Earnings from Samsung Electronics Co. show just how far the mighty can fall. They also tell us how tough it is to turn things around when business is being challenged on multiple fronts.
The South Korean electronics giant posted a 56 per cent drop in third-quarter operating income and a 5 per cent fall in sales. That profit figure was 11 per cent higher than analysts had expected, which is nothing to sneeze at, but it doesn’t paper over the fact that this was the fourth straight quarter of declines on both fronts.
Companies from Apple Inc to Sony Corp are facing a slowdown in sales of smartphones and consumer electronics as the US-China trade war and the slowing global economy prompt consumers to tighten spending. Samsung gets hit by that twice over: shipments of its own devices, and sales of components that go into other companies’ products.
Profit from the semiconductor business, which makes both memory chips and logic processors, fell 78 per cent to 3.05 trillion won ($2.6 billion), the lowest in over three years, Samsung said. This is a particularly brutal outcome because chips accounted for 76 per cent of operating profit last year. And, according to its own account, the challenge is likely to continue this quarter.
The company expects demand for components to turn sluggish in general amid weak seasonal effects, while marketing expenses are likely to increase to address year-end smartphone sales. That second part is worth particular attention. While Samsung has previously shown its readiness to be pragmatic on capital expenditure to adjust for the recent slowdown, it also appears willing to double down on marketing to juice sales of its branded products, such as the Galaxy series of handsets.
Samsung’s IT and mobile business, which primarily consists of smartphones, was one of the few shining lights in the quarter. Revenue climbed 17.4 per cent, the strongest growth in six quarters, to 29.3 trillion won, just a hair less than the 30 trillion record it set in the second quarter of 2017. The difference between now and then, though, is the margin. For almost the same sales figure, Samsung squeezed out 27 per cent less profit this time than two years ago.
Higher marketing costs could again take the shine off the handset business in the fourth quarter, which Samsung admitted will see shipments decline after the post-launch honeymoon of the latest two Galaxy models ends. The elephant in that room is especially stiff competition from Apple Inc’s latest iPhone and Google’s new Pixel, both of which are getting rave reviews.
Sales of Samsung’s new flagship Galaxy S10 were likely aided by Huawei Technologies Inc’s trouble selling outside of China. That helped the South Korean company ship 85 million units in the third quarter, slightly ahead of a year ago. The fourth-quarter decline in shipments will be accompanied by falling average prices for the high-end models.
Samsung has also being showing off gimmicky new folding displays — remember the Fold? — as a way to flex its technology muscles, but don’t expect those to do much to fill in the revenue gaps.
Investors who truly believe in Samsung will be holding on to signals that the memory-chip business is ready to turn around. That’s possible, but then again Samsung is doing its best to tame expectations: “Uncertainties linger over the memory chip market as demand is seen recovering but risks from global industry circumstances persist.”
This leaves management with little other ammunition to handle the slump than to rein in spending, which I have applauded in the past. But that isn’t a business model, it’s a coping strategy. Which tells you that all Samsung can do in this slowdown is manage as best it can.