Samsung Electronics’ strong third quarter performance looks like it was in part from the conglomerate cutting unit prices of suppliers.
Samsung Mobile and Samsung Display significantly reduced unit prices from suppliers in the third quarter compared to the same time period last year, people with direct knowledge of the matter told TheElec.
Samsung Mobile cut the prices by 8% to 9% __ Samsung Display forced a double digit cut to suppliers.
Samsung has cost reduction negotiations with suppliers once every quarter. The usual rate of reduction is 3% to 5% per quarter. But the price cut in the third quarter of 2020 was unusually high, the people said.
The South Korean tech giant made the decision for the big reduction in May. In the second quarter, Samsung and its suppliers saw factory operation rate nosedive due to the poor sales of the Galaxy S20 series.
Some of the suppliers, to increase factory operation rate and sales, won orders from Samsung by offering their components cheaply. This trend expanded to all components which further exasperated unit prices in the third quarter.
Thanks to this cost reduction, Samsung is aiming to ship up to 170 million smartphones in the second half of 2020. The company moved 90 million smartphones in the first half of 2020.
The cut prices of the third quarter will continue to the fourth quarter for suppliers as components that has gone into production usually never see price increase.
Suppliers to Samsung will likely see operating margin rates of 1% to 2% in the third quarter.
However, they may see margin rates recover in the fourth quarter thanks to the Galaxy S21 smartphone series going into production. Samsung puts quality first when it comes to the Galaxy S series and is willing to pay more generously for components used for them.
Meanwhile, Samsung Mobile is likely to have contributed to the conglomerate’s 12.3 trillion operating profit in the third quarter, which beat market expectations. Samsung Mobile likely contributed around 4.7 trillion won in operating profit.