Many South Korean semiconductor and display manufacturers posted negative earnings surprises in the first quarter of this year. Their operating profits are likely to get even worse in the second quarter.
Uncertainties are mounting in the markets as the U.S.-China trade war is escalating. The two superpowers are putting more and more pressure on the South Korean companies and the ongoing economic recession is accelerating. Things are unlikely to get better in the near future.
The price of memory chips is continuing to fall, casting dark clouds over Samsung Electronics and SK Hynix. Besides, the demand is unlikely to rebound. The operating profit of Samsung Electronics is estimated to fall from 4.12 trillion won to 3.5 trillion won from Q1 to Q2. That of SK Hynix is forecast to fall 30 percent or so to slightly over 900 billion won.
In the meantime, Intel, Qualcomm, ARM and Micron Technology have declared to stop supplying their products to Huawei. Under the circumstances, it is predicted that Samsung Electronics and SK Hynix can get more orders from Huawei. In addition, the other Chinese smartphone manufacturers including Oppo, Vivo and Xiaomi may reduce their trade with Micron Technology and hold hands with the South Korean companies. At present, Samsung Electronics is discussing application processor (AP) supply with some of them and Lenovo and Vivo are leaning towards Samsung’s Exynos AP.
However, it is pointed out that the South Korean companies will have a hard time expanding their business with China with the United States urging South Korea to join its anti-Huawei campaign.
When it comes to Samsung Electronics, Huawei is one of the five biggest profit sources, yet semiconductor sales account for only 5 percent of Samsung Electronics’ sales. Meanwhile, 10 percent of the annual sales of SK Hynix are from Huawei. Huawei smartphones already took a direct hit. More and more consumers are likely to shun the phones that can get no Android OS update and Google Play application. Chip design may be affected as well due to the halted transactions with ARM.
Of course, Samsung Electronics and SK Hynix may resort to alternatives if Huawei becomes further isolated. However, the sales of the iPhone in China are predicted to decline due to boycott and an increasing number of users are buying new phones less frequently in the current economic recession. This year, the global smartphone market is likely to show a negative growth for the second consecutive year.
Things are even worse for South Korean display manufacturers. Both Samsung Display and LG Display are forecast to remain in the red for the second consecutive quarter. Meritz Securities recently estimated their Q2 operating losses at 200 billion won and 308.1 billion won, respectively.
Samsung Display is suffering from a decline in iPhone demand. iPhone shipment estimates for this year are being adjusted downward by 7 percent to 10 percent from 180 million units. Fortunately for Samsung Display though, more and more smartphone suppliers are adopting large OLED panels. Likewise, LG Display is expected to be able to make a breakthrough in the large-area OLED panel market once its new facilities in Guangzhou, China are put into operation in the second half of this year.