Samsung Issues First-Quarter Profit Warning, Markets Surprised

A drop in the prices in the global market for memory chips and a slowdown in demand for display panels has forced South Korean tech giant Samsung to announce a surprising profit warning. This announcement by one of the largest tech firms of the world also indicates the tough times that technology companies are facing in the wake of an economic slowdown across the globe.

This latest profit warning from the South Korean technology company was preceded by a similar but a much more shocking announcement by US tech giant Apple when three months ago the company announced its first ever profit warning since 2002 as the company cited the “magnitude” of the economic slowdown in China to be one of the major causes of the warning.

And that announcement was followed by a forecast for its first drop in quarterly operating profits in two years a few days later the world’s biggest chip and smartphone maker Samsung. On that occasion the company had cited issues related to “mounting macro uncertainties” for the weaker chip and smartphone sales in the fourth quarter of 2018.

While there has not been much of an improvement in the market conditions, on Tuesday, Samsung said that the company would miss its forecasts for the first-quarter profits. Te performance of Samsung significantly depends on the performance of its computer chips business.  “The company expects the scope of price declines in main memory chip products to be larger than expected,” Samsung said.

Global electronics firms would be negatively impacted by the economic slowdown in the Chinese economy and the ongoing US-China trade tensions, analysts have warned. They have also predicted that prices of memory chips could have gone down because there could have been a glut of memory chips due to reduction in orders from data-centred companies such as Amazon and Google and weaker smartphone sales.

Poor demand for Apple’s iPhones has also hit Samsung’s chip business because the company supplies the display panels and chips for iPhones of Apple. While being a competitor in the smartphone industry, Apple is also the largest customer of Samsung.

The revenues of Samsung got reduced by 4.5% to $84.3bn (£63.7bn) in the three months to 29 December from a year earlier because of weak iPhone sales and the Chinese downturn, Apple said in January. Profits fell to $19.97bn. Because consumers now take longer to upgrade their phones., there has been a slowdown in smartphone sales.

“Inventories piling up on its memory chip side and the weak performance of its display panels business due to bad sales of Apple’s iPhones are hurting profitability for Samsung,” Lee Won-sik, an analyst at Shinyoung Securities, told Reuters.

Between January and March, Samsung was forecast to make a 7.2tn won (£4.66bn) operating profit which was 50 per cent lower than the company had made a year ago.

Despite both Apple and Samsung blaming the slowdown in China for their woes, the companies are also facing stiff competition from numerous rivals around the world which includes a number of companies from China itself which are churning out cheaper phones than both the companies but with matching hardware quality.

(Adapted from TheGuardian.com)

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