Excess inventory weighs on leading tech firms in Korea
Samsung, SK, LG groups’ tech units ask suppliers for concessions
During the peak of the COVID-19 pandemic, Korea’s leading tech companies largely benefited from consumers staying at home and purchasing products to make their lives more comfortable.
Now, as developed and emerging economies continue to emerge from the pandemic, such consumption patterns have changed. Consumers in the United States, one of the top markets for Korean manufacturers of high-tech products, are changing their buying habits to cope with the highest inflation levels seen in about four decades.
As consumers in key markets cut back on purchases of durable goods such as clothing, tech gadgets and home appliances, leading Korean tech exporters have been struggling after inaccurately assessing supply and demand. Samsung, LG and SK’s technology affiliates have accumulated substantial amounts of inventory, causing the prices of their flagship products to drop, company officials contacted by The Korea Times said.
Crucial to factory utilization rates, inventory refers to the amount of products a company stores on its premises or consigned to third parties such as retailers. In the world of business, inventory usually acts as a buffer between factory output and the completion of customers’ orders.
Inventory also represents current assets as a company normally intends to sell its finished goods within a limited amount of time, typically a year.
Samsung Electronics, the world’s top manufacturer of TVs, smartphones, memory chips and displays, for example, supplies its flagship products to large retailers in North America, such as Target. And changes in the shopping patterns of U.S. consumers caused major retailers there to revise down their profit outlooks. This also caused other big U.S. retailers, including Best Buy and Walmart, to manage their high inventory levels by cancelling inbound shipments.
“Samsung Electronics has no option but to temporarily scale back production at its TV, mobile phone and home appliance plants to respond to demand-side erosion,” an official said. “Mounting concerns over inflation are thought to be the main culprit of eroding end-demand. But the point is that the company can’t raise the prices of key products and this is why Samsung is becoming more aggressive in getting rid of its high level of inventory”.
As of the third quarter of this year, Samsung Electronics possessed 57.31 trillion won worth of inventory assets, up 10 percent from the previous quarter, according to Samsung’s quarterly report to the Financial Supervisory Service (FSS). By the third quarter of this year, LG Electronics had 11.20 trillion won worth of inventory assets, up 15.7 percent from the previous quarter. LG Electronics also supplies TVs and home appliances to major retailers in the U.S., Europe, Asia and South America.
“Despite consumers abandoning upscale retailers because of growing concerns over inflation, we can’t supply our key products to retailers at huge discounts because keeping higher product prices can partially offset profit declines. It’s a smart move to monitor closely any signs of changing consumer behavior. But it’s too early to say that the global consumer market is beginning to see some light at the end of the tunnel because I would say a lot of conditions and circumstances still remain unfavorable compared to the pre-COVID years,” an executive at one LG Group tech affiliate said by telephone, asking not to be identified.
Adjusting factory utilization
rates, slashing investments
Given the numbers provided by the FSS, it’s fair to say inventory levels, not considered as cash equivalents but as one of the key figures directly affecting a company’s cash flow, are elevated compared to the last year.
Samsung, LG and SK Group’s tech affiliates are taking action to heavily hold back on procurement orders and asking their top local suppliers for concessions, such as delayed deliveries, order reductions and even cancellations amid record high inventory levels, each company said. Samsung Electronics, for example, is considering halting the operation of its two smartphone plants in Vietnam for two weeks from December this year to clear inventory.
“We are not positive about the forecast of the global memory chip market in the fourth quarter of this year due to continued weak demand for tech products. Plus, Samsung’s set-making business divisions are set to defend profit margins for the remainder of this year,” an executive at Samsung said. Samsung was cutting down on the production of smartphones, TVs and home appliances because of “swelling inventories,” which LG is also doing.
Micron Technology of the U.S. and SK hynix both confirmed plans to significantly reduce facility investments next year due to what they called an “unprecedented deterioration” in memory chip demand. Samsung, the global leader in the memory chip segment, still remains confident about consolidating its ongoing dominance of the sector as it has no plans for production cuts or a huge reduction in capital expenditures next year.
Rising inflation, which usually impacts multinational tech companies including Samsung, SK, LG and Hyundai, has been forcing investors to rethink whether stocks, which grew in an environment of low interest rates, will be able to continue growing.
But the central point is that while central banks around the world are expected to follow the U.S. Federal Reserve’s widely-anticipated move to lift its benchmark rate to 4.75 percent and 5 percent by March next year, the overall economy is not in such bad shape.
“Similar to the broader economy, technology stocks are very sensitive to inflation, rising benchmark rates and a strong dollar. It looks like all leading technology companies have to prepare for the risk of a global slowdown by seeking to clear out inventory,” said Kim Yong-jin, an economics professor at Sogang University in Seoul.
“Because Samsung, SK and LG’s technology affiliates will have to be highly responsive to the economic environment until the second quarter of next year, I would say these leading tech firms have no option but to further tighten their belts including pausing hiring in unprofitable businesses and winding down some products,” Kim added.
Representatives at Samsung Electronics and LG Electronics declined to comment regarding questions over the specifics of additional belt-tightening measures.