Korean tech blue chips squeezed by higher costs and weak pricing

Televisions are displayed at a retail shop in Seoul. [NEWS1]

Samsung Electronics and LG Electronics are dealing with a double whammy of rising costs and high inventory levels, a prelude to poor profitability.

The electronics companies have experienced double-digit growth in the costs of parts and transportation as the prices of their products rose marginally or even declined in the first half, according to regulatory disclosures released by the companies on Wednesday.

Samsung Electronics, the world's largest smartphone and television maker, is dealing with a 58 percent increase on year in the purchase price of application processors, the primary chipset in smartphones, in the January-June period.

The prices of flexible printed circuit assemblies (FPCA), a core component in the manufacturing of display panels, jumped 19 percent, and those of camera modules for smartphones increased 10 percent on year.

Transportation expenses, which include freight and logistics costs, went up 39.6 percent, affected by high fuel prices.

Prices of the semiconductor wafers used by the electronics maker inched up 4 percent in the first half.

LG Electronics had to pay more for raw materials essential to making home appliances, including refrigerators, washing machines, televisions and air conditioners. It reported a 22 percent increase in steel prices in the first half on year, a 20.3 percent rise in resin prices and a 40.2 percent jump in copper prices.

Chips used in televisions are 42.6 percent more expensive, while vehicle prices increased 39.1 percent. Its transportation costs climbed 46.6 percent.

Only panels for televisions and PC monitors became cheaper.

Samsung Electronics reported a 45 percent decrease in the cost of buying panels, while LG Electronics reported an 18.2 percent drop.

"Last year, televisions enjoyed spectacular growth thanks to pandemic-related demand, which pushed up the prices of panels," said a source in the display industry. "A downturn arrived this year."

Korean manufacturers are unable to pass on the rising costs to customers as competition is fierce, especially from China.

The prices of most of their products are only up single-digit percentages.

LG Electronics refrigerators and washing machines became 3 percent more expenses in the first half on year, while televisions are 4 percent more expensive.

PC monitor prices are up 2.7 percent; air conditioners are 5.9 percent cheaper.

Samsung Electronics smartphones are 9 percent more expensive, TVs 4 percent cheaper and memory chips flat.

High inventories, held by the manufacturers themselves and retailers, add insult to injury.

Samsung Electronics carried 17.6 trillion won ($13.3 billion) of inventory in the first half, up 110.5 percent on year. The figure covers end products and not components.

Samsung Electronics insists that the big number is not an indicator of weaker sales, without clearly explaining the stockpiling of the products.

LG Electronics held 5.4 trillion won of inventory during the cited period, up 14 percent on year.

Another concerning metric is factory operation rates. The operation rate of Samsung Electronics factories for televisions and other media products was 74.4 percent in the January-to-June period, down 3.3 percentage points on year.

In the same category, the LG Electronics operation rate fell by 17.4 percentage points to 80.4 percent.

Market trackers project weak demand will continue through the year.

TrendForce recently lowered its forecast for global smartphone shipments to 1.33 billion units from 1.38 billion this year. The Taiwan-based research firm predicts that shipments of televisions will likely drop to 212 million units compared to the initial forecast of 217 million units.

A combination of slow demand and rising costs may hit earnings.

The market consensus for the third-quarter operating profit at Samsung Electronics shrank to 13.5 trillion won as of Aug. 18 from an estimate of 17.3 trillion won made by analysts three months earlier. That of LG Electronics was reduced to 908.5 billion won from 1.1 trillion won.

"It might be tough for Samsung Electronics to improve profits in the second half due to declining chip prices," said Greg Roh, an analyst at HMC Investment & Securities.

"LG Electronics is facing challenges too, because the third quarter is a seasonally weak period for consumer electronics and it has shelled out a great amount for marketing."

BY CHOI EUN-KYUNG, PARK EUN-JEE [park.eunjee@joongang.co.kr]