High-tech and consumer electronics bellwether provider Samsung Electronics issued its own profit warning this week followed by LG Electronics. The news coupled to Apple’s prior profit warning add to industry concerns of structural shifting in smartphone markets.

This Supply Chain Matters blog is a follow-on to our industry supply and customer demand specific predictions of our just published 2019 Predictions for Industry and Global Supply Chains (Now available for complimentary downloading in our Research Center).

We specifically cited High Tech and Consumer Electronics Supply and Customer Demand networks unique challenges in the comiConsumer Electronics manufacturingng year. Major suppliers faced with huge capital costs to build new production facilities to accommodate more advanced production and technology support processes have been reluctant to add additional capacity with the current unpredictable geo-political global trade environment.

Apple’s sudden and significant revenue shortfall warning added to such concerns. The news of Apple’s warning and the consequent impact on Apple stock has now cascaded even more to the stock levels of major Apple suppliers such as Hon Hai Precision Industry (aka Foxconn), Japan Display, Murata Manufacturing, Taiyo Yuden Co. and others. Now, industry shocks are extended.

Samsung Electronics

This week, a significant industry bellwether, Samsung Electronics indicated that the company’s fourth quarter profits will decline upwards of 29 percent for the most recent quarter. Samsung is expected to formally report financial results for the December-ending quarter at the end of this month. That has now added to industry concerns and watchouts.

Samsung not only produces end-item products such as smartphones and consumer electronic devices, it further supplies major electronic components for other global based high-tech manufacturers. This week’s profit warning pointed to “lackluster demand” for memory chips and mounting competition in its smartphones and handsets business. Samsung has reportedly faced similar weak demand for its two most recent premium Galaxy S9 and Galaxy Note 9 smartphone and tablet devices.

According to a published report from The Wall Street Journal, Samsung indicated that its semiconductor-based memory business which represented about three-quarters of operating profit in recent quarters would “remain subdued” heading into Q1 of 2019. Cited data from DRAMeXchange indicated that overall DRAM pricing fell between 7 and 10 percent in the final quarter of 2018 and is expected to decline an additional 20 percent in the current first quarter, the largest pullback in ten years. Similar declines are projected for NAND memory pricing.

Such indicators obviously implies yet another demand and supply imbalance in an industry that was previously plagued with key component shortages.

LG Electronics

South Korea based LG Electronics further shocked equity markets with a warning that profits are likely to plummet 80 percent from the year earlier period in the December-ending quarter. The globe’s second-largest television producer behind Samsung further warned of a 7 percent decline in revenues.

A published Reuters report indicated that analysts are pointing to thinning profit margins for high-end TV’s while LG’s smartphone business continues to lose money.

According to multiple reports, LG declined to disclose any further details of Q4 financial performance pending the announcement of full results at the end of this month.

Reader Takeaway

In our high-tech industry prediction, we pointed to the ongoing plateau of the smartphone market growth affecting industry influencers Apple and to some extent Samsung, as catalyst’s for widespread industry concern. The latest headlines reflecting Samsung’s and LG Electronics profit warnings adds further credence to a changing smartphone market where global consumers are shunning higher-priced for lower-riced models with similar or basic need functions.

Major supplier revenues and profits have long been dependent on lower margins but higher overall unit volumes. That strategy is indeed now being tested as more manufacturers and suppliers continue to report on operational and financial performance.

Regarding headlines that the ongoing U.S. and China trade war are impacting the industry, while remaining pertinent, are not as concerning as is changing line-of-business product and market dynamics. Suddenly, functionality at the lowest cost is fast becoming the consumer preference. It would also seem that consumers are no longer motivated to buy based on cooler features, but rather on replacement need. That provides apprehension for hardware focused industry supply  ecosystems.

The sum total is likely that we can anticipate a lot of changed design, sourcing, production and sales strategies for consumer electronics supply chains in the coming year.

Bob Ferrari

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