Samsung Electronics, Crisis?
Samsung Electronics, Crisis?
  • By Kim Yu-na (yuna@koreaittimes.com)
  • 승인 2014.07.12 06:23
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With Samsung Electronics' business performance falling short of market expectations, some are wondering if the earning shock is intentional. Many business experts are wondering how the well-organized Samsung control tower system didn't do anything in a situation where its operating profit decreased by about 15% compared with that from the previous quarter.

It is said that Samsung Electronics Chairman Lee Kun-hee, who has been hospitalized in Samsung Medical Center after acute myocardial infraction, isn’t communicating well and has trouble recognizing people even though prominent medical experts have been treating him. He is slow in recovering consciousness and Samsung has a slim hope from the slow progress of his conditions although he has had strong response from stimulus.

The earning shock results in built up tension within the organization in which 'owner risk' is growing after Chairman Lee Kun-hee's heart attack and the company had to turn to emergency management. Some analyze that this gives a chance to clearly eliminate Samsung Electronics' managerial problems before vice chairman Lee Jae-yong becomes the heir-apparent of the Samsung corporate.

Samsung Electronics' operating profit in the second quarter was 7.2 trillion won, about a 15% drop from the first quarter (8.49 trillion won), and about a 24% drop from the same period of last year. It was earnings shock to dip below the 8 trillion won mark of its quarter operating profit, the first time it has happend in 2 years. The major problem of the earnings shock was due to the slump in its mainstream smartphone business, IT, and IM fields. The major reason of low profits in IM business is because of slump in sales of the smartphone Galaxy S5, which was launched earlier this year and met fierce competition in Chinese and European markets. Samsung Electronics in the tentative business performance report cited the strong won in the second quarter, a decline in the sales of smartphones and tablet PCs and increase in marketing expenses for stock reduction, a LSI system directly influenced by wireless (mobile) products, and a drop in display business profit as factors affecting its low operating profit in the second quarter. Some say it doesn't make sense to blame the sharp rise in the Korean won because most products are made abroad.

 

Stock market lowers target stock price

Because of Samsung Electronics' earnings shock in the second quarter, stock firms adjusted the forecast for Samsung Electronics' third quarter operating profit and lowered the target stock price. Each company made different estimates the forecast of Samsung Electronics' third quarter with some predicting an operating profit from as high as 9.4 trillion won to as low as 7 trillion. Uncertainty surrounding Samsung Electronics is growing. Stock experts predict "if Samsung Electronics shows the results of its strategic changes or strengthens stockholder-friendly policy, the stock price can drastically rebound,"

Samsung Electronics' earnings shock, the signal of economic downturn

Even though the earnings shock is more of a temporary slowdown rather than structural problems, concerns over the ramification for the overall economy is growing because Samsung Electronics has played a leading role in the Korean economy. With the Sewol ferry disaster and a steep rise in the Korean won there is low confidence in consumption and investment, many people worry that the drop in Samsung Electronics' operating profit may be a signal of economic stagnation for domestic demands and exports as well as performances of conglomerates and small-and medium-sized companies.

Samsung Electronics is not the only domestic company to fall on hard time. Korea's 3 majors shipping companies Hyundai Heavy Industries Co., Ltd., Daewoo Shipbuilding & Marine Engineering Co., Ltd., and Samsung Heavy Industries Co., Ltd. in the first half of this year were cut in half to about $14.1 billion compared with the same period last year. In the second half of this year, economic situation in the shipbuilding business may get better, but it will be difficult to achieve the goal of $54.5 billion. The situation is the same to other markets.

 

Samsung Electronics' earnings shock makes subcontractors cry

After the release of Samsung Electronics' second quarter business results, subsidiaries of Samsung Electronics as well as its subcontractors are concerned. Because of the slump in Samsung Electronics' smartphone business, the subsidiaries such as Samsung Electro-mechanics Co., Ltd., Samsung Display Co., Ltd., and Samsung SDI Co., Ltd. lowered the forecasts for their operating profits and subcontractors that deliver smartphones components to Samsung Electronics received a double blow of decreased demand and pressure to slash the prices of the parts. They discuss cutting part prices every quarter but the pressure will increase.

