Headache, but Also Some Relief in Q3 for Asian OEMs

Reporting season is nearly over for the third quarter, so we've taken a look at the leading OEMs based in Asia to see where things stand. It was a tough quarter for most, but continued strength for smartphones appears to have tempered some of the continuing effects of Japan's post-tsunami recovery, China's wage uncertainty, and retail weakness in Europe and the US. Here's a snapshot going into the fourth quarter:

Korea's {complink 4751|Samsung Electronics Co. Ltd.} saw profits fall a dramatic 23 percent, a surprising figure given the high-profile success for its Galaxy tablets and smartphones. The decline was due to a downturn in its mainstay chip business, and a lesser fall in demand for flat panel displays.

That would be good news for {complink 5114|Sony Corp.}, whose handset joint venture with {complink 1879|Ericsson AB} broke even on the quarter. Shipments were down 9 percent compared to the same quarter last year. But the operating margin was up 2 percent, compared to a loss of 3 percent last year. The shift is explained, the company claimed, by the trend toward smartphones, from so-called “feature phones,” which have lower profit margins.

Sony added to the news yesterday with an announcement that it was buying out its Ericsson for $1.5 billion, and taking sole control of the mobile venture. The third quarter move means a shift for suppliers, most based in Asia, with Japan's Sony now firmly in the smartphone business, and Ericsson — which helped invent the cellphone industry — out. They're going to focus on networking equipment.

LG took nearly $130 million in losses in the quarter, but like Samsung, the numbers were contradictory for the Korean giant's suppliers. Shipments of flat screens were the highest ever in a third quarter for the company. But sales were down. That would seem to imply lower orders in the future, but there's not much evidence of that yet. Insofar as LG sales stay flat, orders to suppliers, many of which are in China, will have to sag at some point. But not yet.

In China, ZTE, the massive networking and mobile device company, passed Apple to become the world's fourth-largest maker of mobile devices (Nokia is still first). The reason: price. ZTE is leading growth in lower-price models and taking most of the bottom end of a 14 percent increase in mobile phone sales this year.

What can suppliers take away from this snapshot? The most important lesson appears to be that OEMs are still increasing production even in the face of lagging consumer sales. The bet seems to be that taking control of new smartphone and tablet businesses will pay off post-crisis, so losses now will be offset. Weak sales by OEMs aren't rippling down the supply chains as much as they would in a more normal economic environment. High-stakes bets for OEMs should mean stability for suppliers for the rest of the year and into the spring. News like sales growth from ZTE, and the Sony-Ericsson buyout, should make suppliers able to do something that's not always easy in 2011: smile with relief.

5 comments on “Headache, but Also Some Relief in Q3 for Asian OEMs

  1. electronics862
    October 31, 2011

    Thanks for the post Mac. By looking at the Samsung is down 23%, LG's $130 million losses in the quarter is the whole market going down? But still the supply is high, there is always a hope for the best market. The smartphone and tablet will be the prominent portion of the e-market.

  2. Daniel
    November 1, 2011

    Marc, Asian OEM companies may have a good Q3 results, because of the impact of Q1 & Q2. But due to the flood in Thailand, the Q4 results may not be good, more over again there may be chance for global economic slowdown too.

  3. Jay_Bond
    November 1, 2011

    My takeaway is that these Q3 numbers are overall a good thing. Yes, some companies like Samsung and LG show losses, but this is due to specific market segments pulling them down, not overall sales performance. This means that Q4 numbers and total 2011 numbers should show us that despite global economic issues, the electronics industry is doing well and not as downtrodden as other global markets.

  4. Marc Herman
    November 1, 2011

    Heh. I see what you mean; my sense of it was that we are seeing with samsung a great example of the difference between bottom line and public profile. Samsung, thanks to the Galaxy line, is absolutely everywhere — except for in the black part of the balance sheet. We all know why that is so, but it's still a nice reminder that visibility doesn't always mean clear success. At least in the short term. Thanks for your comment. 

  5. Marc Herman
    November 1, 2011

    I have that sense too, yeah. Though if you can answer your own question on timing, then I would also like some stock market tips from you.

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