Samsung profits drop by 95% as gadget buying slumps

Samsung profit plunge indicates the economic rollercoaster for the industry is far from over.
27 April 2023

Samsung – world-class canary in the mine of the industry’s prospects?

Samsung Electronics, currently second in the world when it comes to smartphone sales (behind only Apple), saw the falling demand for tech devices hit it hard in January-March 2023, with a profit plunge of 95% compared to the same quarter in 2022.

The plunge means the January-March 2023 quarter saw Samsung register its smallest profit overall for 14 years. Admittedly, Samsung being Samsung, that still leaves the company in the black to the tune of 640 billion won ($478.6 million) for the quarter, so it’s not as though markets will especially crash in panic at the news, but it is both significant and indicative of a wider trend that’s both driving and, perversely, following the recent geopolitical and socioeconomic upheaval in the worldwide market for high technology.

Also, it’s worth noting the true scale of the Samsung plunge – 640 billion won is all very well, but for the same quarter in 2022, the company rakes in profits of 14.12 trillion won. The company’s revenue fell 18%, but still looked healthy at 63.7 trillion won.

Samsung’s chip division in particular took the brunt of the impact, going from a 8.45 trillion won profit in 2022 to a lost of 4.58 trillion won in 2023.

The trend behind the figures.

That is probably the most cogent expression yet of a trend that manifested in 2022 and continues in 2023. A combination of geopolitical elements like Russia’s illegal invasion of Ukraine and the subsequent economic warfare that’s been waged between President Putin’s Russia and much of the NATO bloc has led to difficulty with price rises above wages, and inflation has become an increasingly depressive factor on the purchase of new high-tech equipment.

Added to that, the forced necessity of the Covid years, when sales of high-tech chip-based technology were at a premium as the world moved into a stay-at-home, work-from-home basis, means that an unprecedented number of people around the world were driven to buy new technology within the same period, and that naturally, much of it is still under warranty and so the urge to buy replacement kit has been artificially supressed by exactly the same conditions that previously saw it artificially inflated.

That reduction in tech-buying as a result of the inflationary pressures in the market and the previous buying spree has led companies to run down stock, rather than particularly over-invest in new product buys (with the iPhone 14 being a notable exception to that rule, because it’s a new iPhone, you could make it a smoothie and call it Kool-Aid).

For all the sardonic pops at Apple though, this running down of stock has had a serious effect – as Samsung is feeling. Chip prices have dropped around 70% across the last nine months. Samsung, along with some smaller rivals (which, to be fair, means most of the chip producing world) announced it would be cutting its own production of chips in April 2023, with at least the intention of stimulating re-growth.

Wary consumer syndrome.

Will that work?

Analysts are at least a touch sceptical – while inflationary pressures persist (largely depending on international economic conflict, which is currently the alternative to international military conflict), the likelihood is that consumers will remain wary of buying anything with any hint of frivolity about it – which includes new tech.

That said, it’s expected that by the second half of 2023, stocks will be running down and the chip market will begin to rise again – albeit at a slower pace than expected while inflationary pressures persist.

In preparation for either the rebound, or more likely the slow hill-climb ahead of the chip market later in the year, Samsung spent 9.8 trillion won on chips, while setting up two new production bases – one in Texas and one in Pyeongtaek, South Korea.

“Samsung Electronics will continue to invest in memory semiconductors at a similar level to the previous year … to secure mid- to long-term competitiveness,” it said, by way of explaining both the investment and the new factories.

We mentioned that Samsung is currently the world’s number 2 smartphone maker, and that’s borne out in the company’s mobile business in Q1, despite its overall 95% profit plunge. While last year, the January-March quarter saw it pull in 3.82 trillion won profit, this year it just edged ahead, at 3.94 trillion won.

A struggle for survival.

The trend is important to the whole industry of course, and by no means all chip-reliant businesses will have the billions or even trillions of won cushion that Samsung does. The question will be whether, given the relative nosedive of profits in firms like Samsung, and the reasons behind them, how many smaller firms will find themselves going to the wall before the demand for chips and advanced technology crawls its way back out of its current doldrums.

Samsung expects to make a “slight” recovery in the next quarter, and to pull laboriously back to something like its former strength, doubtless buoyed by its mobile arm until the chip sector begins to move in the right direction again. The same will be true of other tech behemoths – even if, as we’ve seen throughout late 2022 and early 2023, they have to lose staff like chunks of hot dog during a margarita bender to do it.

The question is how much of the sector will have the resilience to bounce back across the course of 2023. And the Samsung results show one thing above all – the rollercoaster of Covid, post-Covid, geopolitics and inflationary economic spirals that dominated the last few years is not quite done with the tech industry just yet.