Samsung Electronics shareholders meet in Suwon.
Photo: Yonhap News/Zuma PressWhen the novel coronavirus ripped through China earlier this year, Samsung Electronics Co. executives could take solace in a multiyear bet that diversified its smartphone production into Vietnam and India, insulating it somewhat as the world’s supply chain wheezed.
But as the coronavirus took on the proportions of a global pandemic—shuttering schools, businesses and gatherings from South Korea to North America to Europe—the value of that strategy eroded, forcing a re-evaluation of how much diversification can shield businesses and markets from such a widespread threat.
The pandemic has challenged Samsung, the world’s largest smartphone and memory-chip maker, on two fronts. Worries about the virus are weakening buyers’ demand for flashy devices, such as its new lineup of Galaxy handsets, and the supply chain in Asia is only beginning to re-emerge from lockdowns and quarantines that could still muffle access to key parts even outside China.
Those woes illustrate the pandemic’s economic magnitude and how it has tripped up even one of the world’s most diversified manufacturers. The dive in smartphone demand in China early this year is expected to foreshadow similar demand shock in Samsung’s most prized market, the U.S., as local and federal officials consider more drastic measures to curb the disease.
At Samsung’s annual shareholders’ meeting Wednesday, D.J. Koh, the president and chief executive of the company’s IT and mobile-communications division, acknowledged the virus was forcing them to revise demand projections for the company’s handsets.
“Originally the demand for smartphones was expected to grow this year,” he said. But with Covid-19 and the possibility its effects could last longer than expected, “the smartphone market is somewhat contracted.”
That contraction will be felt for months, if not the entire year. A Counterpoint Research analysis projected global smartphone sales for the first quarter could fall by at least 7% compared with the prior year’s, and that “downside risks are increasing daily.”
“The expectation of a quick recovery has diminished the further out we’ve gotten. Uncertainty keeps going up and the news keeps getting worse,” said IDC analyst Linn Huang, who has been assessing the pandemic’s impact on device sales trends.
The virus has already transformed Samsung’s operations, as it has for just about every other major company on the planet. On Monday, Samsung issued an internal memo urging all employees to “work from home where possible,” and said it would be conducting health screenings, including temperature checks, before allowing workers to enter any of its facilities. The Suwon, South Korea-based company has also restricted travel to trips that are “mission-critical,” it said.
Samsung also had to briefly shutter, on multiple occasions, a South Korean plant near the city of Daegu where it manufactures its Galaxy Z Flip devices and some Galaxy S20 phones, so that crews could disinfect the premises after cases of coronavirus were detected. Its share price has slid, as have those of its South Korean technology peers LG Electronics Inc. and chip maker SK Hynix Inc.
Some supply-chain issues are improving. As China turns the corner on its own crisis and the number of new cases decreases, logistics are springing back, said Mr. Huang. But factories may still be squeezed for critical components such as printed circuit boards if production doesn’t recover quickly enough to catch up to dwindling inventory, he said.
Samsung remains reliant on needed components from China for its factories in Vietnam and India.
Photo: Linh Luong Thai/Bloomberg NewsSamsung moved its factories out of China, but remains reliant on needed components from the country for its factories in Vietnam and India. Problems procuring some of those components were so urgent that Samsung had offered last month to infuse up to $2.1 billion in loans and cash payments to local suppliers.
What is expected to worsen is demand for Samsung’s handsets, now that the virus has reached the U.S. and Europe. Analysts have estimated the widespread lockdowns and quarantines in China, the world’s largest smartphone market, have depressed handset demand by more than 30% in the first quarter. The U.S. and Europe are expected to see a more moderate version of that sales shock as the virus disrupts day-to-day life.
The depressed demand also affects Samsung’s sales strategy at a critical time, as it attempts to woo new consumers with its newly 5G-equipped yet pricey Galaxy S20 line.
And though Samsung Electronics’ prized handsets and chips are primarily made in Asia, the pandemic’s impact in the U.S. and Europe could have other manufacturing implications for the conglomerate’s businesses. Europe is home to some of its television and battery manufacturing operations, and Samsung has foundry and other manufacturing plants in the U.S., including a washing-machine factory in South Carolina.
Hope glimmers yet: Its home country of South Korea, where its key factories are based, has emerged as a world-wide model for combating Covid-19, with widespread testing and treatment that has helped cap cases as other countries have stumbled.
But even precautionary measures around Wednesday’s shareholders’ meeting in Suwon kept some of those worries on display. Mask-wearing attendees were required to have their temperatures taken with hand-held devices and were given hand sanitizer before entering the venue. They sat with two seats between them as the meeting began, and at least two medical tents were on site.
Write to Timothy W. Martin at timothy.martin@wsj.com
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2020-03-19 10:30:00Z
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