 

'Well-organized Samsung' Why

With the reality of Samsung Electronics' earnings shock settling in, some point out the mismanagement of a company that had previously been called 'well-organized Samsung'. It has caused the effective management control system to face the crisis and come up with a scenario for the future. In April, Samsung Electronics’ managing director Lee Myung-jin predicted in a corporate briefing that the sales of smartphones in the second quarter would increase from 88 million units to 90 million units, sales came in at about 77 million units.

Even though Samsung predicted market stagnation, it failed to deal with the problem. Samsung Electronics forecasted the off-season of the smartphone market would last until April and ever-fierce competition driven by a new model spread. With the slowdown in growth of tablet PC, it also predicted fierce competition because of the line-up diversification from each company. But experts say despite these predictions, Samsung Electronics didn't make appropriate measures.

 

China in the middle of Samsung Electronics' earnings shock

According to foreign media reports, Chinese low-cost smartphones have had great influence on the earnings shock. Along with fierce competition from Apple in the premium phone field, Samsung also faced competition in an emerging low-cost phone market in China. Chinese companies stress its dominance in the Chinese market by equipping a low-cost high quality screen to their phones. Financial Times also points out that because of the growing leverage of Chinese low-cost smartphones released by Chinese companies such as Xiaomi and Lenovo, Samsung is struggling in the Chinese market. It goes on to say that the slump in smartphone sales was a blow to the process and display panel sectors and 'vertical combination of a group' that makes Samsung Electronics successful, this has led to a protracted stalemate.

 

Good or Bad

With Samsung Electronics' operating profit slightly above 7 trillion won, there are various opinions on future business performance. This is because of smartphone marketing cost, one of factors for underperformance. One side argues that the massive marketing cost to remove middle-and low-cost phones stocks in the second quarter is a temporary phenomenon, but the other side claims that Samsung Electronics has to pay a large amount towards marketing to compete with a new iPhone that will be released by Apple soon after the third quarter.

There is good news for Samsung Electronics ability to increase its performance in the third quarter. The company plans releasing its Galaxy Note 4, strengthening middle-and low-cost products lineup, eliminating middle-and low-cost phones stocks, entering into the peak season of memory semiconductor, as well as high profits in sales of TV and household appliances. However, it is said that Samsung Electronics will not make outstanding growth because of the release of the iPhone 6 by Apple, emerging Chinese companies including Xiaomi, a slump in AP business, and the bad state of premium phone markets in the USA and Europe.

The new iPhone 6 by Apple which is due to be released in the third quarter has a large screen, 4.7 inch by 5.5 inch, which can encroach on the large screen smartphone market that has been dominated by Samsung Electronics with the Galaxy Note. Therefore, Samsung Electronics set a strategy to face the situation with its premium phone 'Galaxy Note 4', however it may struggle as a large amount of people who are waiting for iPhone 6 to be release.

The worsening business results of Samsung Electronics will accelerate the inheritance of management to vice president Lee Jae-yong, who has been conducted affairs for the company after Chairman Lee Kun-hee suffered a heart attack. If Chairman Lee Kun-hee passes down his shares and cash equivalent to about 12 trillion won from Samsung Life Insurance Co., Ltd. and Samsung Electro-mechanics Co., Ltd., to the third generation of Samsung corporate, they will have to pay about 12 trillion won in inheritance tax. If share values go down, vice president Lee Jae-yong can afford to pay in cash by selling the shares of affiliates.

 

 

What is next growth engine

Samsung Electronics is trying to bounce back with 'NOTABLE' in the second half of this year. NOTABLE is a compound word of Note, Tablet, and Wearable. An officer from Samsung Electronics stated, "The alternative way to overcome stagnation in the smartphone market is in the tablet and wearable markets." However, the growth potential of the 'NOTABLE' is limited. In 2012, Samsung Chairman Lee Kun-hee already announced 5 major new growth industrial sectors including solar energy, car components, LED, Bio, medical equipment, and increased investment. But Samsung didn't enter the markets dominated by front runners such as Philips and Siemens.

 

Samsung Electronics' growth engine, restart

Samsung Electronics has more than 6 trillion won in cash. It means Samsung has a live bullet to actively carry out M&A. In the first half of this year, global IT companies conducted massive M&A, but Samsung Electronics did nothing. Experts point out Samsung has to be more aggressive for M&A. Intensive prior investment, R&D, and thoroughly management systems are also effective. Whenever Korean economy is in crisis or not, Samsung Electronics has previously made a breakthrough based on aggressive decision making and an elaborate strategy. When will the growth engine of Samsung Electronics restart


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