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Samsung Will Have Tough time turning a Profit in 2016

January 6, 2016 - Written By Cory McNutt

After a very bumpy 2014 and early 2015, Samsung is expected to announce its second straight quarter of annual profit during the period of October – December, but analysts say not to expect 2016 to be quite as forgiving.  Samsung was able to show profits in 2015 because of their components business – memory chips and displays – but a slower market in China and emerging nations continue to erode their sales.  Samsung was always able to turn to its component sales as a backup to offset slower smartphone sales…but the market has to be there to support those component sales.  Park Jung-hoon, fund manager for HDC Asset Management, said, “I initially thought Samsung’s 2016 profits would fall but still be close to 2015’s, but that seems unrealistic at this point.  Nobody has any idea about when and by how much demand can recover.”

Based on a survey of 30 analysts, Thomson Reuters SmartEstimate originally thought that Samsung may show a profit of 26-percent over the same period last year, but many brokers are now cutting their forecasts due to the weaker demand for memory chips and displays.  Even Samsung Chief Executive Kwon Oh-hyun spoke of his concern of the weak global economy.  If there is any silver lining in this cloud for Samsung, they are in good company – even Apple shares dropped 2.5-percent after it was discovered that Apple would cut production of its latest iPhone models by 30-percent due to an abundance of inventory going into the January -March quarter.

Technology gadgets are one place where consumers, especially in emerging nations, will cut corners when money is tight.  TrendForce is predicting a 0.6-percentage drop or $329 billion in memory chips as global sales of smartphones slow down.  Microsoft’s Windows 10 has not sparked the demand for personal computers…weaker sales of the new iPhone…and key products such as televisions and laptops have declined steadily during the fourth quarter…have all had a major impact on Samsung’s chip and display sales.  KTB Securities analyst Jin Sung-hye said in a report that “Inventory buildup stemming from weak demand will push components prices to lower-than-anticipated levels during the first half of 2016, cutting a 2016 profit forecast for Samsung to 24.2 trillion won from 25.4 trillion won previously.”

Samsung’s $58 billion cash reserves and their still commanding lead in technology will allow them to weather the storm and continue to develop 10-nano processors and foldable screens, but it will be hard for Samsung to make up for those weaker sales if it loses smartphone market share to competitors Apple and Huawei.  While auto components and healthcare products seem to be markets that Samsung is trying to grow, it will take years before they generate enough profits to make a real difference.