Samsung Elec, SK hynix on stockpile of inventories likely to adjust yield H2

[Graphics by Song Ji-yoon]

South Korean IT component and finished goods majors are expected adjust their factory operation and output in the second half as they are required to ease the stockpiling of inventories from slowed demand.

According to Samsung Electronics’ half-year business report, its inventory assets totaled 52.09 trillion won ($39.6 billion) as of the end of June, up 26 percent from 10.7 trillion won six months ago.

It is the first time that the company’s inventory assets surpassed 50 trillion won.

Inventory assets in device solutions (DS) division overseeing chips surged 30.7 percent, device eXperience (DX) in charge of TVs and home appliances 21.3 percent, and in display 21.8 percent.

Inventory assets accounted for 11.6 percent of Samsung Electronics’ entire assets, up 1.9 percentage points from 9.7 percent last year.

The increase in inventory assets come as Samsung Electronics has been more active in securing raw materials and stocked up products ahead of supply chain setback. Weak demand for TVs, smartphones, and chips also led to more stocks.

“We expanded inventory holdings this year due to supply issues deriving from Russia-Ukraine war,” said Suh Byung-hoon, vice president at Samsung Electronics, during a conference call after second quarter earnings release. “We expect inventory in DX division to adjust to an adequate level in the second half. As for DS division, we will carry out an appropriate inventory policy linked to market conditions.”

Inventory at memory chipmaker SK hynix Inc. has also surged 33.2 percent to 11.88 trillion won at the end of June from the end of December. Inventory assets took up 11.4 percent of its entire assets in June, up from 9.3 percent. Inventory turnover, on the other hand, fell to 2.7 times from 3.2 times.

SK hynix during a recent conference call noted that inventory of memory chips like DRAM and NAND flash has increased and made a downward adjustment in memory chip demand outlook for the second half.

Inventory of liquid crystal displays (LCDs) at LG Display Co. that makes TV panels has also surged to above appropriate level due to slow demand and China’s Covid-19 lockdown. Inventory assets were up 41 percent in June from last year to 4.7 trillion won. They accounted for 12.3 percent of entire assets, up from 8.8 percent. Inventory turnover fell to 5.4 times from 8.9 times.

Inventory at LG Electronics has also increased this year on slow demand for home appliances and TVs.

Excessive inventory leads to more vulnerability to market changes and less flexibility in corporate activity. It also increases cost burden and deteriorates profitability when there are concerns about economic slowdown and sluggish demand from inflation.

Companies, as a result, are focused on normalizing inventory by lowering utilization of production lines.

Samsung Electronics has lowered utilization of its visual device production line to 63.7 percent in the second quarter from 84.3 percent in the first quarter and handset production line to 70.2 percent from 81 percent.

LG Electronics also adjusted utilization rate for major home appliance products like refrigerators to 119 percent from 127 percent, washing machines 81 percent from 99 percent, and air conditioners to 108 percent from 129 percent. Utilization for TV production line fell sharply to 72.5 percent from 87.8 percent.

A downward adjustment has led LG Electronics’ TV business to suffer 18.9 billion won in losses in the second quarter, the first quarterly red in 7 years.

Utilization rate at LG Display’s Gumi display production line fell to 97 percent in the second quarter from full operations in the previous quarter.

Companies are also reconsidering facility investment plans.

SK hynix had planned to hold a board meeting to approve expansion of its Cheongju plant in North Chungcheong Province in the end of June but it pushed off the decision due to unfavorable chip industry environment.

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