Big Tech companies prosper despite chip shortage4 min read . Updated: 08 Apr 2021, 10:35 AM IST
- Samsung’s forecast of a 44% rise in quarterly operating profit shows strong demand for phones, other consumer electronics
The global semiconductor shortage, snarling the availability of everything from cars to refrigerators, hasn’t crimped big tech’s profits.
Churning out products around the clock, semiconductor giants can’t keep pace with demand, as vaccines roll out, economies reopen and people keep spending.
An early barometer of the tech industry’s ongoing financial strength came Wednesday, as Samsung Electronics Co. forecast a 44% rise in operating profit despite its U.S. chip production getting wiped out for weeks due to severe weather in Texas. If not for that, Samsung’s semiconductor operating profit would have matched, if not topped, last year’s first-quarter performance, industry analysts said.
But the surprise driver of Samsung’s expected bottom line was a resurgence in sales of its smartphones and home appliances.
The company’s mobile-business operating profit, aided by a weakened Huawei Technologies Co. hit by sanctions, rose roughly 50% from the prior year, while it doubled in its consumer electronics division, which includes appliances, according to estimates by CW Chung, a Seoul-based analyst at Nomura Securities.
“Basically the consumer spending and sentiment appears to be very strong," Mr. Chung said. “People can’t travel, so they’re spending money on durable goods, smartphones, TVs, home appliances."
Global smartphone shipments of all brands slid 8% in 2020 over the prior year, according to market researcher Strategy Analytics, as consumers rode out the pandemic as with prior downturns by curbing spending on flashy gadgets. But this year, as people feel more confident about an economic rebound, smartphone sales should rise about 7%, the firm projects.
In the opening months of this year, Samsung’s mobile phone business prospered by moving up the launch of its flagship Galaxy S21 model by roughly a month from its usual timetable. It also benefited from a weakened Huawei Technologies plus LG Electronics Inc.’s signaling in January that it would exit the mobile-phone industry, which the South Korean company made official on Monday.
Samsung likely avoided the worst effects of any component shortages because of its standing as the world’s biggest smartphone maker and the fact it makes many of the key parts itself, from memory chips to flexible displays, said Neil Mawston, executive director at Strategy Analytics.
“There’s a post-Covid recovery going on," Mr. Mawston added, “and when people get more spare cash they want more gadgets."
As a supplier, Samsung is likely to reap even greater benefits in the months ahead, as the full effects of the chip shortage materialize—and that hands manufacturers like itself greater pricing power. After boom years in 2017 and 2018, major semiconductor makers ended up with a glut of excess supply and responded by pulling back on multibillion-dollar investments that boost capacity.
Only in recent months have chip makers aggressively ramped back up their capital expenditure plans. Taiwan Semiconductor Manufacturing Co. last week said it would invest $100 billion over the next three years to boost production capacity, following Intel Corp.’s planned $20 billion on two new chip factories. Samsung previously earmarked about $116 billion by 2030 to further diversify its chip production, and is considering an investment of up to $17 billion to build a new facility in the U.S.
But those moves will take months, if not years, to resolve the widespread shortages. In the U.S., companies ranging from auto makers to home appliance makers have urged the Biden administration to craft measures to boost domestic chip production. Roughly $50 billion of President Biden’s $2.3 trillion infrastructure plan will go toward the American semiconductor industry, offering production incentives among other moves.
The Biden administration is expected to meet later this month with chip makers and other manufacturers, with Samsung a likely participant.
In the first three months of the year, prices actually slid for NAND flash memory, which gives devices their storage capacity, while prices for DRAM chips used in computers and servers rose in the modest single digits, said Sanjeev Rana, a senior analyst at CLSA, a Seoul-based brokerage. But in the coming months, NAND prices will rise and DRAM prices should grow 15% to 20%, he added. Samsung is the largest maker of both types of chips.
“About the chip shortage, why should it be terrible for semiconductor companies? It’ll be terrible for the customers, but not necessarily for the producers," Mr. Rana said. “It’s actually positive for them."
Supply crunch or not, chips are becoming more ubiquitous. Total semiconductor unit shipments are expected to increase 13% this year to a record 1.13 trillion devices, according to IC Insights Inc., a semiconductor-market researcher. Shipments grew just 3% in 2020.
The PHLX Semiconductor stock-price index, which includes large chip makers and suppliers, is up 17% this year.
The chip shortages may not be resolved for another two to three years, with virtually no shot of showing improvement through 2021, said Hui He, the principal analyst of semiconductors at market-research firm Omdia. The backlog is exacerbated by newer demand for chips, such as the shift to remote working, plus existing customers stockpiling extra inventory over fears of price increases or product unavailability, she added.
The heavy investments into new manufacturing sites will also take years to become operational: “Building up new foundries will not be easy," Ms. He said. “It’s not a short amount of time."
This story has been published from a wire agency feed without modifications to the text.