As the sharp rise in memory semiconductor (hereinafter "memory") prices has increased the cost burden for smartphone manufacturers, it is expected that pressure to lower supply prices will intensify for domestic electronic component companies. However, LG Innotek and Samsung Electro-Mechanics are projected to experience different impacts depending on their customer dependence and product-specific supply and demand conditions.
According to market research firm TrendForce on the 5th, contract prices for general-purpose DRAM and NAND flash in the fourth quarter of this year are expected to rise by 10% to 15% and 15% to 20%, respectively, compared to the previous quarter. Mobile DRAM prices for smartphones are expected to remain flat or see a slight increase during the same period.
The upward trend in memory prices is directly translating into increased cost burdens for set (finished product) manufacturers. Apple, one of the world's largest memory buyers, is no exception. This is because Apple uses memory not only in iPhones but also in various products such as Macs and iPads. John Turners, Apple's Chief Executive Officer (CEO), recently stated during an earnings conference call, "While memory costs increased in the September quarter compared to the June quarter, this burden was partially offset by existing inventory and cost reductions in some non-memory components," while also predicting that "memory costs will be even higher in the December quarter." Kevin Parekh, Apple's Chief Financial Officer (CFO), also explained that the company is continuously pursuing cost reductions for non-memory components.
Consequently, industry sentiment suggests that pressure to lower prices on component suppliers will grow. LG Innotek is analyzed to face relatively greater impact due to its high revenue dependence on Apple. In fact, of LG Innotek's total first-half revenue of 1.1062 trillion won this year, approximately 80%, or 884.15 billion won, was generated from a single customer. Although the customer's name has not been disclosed, industry sources believe it to be Apple. Particularly for its main product, camera modules, fierce competition with Chinese companies is expected to make customers' cost-cutting demands work against LG Innotek in price negotiations.
LG Innotek has already suffered a hit to profitability due to the decline in the won-dollar exchange rate. While third-quarter revenue this year was 636.71 billion won, an 18.6% increase from the same period last year, operating profit fell by 53.4% to 94.8 billion won. Despite expanded supply of high-value-added camera modules, the exchange rate decline dragged down profits. If supply price reductions are realized in the future, the recovery of profitability will inevitably slow down.
In contrast, Samsung Electro-Mechanics is assessed to be in a relatively advantageous position in price negotiations. Although Samsung Electro-Mechanics also supplies Apple with MLCCs (multilayer ceramic capacitors) and other components, it is known that the proportion of related revenue is not significant. Accordingly, the impact of Apple's cost-cutting demands on the company's overall performance is judged to be relatively limited. Opinions are emerging in the component industry that short-term pressure for price reductions will also not be significant, considering supply constraints and high substitution difficulty for MLCCs and semiconductor package substrates.
The expansion of demand for high-value-added components, such as those for AI servers, which can offset unit price pressure on smartphone parts, is also supporting Samsung Electro-Mechanics' performance. In a recent earnings conference call, Samsung Electro-Mechanics explained that the number of suppliers capable of providing MLCCs is limited and it takes considerable time to expand production capacity, so the tight supply situation will continue. Indeed, third-quarter revenue this year reached 376.33 billion won, an all-time quarterly high, driven by increased sales of MLCCs and semiconductor package substrates.
Kim Min-kyung, a research analyst at Hana Securities, stated, "Differentiation based on Apple's profitability defense capabilities and component makers' bargaining power within their customer base will be the key variable for future performance."
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