Earnings Shock Hit
Samsung Electro-Mechanics announced on July 29 that it reported an operating profit of 8.5 trillion won (US$8.3 billion) in the second quarter of this year, a year-year decrease of 90.5 percent. The company turned over 1.8607 trillion won (US$1.8125 billion) in Q2, a 7.6 percent quarter-on-quarter increase, but down 22.0 percent from a year ago.
The company explained that amid the slowdown in global smartphone market growth, it sales growth weakened due to a reduction in major customer companies' demand and a rise in inventory for mid to low-end smartphones. Its operating profit increased by 40.5 percent in Q2 compared to the previous quarter, thanks to efforts to increase profitability by improving manufacturing yield. However, its operating profit plummeted in the second quarter compared with the same period last year, affected by intense competition and the unfavorable won-dollar rate.
Samsung Electronics is the largest customer company, accounting for 60 percent of Samsung Electro-Mechanics' sales as of 2013. Hence, when Samsung Electronics exhibits poor performance, Samsung Electro-Mechanics has no choice but to struggle. It is not an overstatement to say that Samsung Electronics reported an earnings shock in Q2. On July 8, the tech giant announced that its sales in Q2 are estimated at 52 trillion won (US$50.7 billion), with gross operating profits at 7.2 trillion won (US$7.0 billion). The firm's sales decreased 9.5 percent year-on-year, and its operating profits were reduced by 24.5 percent compared to the same period last year. The tech company's worsening performance is mainly attributable to a reduction in sales of smartphones produced by the information technology & mobile communications (IM) division, stemming from the stalled growth of the smart phone market. The IM division represented 60.7 percent of Samsung Electronics' sales last year, with 67.8 percent of the company's operating profits.
Samsung Electronics has recently stepped up efforts to escape from the crisis, as shown by the fact that executives in the IM division gave up 25 percent of their bonuses in order to achieve the sales target for the first half of this year. Nevertheless, the company's lackluster sales of smartphones are expected to continue. Therefore, the company is unlikely to show as good performance as it did in the past. The release of the iPhone 6 in the fall is expected to aggravate the problem. Experts are saying that Samsung subsidiaries like Samsung Electro-Mechanics are also going to suffer from Samsung Electronics' poor performance.