Tech giant Samsung Electronics has flagged its first quarterly profit drop in two years, painting a grim outlook amid growing competition from Chinese smartphone makers and declining chip prices.
The South Korean firm, the world’s top maker of smartphones and memory chips, has enjoyed record profits in recent years despite a series of setbacks, including a humiliating recall and the jailing of its de facto chief.
But operating profit during the October to December period was expected to be around 10.8 trillion won ($9.8bn), down 28.7 percent from a year earlier, Samsung said in an earnings estimate on Tuesday.
The figure was below market consensus of about 13.5 trillion won, according to market researcher FnGuide.
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Sales dropped more than 10 percent to 59 trillion won in the period, Samsung said.
It cited “lacklustre demand in the memory business and intensifying competition in the smartphone business” for the dismal outlook.
“Memory earnings fell significantly … due to weaker-than-expected demand amid inventory adjustments at data-centre customers,” which led to a “greater-than-expected” drop in chip prices, it said.
“We expect earnings to remain subdued in the first quarter of 2019 due to difficult conditions for the memory business but strengthen in the second half.”
But analyst Kim Sun-woo of Meritz Securities said worsening supply and demand conditions for semiconductors and the structural challenges facing Samsung’s smartphone business will drag down the firm’s profits throughout 2019.
Demand for DRAM memory chips “will hit a low in the fourth quarter of 2019”, he told AFP news agency.
Samsung’s weaker earnings adds to worries for investors already on edge after US tech giant Apple last week took the rare move of lowering its quarterly sales forecast, citing poor iPhone sales in China.
“If Apple’s not selling, then is it Samsung that’s selling well? It is not. The smartphone market is already saturated,” senior analyst Greg Roh at Hyundai Motor Securities told Reuters news agency.
“Apple’s iPhones have not been selling well in China at least since Huawei’s chief finance officer was arrested. That’s even worse for Samsung because that would drag its chip prices down,” Roh said, referring to Apple as a Samsung chip client.
Canadian police arrested Meng Wanzhou, chief financial officer of Huawei, on December 1 at the request of the United States. US prosecutors have accused Meng of misleading banks about transactions linked to Iran, putting the lenders at risk of violating Washington’s sanctions. She denies wrongdoing and China has demanded her release.
Samsung withholds net profit and sector-by-sector business performance data until it releases its final earnings report, which is expected later this month.
For 2018, the firm expects operating profit to reach 58.9 trillion won, up nearly 10 percent from the previous year, and sales to inch up 1.6 percent to 243.5 trillion won.
Shares in Samsung Electronics, the flagship subsidiary of the Samsung Group that dominates South Korea’s economy, were down 0.4 percent in mid-morning trading.
While Samsung leads the global smartphone market with a 20 percent share, it faces mounting competition from Chinese rivals like Huawei – which surpassed Apple to take second place last year – offering quality devices at cheaper prices.
“Samsung is losing ground to Huawei, Xiaomi and other Chinese rivals in the huge China and India markets,” Neil Mawston, executive director at market researcher Strategy Analytics, said in a report.
Samsung once also had a 20 percent market share in China but has seen its sales tumble to less than one percent of the world’s largest smartphone market in the third quarter, and last month announced the closure of its factory in Tianjin.
It will reportedly roll out a new line-up of its flagship Galaxy handsets at next month’s World Mobile Congress in Barcelona as it seeks to regain a competitive edge in a market segment it once dominated.
Samsung is also set to introduce the world’s first bending smartphone in the first half.
The tech giant’s reputation suffered a major blow after a damaging worldwide recall of its Galaxy Note 7 devices over exploding batteries in 2016, which cost the firm billions of dollars and shattered its global brand image.
It also took another hit after the bribery conviction of Lee Jae-yong – the son and heir of the group’s ailing current Chairman Lee Kun-hee.
The 50-year-old scion was a key figure in the scandal that ousted former South Korean President Park Geun-hye following massive nationwide protests, and was sentenced to five years in jail last year.
But he was released from jail in February last year after several of his convictions were quashed on appeal.