A Gloomy Forecast for Suppliers
In its earnings conference call on January 31, Samsung Display announced that the company’s earnings improved in the fourth quarter of last year as the company started supplying smartphone panels to major customers. Here, the major customers mean Apple and smartphone panels are organic light emitting diode (OLED) panels for the iPhone X. Samsung Display's operating profit in the fourth quarter of last year jumped 5.2% year on year and 45.4% compared to the previous quarter only to reach 1.401 trillion won while exclusively supplying OLED panels for Apple's iPhone.
However, a gloomy forecast was made that its operating profit would be cut in half (about 750 billion won) in the first quarter of this year. Ironically, this forecast also cuts across the Apple iPhone. It is expected that it will be inevitable that other Korean parts makers supplying components to Apple as well as Samsung Display will suffer sluggish earnings until the launch of Apple's next smartphone.
Observing parts for the iPhone X explains why Korean companies will suffer sluggish earnings. Samsung Display exclusively supplies OLED panels for the iPhone. About half of Apple's fourth-quarter sales came from Apple last year. Rigid flexible PCBs (RFPCBs) on OLED panels are indirectly supplied to Apple by Samsung Electro-Mechanics, Interflex and BH through Samsung Display. That's why damages were done in a chain reaction. To top it off, Samsung Electronics and SK Hynix are supplying memory semiconductors such as DRAMs and NAND flashes and LG Innotek, dual camera modules and face recognition modules, which are core parts of iPhone X. Samsung SDI and DS Neolux supply OLED materials through Samsung Display.
"Since the launch of iPhone X, not only top-tier but also second- and third-tier partners had enjoyed “trickle down” effects from Apple until the fourth quarter of last year,” said a representative of an FR PCB supplier. "But recently, order volume reduced by half. Some companies raised the portions of their supplies to Apple to 70% to 80%, but it is said that a drop in order volume forced them to execute unpaid leaves for employees.
"Samsung Display's operating profit in the first and second quarters will hit only 770 billion won which is about half of that of the same period last year," said Song Myung-seop, a researcher at HI Investment & Securities. The utilization rate of Samsung Display's Asan Tangjung A3 Line which produces OLEDs for Apple already went below the average.
The smartphone industry says that this “Apple Shock” cannot be blamed on the iPhone X only. The iPhone X’s sluggish sales can be attributable to a combination of factors such as rising prices of components such as memory semiconductors and a spike in smartphone prices sparked off by the rising prices of components, the launches of many new premium models, and market saturation, according to industry experts. Although Samsung Display began to mitigate concern over sales slumps, explaining that they were expanding its global customer base such as China to lower dependence on a specific customer, Apple, the combination of factors are making the market skeptical about Samsung Display’s explanation.
What the parts industry is most concerned about is the slowdown of the smartphone market’s growth. According to Canalys, a global market research firm, the number of smartphones shipped in China, the largest smartphone market in the world, reached 459 million last year. After sharply growing from 2009, shipments fell for the first time.
Those in the parts industry are also paying attention to the high price of the iPhone X (US$ 1,149 for the 256GB model). They say that the iPhone X showed that a smartphone priced for more than one million won could hardly appeal to consumers. "As shown in the iPhone X case, it does not work to raise prices of smartphones simply because their specifications improved," an industry official said. “Smartphone makers will pressure parts makers into cutting down on prices.” Recently, Chinese smartphone makers asked their government to investigate prices of memory semiconductors supplied by Samsung Electronics and SK Hynix, claiming that the prices were too high in line with this situation.