Reflected Benefit
The “Xiami Effect” of China is strongly blowing the sails of the Korean smartphone component industry. Component supplies to local smartphone manufacturers in China are surging, especially from Samsung Electro-Mechanics and LG Innotek. Component sales to Chinese smartphone manufacturers for those two companies during the first half this year increased by 40 to 50 percent compared to the same period last year. This trend is expected to continue for the second half as well, which will greatly influence the performance of relevant companies.
While front companies who manufacturer the final products, such as Samsung Electronics, are suffering from these low-priced products from China, component and material manufacturers such as Samsung Electro-Mechanics and LG Innotek are boosted by increased demand for their products. The two sides are in stark contrast.
Xiaomi is the number one local smartphone company in China, and it pulls a lot of weight in the components industry. According to the related industries on August 19, component sales of Samsung Electro-Mechanics to Chinese smartphone companies during the second quarter of this year jumped up by over 40 percent compared to the same period last year. Supplies of major smartphone components such as Multi-Layer Ceramic Capacitors (MLCC), camera modules, motors, and power components to the smartphone manufacturing troika in China -- Xiaomi, Huawei, and ZTE -- has radically increased.
Samsung Electro-Mechanics started to supply camera modules to Xiaomi this year. Samsung Electro-Mechanics is also establishing various sales networks with Huawei and ZTE. Although the performance during the first half of this year was a little behind the same period last year, the belated Xiaomi Effect is expected to become a growth driver for performance improvements during the second half. If the current trend continues, component sales to Chinese smartphone companies are expected to grow by 100 percent this year.
LG Innotek is also benefiting from the Xiaomi Effect. As supplies of components including camera modules and organic light emitting diodes (OLED) for mobile devices jump up, sales to Chinese clients during the first half have increased by 50 percent compared to last year. Total component sales to Chinese smartphone companies this year is also expected to rise over at least 50 percent. Due to the increasing component supplies of both companies, the operating ratios of major component factories have improved conspicuously. Chip components factories, including the MLCC factory of Samsung Electro-Mechanics, have been operating at 99 percent, an 18 percentage point surge from the 81 percent during the same period last year. The LED factory operating ratio of LG Innotek also increased 12 percentage points within a year, from 64 percent during the first half of last year to 76 percent during the first half of this year.
Samsung Electro-Mechanics and LG Innotek formed a task force (TF) and exclusive team respectively to speed up the penetration of the Chinese market. Moreover, the fact that they expanded R&D expenditures for exports to China is credited for securing advantageous positions in the middle of the Xiaomi Effect. Especially in terms of R&D expenditure portion in the sales revenues during the first half this year, LG Innotek used 6.7 percent of its sales revenues for the first half of this year on R&D, which is a historical high. Samsung Electro-Mechanics used 7.8 percent, the highest since 2009, also as of the first half.