Korean chipmakers face more setbacks
Companies hit hard by falling profit, trade row with Japan, US-China conflict
By Nam Hyun-woo
Samsung, SK and other large business groups are struggling to minimize the fallout from the global economic downturn, the growing trade conflict with Japan and the prolonged U.S.-China trade row, according to industry analysts Monday.
The companies have suffered from plunging profits in the first half of 2019 and face a more bleak business outlook for the rest of the year, the analysts said, stressing Korea Inc. is facing escalating downsize risks at home and abroad.
In particular, deteriorating business conditions for Samsung Electronics and SK hynix ― Korea's two largest semiconductor makers, which account for more than 20 percent of the nation's outbound shipments ― have been fueling fear over a possible economic crisis.
According to the analysts, Samsung Electronics is expected to announce a slew of disappointing numbers during its earnings announcement for the second quarter slated for Wednesday.
The world's largest chipmaker has already sent a warning to the market through its earnings guidance for the period, in which it said its operating profit is expected to plunge to 6.5 trillion won, down 56 percent from a year earlier.
SK hynix has already triggered an alarm, as its second-quarter operating profit plummeted a whopping 89 percent from a year earlier to 637.6 billion won.
The two titans' suffering is largely attributed to the global memory chip price downturn, which has been showing signs of rebound recently, but Japan's export restrictions on three core materials needed to make semiconductors is posing as another challenge.
Both Samsung Electronics and SK hynix, which heavily rely on Japanese imports, are working to secure the materials, but have yet to come up with effective countermeasures if Japan's restrictions are prolonged.
During a conference call, SK hynix Chief Financial Officer Cha Jin-Seok said, “It is difficult to rule out the possibility of production setbacks if Japan's export restrictions get protracted.”
The company said it plans to cut its DRAM production capacity later this year and reduce NAND wafer input by more than 15 percent this year, up from its earlier plan to decrease it by 10 percent.
Samsung Electronics is yet to announce plans on adjusting its output, but analysts expect Samsung may come up with similar plans to counter uncertainties in securing materials and predicting demands.
Refiners and chemical firms also ended up logging contracted numbers in the second quarter.
S-Oil saw an operating loss of 90.52 billion won in the second quarter and Hyundai Oilbank suffered a 50.8 percent year-on-year decline in operating profit. SK Innovation also posted a 41.6 percent year-on-year decline in its operating profit for the second quarter.
Japan's plan to remove Korea from its “whitelist” of countries with preferential trade treatment is another concern for manufacturers. Since the removal will affect trade of at least 1,100 items, which include parts necessary for making electronic devices, companies such as Samsung Electronics and LG Electronics are feared to be affected.
“Companies have been suffering from the fallout of the protracted U.S.-China trade conflict, and now they have to predict what will happen in the Korea-Japan trade relations,” said an official at one of Korea's large business groups.
“Too many uncertainties are swaying businesses all at the same time. It is so difficult to come up with future strategies and investment plans, and this will slow the country's economic growth engine.”
Analysts express concerns that sluggish corporate performance has led to the slowdown of the entire economy.
“The private sector's contribution to the country's economic growth has turned negative, and businesses' outlook has worsened,” said Kim Yun-kyung, business team head at Korea Economic Research Institute. “All of these are leading to growing concerns on an economic slowdown in the latter half of this year.”