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10 October 2019

OLED uptake tips LG to record sales while Samsung arrests slide

South Korea’s two electronics giants Samsung and LG are often compared but the headline results can mask the real underlying story. There is something of this in the latest preliminary Q3 2019 results with LG posting record sales while Samsung registers a 56% fall in profits. Yet in the parallel universe where results are judged by expectations rather than actual attainment, Samsung emerged the happier because its profits beat analyst predictions by around 6% and sales were also above that line, among wider indications that the overall tech supply chain which it relies on so much for revenues is recovering from disruptions faster than had been expected.

The bigger picture is complex because both companies have fingers in so many pies, but we should remember we are not quite comparing apples with apples because there are some significant differences as well as overlaps. For one, Samsung is about four times bigger with 2019 revenues heading for over $200 billion compared with $50 million for LG.

As CE (Consumer Electronics) giants, there is indeed a lot of overlap, with both boasting significant presence in TVs, computer monitors, home theater systems, refrigerators, washing machines, wearable devices, smart appliances, smartphones and solar panels. But the extent of their involvement varies, such that Samsung is the market leader in smartphones with 31% of the global market ahead of Apple at 22% and Huawei third at 10%, while LG is only a bit part player on 3%, although much more in the US. Samsung is therefore much more exposed to fluctuations in the smartphone market than LG.

An even bigger difference is that Samsung is now the world’s biggest semiconductor company, having regained that title from Intel in January 2018 with $73.6 billion in sales in 2018, which was 20.4% up on the previous year to yield a 15.5% global market share and generating revenues exceeding LG’s entire turnover. Of this, almost 90% came from memory chip sales, so Samsung is above all vulnerable to fluctuations in that volatile market, as the pun goes.

To put a bit more flesh on that, Samsung as of Q2 2019 held 45.7% of the global dynamic random-access memory (DRAM), these being chips that, unlike flash memory, are volatile so that data requires electric power to be sustained. Samsung is also number one in NAND flash memory chips with 34.9%, these being non-volatile chips that do not need power to retain data.

With this background, the current Q3 results can be analyzed more clearly.

Samsung has projected a 56% drop in third-quarter operating profit to about $6.4 billion, while revenue slid 5.3% year-on-year to $51.8 billion. However, both results are in comparison with the company’s best ever quarter a year ago and are also as indicated slightly better than had been expected. Ahead of the full publication, Samsung declined to elaborate on reasons, but we can confirm they reflect decline in smartphone sales and prices, combined with earlier intensifying competition in its memory chip business exacerbated by global forces, notably the intensifying trade war between the US and China.

Resulting uncertainty has cut demand for chips as well as displays, hurting Samsung more than LG, having previously ramped up production and saturated the market, bringing prices down. DRAM prices slipped by up to 25% per quarter and NAND by up to 20%, leading to three straight quarters of profit decline for Samsung. But for the last quarter ending September 20, the rates of decline in both DRAM and NAND prices fell significantly to 10% in the latter case, suggesting that the worst may be over barring further geopolitical or economic shocks. Indeed, Samsung’s share price has bounced back by almost 24%. By comparison LG shares stand about 9% higher than on January 1 this year.

LG is immune from these movements in the memory chip market but has different problems. Firstly, its tenuous grip at the lower end of the smartphone market is slipping with sales down about 20%, with the company moving manufacturing from its home country to Vietnam to cut costs. Ironically, it has been feeling the heat from Huawei, with the pressure from the Trump administration on that company coming too late to arrest what could be a terminal decline. Samsung on the other hand experienced an uptick as a result of Huawei’s problems there, but at the same time a decline in chip sales because the Chinese giant is a major customer of those for phones. All in all, Samsung is probably relieved that the heat has gone off Huawei over mobile phones after Google in particular exerted pressure to avoid any bans, concerned how that might impact Android globally, but that is another story.

The most interesting aspect here of the battle between Samsung and LG concerns their choice of different technology for displays and TVs, even if the names are confusingly similar. LG has put its full weight behind OLED (Organic LED), while Samsung has backed QLED (Quantum dot LED). Although the latter sounds the more advanced with the word quantum it is really just an enhancement of legacy LED technology, while OLED represents a radical step forward if not a new generation.

OLED is clearly an advance in potential quality, requiring no backlight because its organic molecules convert signals directly into visible light. This means OLED displays can be thinner and lighter than their LED counterparts but more importantly they can achieve higher contrast ratios in poor ambient light conditions, with deeper blacks and greater luminance range. But there are problems, notably their lifespan because chemical breakdown in the semiconductors results in accumulation of components around the emissive areas that do not radiate light, or that even quench it. The outcome is declining radiance and luminance over time, which OLED researchers have worked hard to mitigate, for example by reducing the power needed to generate the pixels.

But Samsung was deterred by such factors for large TV displays and bet on being able to enhance LED displays to reduce their quality deficit over OLED. It has developed QLED displays using quantum dot technology that was pioneered in microscopy as a fluorescence technique whereby specific molecules, when exposed to light, reemit their own radiation at a different wavelength and therefore color. In the case of QLED displays, that color is manipulated by controlling the wavelength of the backlight to which these molecules are exposed. The remitted light then traverses a few other layers inside the display, including a liquid crystal (LCD) layer, to create the picture.

To date, QLED has failed to match OLED for quality, so that for example LG’s 2019 C9 OLED consistently beat Samsung’s 2018 Q9 QLED in subjective assessments. On the other hand, Samsung’s Q9 scored more highly than almost any non-OLED screen, so the argument that it is good enough carries some weight.

What is clear is that OLED’s deficiencies are less severe for smaller displays and so the technology has gained more ground for smartphone screens. There is less challenge achieving uniform quality across smaller screens and production yield is higher, reducing costs. But in that area of OLED Samsung has invested heavily and is indeed the global number one with around half of all shipments.

Almost 500 million smartphone OLEDs will have been produced in 2019, up around 13% on 2018, while wearables and specifically the smart watch market is also generating demand for these smaller panels.

Meanwhile on the TV front, new LCD technologies apart from quantum dot, such as dual-cell LCD and mini-LEDs, look like retarding the growth of the OLED TV market upon which LG is so dependent. So perhaps LG should make hay with its latest results while the sun is shining a little, as it reports consolidated revenues of $13 billion for Q3 2019 and profit $650 million, respectively 1.8% and 4.3% up on the same quarter of 2018. Samsung’s strategy of being good enough and more affordable looks like prevailing, even if it will always face ups and downs in smartphones and memory chips.