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| A men wearing a mask walk by an electronic board showing the Shanghai and Shenzhen stock indexes in Shanghai, China, as the country is hit by an outbreak of a new coronavirus, Feb. 3. Reuters-Yonhap |
Coronavirus outbreak raising shortage in chips, displays
By Kim Yoo-chul
Ironically, the spread of a novel coronavirus is helping leading South Korean parts suppliers see increased profits as their Chinese rivals are being forced to reduce their manufacturing volume in segments they compete in.
South Korea is the home to the world's top two memory chip suppliers ― Samsung Electronics and SK hynix. Also, Samsung Display and LG Display are leading the global display market, while Samsung SDI and LG Chem are the major battery suppliers. All these firms are battling with their Chinese rivals in each business segment.
Because Wuhan, the Chinese city at the epicenter of the coronavirus outbreak, is considered a "vital cog" in China's electronics industry production of both sub-assemblies and goods for leading companies, the virus could create "supply-chain" problems for top-tier technology companies.
But the South Korean technology heavyweights are well-positioned to possibly generate increased earnings at least until the third quarter of this year. The biggest beneficiaries will be Samsung, LG Display, as well as Samsung Electronics.
During a recent conference call to investors, LG Display's finance chief Suh Dong-hee said the outbreak of coronavirus will have an effect on the supply and pricing of conventional LCD displays used in personal computers and LCD TVs. "The supply of LCD panel prices will remain tight," the senior LG executive said. The LCD industry is subject to cyclical supply and demand trends.
As he said, at least five or six LCD display fabrication facilities in Wuhan are already suffering from production cuts ― the overall utilization rate for all LCD factories in China could fall by as much as 20 percent during February. Market research firm IHS estimated that per-panel prices could rise by $1 to $2 but could go as high as $3 to $5. That means South Korean LCD suppliers could generate higher profit margin.
Regarding its second quarter earnings guidelines, an LG Display spokesman declined to comment.
"LCD factories are facing shortages of key components as a result of mandates designed to limit the contagion's spread," said IHS.
Regarding the short-term outlook in the memory chip sector, Samsung and SK are already reacting "wisely and quickly" to the coronavirus with the industry leaders confirming they won't be spending a lot to expand production capacity.
Samsung didn't directly mention what impact it expects the coronavirus to have, in a conference call, though analysts and officials said prices would rise as disruptions in production at Chinese suppliers will be "positive" for the industry leader. Samsung said it won't increase its spending on chip facilities; as did SK, which "clearly confirmed" a severe investment cut in its facilities.
"In the short-term, Samsung and SK will directly benefit from a whopping rebound in chip pricing after an oversupply of chips back in late 2018," said a Samsung official. Bernstein Research said, "We think Samsung is being overly conservative on 2020 demand projections and therefore capital expenditure and capacity plans, thus making a full memory recovery even more likely."
In a fourth quarter earnings report, Monday, LG Chem, the world's top battery supplier, said its battery production lines in China have been stopped as the virus spreads.
But if the virus actually squeezes the Chinese economy, the world's second-largest, then that would limit the growth rate of the South Korean suppliers, according to analysts.
"A delayed restart of industrial production in China will be a major disruption. This will create a large negative shock to the Asian manufacturing supply chain as new orders from China for intermediate goods and raw materials slump," said Rajiv Biswas, IHS's Asia-Pacific Chief Economist in a report.
Kim Kyung-min at Hana Financial said the local brokerage expects the impact of the Wuhan virus pandemic to be "limited" to the display and semiconductor industries. However, he was worried that the electronics industry could face a cascading disruption that could possibly change the overall industries' growth forecast this year.
"Semiconductor and display industries are looking good and the virus effect will be quite helpful for major players in the industries. But the virus has exacerbated the economic unease and could push China's economic growth below 5.5 percent a year in the first quarter. That will hurt general consumer sentiment," Kim said.
The total number of the coronavirus cases in mainland China soared to 17,205, Feb. 2, according to the country's National Health Commission. The Chinese yuan has also fallen against the greenback on rising financial market concerns about China's worsening near-term economic outlook due to the virus.
