South Korean Tech Giants Under Pressure Amid Competition with Chinese Products

SEOUL, TUESDAY — Two giant South Korean technology companies reported a decline in operating profits for the third quarter of 2024 that fell short of market expectations. Despite rising sales volumes, the two companies’ profit performance was depressed amid increasingly fierce competition with Chinese products.

In a statement on Tuesday (8/10/2024), Samsung Electronics estimated that its Q3-2024 profit would nearly triple from the previous quarter. However, the performance still failed to meet market expectations.

In a mandatory report, the tech giant revealed that operating profit for July-September is expected to rise to 9.1 trillion won (Rp 105.7 trillion), up 274.5 percent from the previous year. According to South Korean news agency Yonhap, citing a financial data company, this gain is almost 12 percent lower than the average forecast.

The figure also decreased by almost 13 percent from the company’s operating profit of 10.44 trillion won (Rp 121.2 trillion) in the second quarter of 2024. The decline in Samsung Electronics’ operating profit occurred despite its sales increasing by 17.2 percent year-on-year to 79 trillion won (Rp 916.9 trillion). Samsung’s shares fell by 1.5 percent in Seoul on Tuesday following the release of the company’s financial report.

Samsung management has issued an apology for performance that fell short of market expectations. The apology was directed at customers, investors, and employees.

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“Due to results that do not meet market expectations, concerns have arisen about the competitiveness of our fundamental technology and the future of the company,” said a statement signed by Jun Young-hyun, Vice Chairman of the Device Solutions Division.

According to the statement, many people are talking about the Samsung crisis. “We will ensure that the serious situation we are currently facing becomes an opportunity to start anew,” the statement said.

The problem is that the company is struggling to capitalize on the high demand for chips used in artificial intelligence (AI) servers. Samsung Electronics is a subsidiary of South Korean giant Samsung Group, one of the country’s largest conglomerates. Samsung Electronics is also one of the world’s largest memory chip makers.

Jene Park, a senior analyst at Counterpoint Research, stated that there had already been predictions of a decline in Samsung’s memory chip sector. “This decline is caused by delays in the supply of fifth-generation HBM (HBM3E) and a general decrease in demand for memory chips,” he said.

We will ensure that the serious situation we are currently facing becomes an opportunity for a new start.

Park added that in the smartphone business, sales of Samsung Electronics’ new foldable devices were also seen below expectations. This is because competition among foldable device suppliers is getting tighter.

Quoted from the business media Nikkei Asia, October 8, 2024, currently, the marketing of Chinese foldable phones is expanding throughout the world. Samsung’s foldable phone market in Western Europe, for example, is increasingly being competed with by Chinese products. One of them is by products made by Honor which was formerly a subsidiary of Huawei.

Joanne Chiao, an analyst at Taipei-based research group TrendForce, said that in the component manufacturing sector, supply has entered a slack season, with capacity utilization rates at foundries generally flat or slightly down.

Last week, Samsung Electronics said it planned to cut jobs at some locations in Southeast Asia, Australia and New Zealand. The statement described the move as a routine workforce adjustment “to improve operational efficiency.”

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Bloomberg business media reported that the job cuts are expected to affect about 10 percent of the workforce in the market. Currently, the company based in Suwon, South Korea employs more than 267,800 people. More than 50 percent of its workforce is overseas.

The depressed performance in Q3-2024 is the opposite of Q2 performance. In that period, Samsung showed the highest growth since 2010 with operating profit soaring to 10.44 trillion won (Rp121.2 trillion). This growth was due to the recovery in chip prices and continued growth in demand for generative AI.

Logistics and marketing costs

On Tuesday, LG Electronics Inc. also said its third-quarter 2024 operating profit forecast fell 20.9 percent from the same period a year earlier. The depressed performance and falling short of market expectations were due to rising logistics and marketing costs.

LG Electronics’ operating profit in the third quarter of 2024 reached 751.1 billion won (Rp8.7 trillion) for the July-September period. This amount is down from last year’s operating profit of 905.1 billion won (Rp10.5 trillion).

In fact, quoted from Yonhap, LG Electronics sales increased 10.7 percent to 22.17 trillion won (Rp 257.6 trillion). The company did not provide data for net profit. According to a survey conducted by Yonhap Infomax, a financial data firm of the Yonhap News Agency, the operating profit was 22.5 percent lower than the average estimate.

LG Electronics said the decline in net profit, despite rising sales, was due to rising sea transportation costs and marketing costs amid increasingly tight competition.

“Although the external environment continues to be challenging, including delayed demand recovery, rising raw material costs, and fluctuating ocean freight rates, it is significant that we have continued to increase sales volume,” LG Electronics said in a statement.

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According to the statement, their efforts to modernize the business portfolio have led to improved fundamental competitiveness. “And, we maintain growth momentum,” the statement said.

Today, LG Electronics Inc. is a home appliance giant after divesting its smartphone business in 2021. Since then, the company has continued to diversify its business portfolio into future-oriented home appliance technologies.

The depressed business of Samsung and LG is considered to be inseparable from Beijing’s efforts to continue to encourage localization of the supply chain. With localization, Chinese industries are encouraged to use domestically produced raw materials. As a result, Chinese electronics companies are increasingly able to produce cheap products. Its marketing continues to expand.

One of them is in the foldable smartphone market which was initially dominated by Samsung products. In September 2023, Chinese technology giant Huawei Technologies released the Mate XT foldable smartphone. This premium market phone shows impressive performance with its advantage of being able to fold three times.

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In the mid-range market, Honor is aggressively promoting the Magic V3 smartphone. This foldable phone is only 9.3 millimeters (mm) thick or the thinnest and lightest foldable smartphone in the world at the moment. Honor CEO George Zhao even promoted this phone can be folded more than 500,000 times and offers better brightness and scratch resistance than premium iPhones and Samsung smartphones.

For its raw materials, Honor gets its OLED screens mainly from domestic Chinese suppliers such as BOE Technology Group and Everdisplay Optronics. Domestic purchases further strengthen China’s display manufacturing industry. In addition, it also lowers the production costs and selling prices of Chinese foldable phones compared to buying screens from outside China.

OLED screens are the most expensive parts in smartphone production. According to Omdia, Samsung’s OLED smartphone screens cost around $80 to $100 (Rp1.2 million-Rp1.6 million). Meanwhile, Chinese screen manufacturers can offer them for $30 to $40 (Rp470,000-Rp626,000) each, although the quality is also in line with the price.

“There is no way Samsung’s display manufacturing can compete with China on price. And there is no way Chinese smartphone and electronics makers like Huawei, Xiaomi, Oppo and Vivo will turn to foreign suppliers again once they have local suppliers,” David Hsieh, senior research director for displays at London-based telecommunications, media and technology analysis firm Omdia, was quoted as saying by Nikkei Asia. (AFP)