynamic random access memory chips will decline 22% to $77 billion in 2019 -- a big blow to Samsung, which leads the market with a 40% share.

But the analysis company expects the market to rebound in the longer term, thanks to stronger demand for server DRAM from global internet companies such as Amazon, Microsoft, Facebook, Google and Tencent Holdings.

Some analysts estimated that Samsung's recovery will come earlier. "The semiconductor industry hit the bottom of earnings in the first quarter, going through the worst time," said Kim Dong-won, an analyst at KB Securities. "We expect the demand will rebound later."

Samsung's abrupt downturn stems from three factors: an excessive focus on product functionality and quality, a higher cost structure and the prolonged absence of its charismatic leader.

The company's obsessions with quality was recently highlighted in the Galaxy Fold, a foldable smartphone. Scheduled for release this month, the phone's assumed price is around an eye-popping $2,000. Samsung, however, insists the device will be popular thanks to its high quality and functionality.

But Chinese rival Huawei Technologies was quick to follow, stealing some of the Galaxy Fold's thunder. It plans to introduce a similar foldable smartphone in June. Unlike the Galaxy Fold, which hides the display when folded, the Huawei phone's display will be on the outside when folded. The design is simpler than Samsung's.

Huawei's Mate X foldable phone, right, and Samsung's Galaxy Fold flexible smartphone (Nikkei montange/AP/Reuters)

And Samsung no longer has the advantage of low costs that it once did. Its high cost structure comes mainly from labor costs. Its employees' average annual pay rose to over $89,500 last year from about $60,000 in 2009.

The latest average annual pay for Chinese rival Xiaomi was below $44,700, according to a local news report.

Samsung is also without strong leadership. Chairman Lee Kun-hee's swift decision-making and bold spending decisions helped drive the company top its leading global position. After a four-year of absence due to health issues, the company is suffering. During that time Samsung has spent over 30 trillion won on OLED display panel production equipment. Vice Chairman Lee Jae-yong, Kun-hee's eldest son who has effectively taken over, awaits a trial on bribery allegations.

The poor results for Samsung, along with its local rival SK Hynix, are hampering the South Korean economy, which relies heavily on the two companies and the semiconductor industry. South Korea's exports fell 8.2% to $47.1 billion in March from a year ago.

Nikkei staff writer Kenichi Yamada in Seoul contributed to this report. 

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