Huawei ban and China backlash lifts profits for Samsung Electronics

South Korean smartphone and chip giant reports a US$11 billion operating profit in third quarter

An international backlash against Huawei has helped boost Samsung’s bottom line.

In the third quarter, the tech division of the South Korean powerhouse reported a 50% surge in smartphone sales compared to the same period last year.

Global concerns about Huawei’s close links to China’s ruling Communist Party have dented consumer demand for smartphones made by the Shenzhen-based 5G giant.

Sanctions imposed by the United States amid national security concerns have also hit Huawei hard.

“Samsung has been quite aggressive in new launches as well as channel strategies, riding on the ongoing anti-China sentiment,” Prachir Singh, a senior analyst at Counterpoint, a technology research group based in Hong Kong, told the AFP news agency.

What were the numbers?

Well, Samsung Electronics announced at the end of October that operating profits in the July-September period jumped 59% to 12.35 trillion won (US$11 billion).

Included in those figures was a massive increase in smartphone profits. During the third quarter, they increased to 4.45 trillion won ($4 billion) compared to the same period in 2019.

“After the US restrictions against Huawei took effect in earnest, demand from Chinese customers has increased,” Han Jin-man, a senior vice-president of memory chip business at Samsung Electronics, said in a news briefing.

Will that continue into the fourth quarter?

Difficult to say as major markets in Europe and the US grapple with a second wave of the Covid-19 pandemic.

Marketing costs are expected to be higher in the current quarter as Apple, Vivo, Xiaomi and Samsung try to take over Huawei’s market share

Park Sung-soon, an analyst at Cape Investment & Securities

“Global demand is forecast to increase year on year, but uncertainties are unlikely to ease given the possibility of additional waves of the pandemic,” Ben Suh, the executive vice-president of investor relations at Samsung, said in an earnings call. 

There are also other dark clouds on the horizon.

Samsung is a big exporter to China of advanced semiconductors. Chip profits jumped 82% to 5.54 trillion won ($5.1 billion) in the third quarter compared to the same period last year.

But one of its main customers is Huawei, which is blocked from accessing technology from American companies. 

In September, it was placed on a blacklist by Washington because of its perceived links to the Communist Party-state, effectively blocking Samsung shipments to Huawei.

A change of US president from Donald Trump to Joe Biden is unlikely to affect that policy in the world’s largest economy. 

So, will the chip environment become increasingly volatile?

Probably. For Samsung, it involves walking a fine line between exports to China and its relationship across the world and, in particular, the US.

Smartphone shipments in the final three months of the year are predicted to drop by about 5% compared to the third quarter.

A lack of new models after the rollout in August of the Galaxy Note 20 and the Galaxy Z Fold 2 could also affect revenue. Apple’s latest iPhone 12 will also bite into Samsung’s market share.

“Marketing costs are expected to be higher in the current quarter as Apple, Vivo, Xiaomi and Samsung try to take over Huawei’s market share,” Park Sung-soon, an analyst at Cape Investment & Securities, said as reported by the Reuters news agency.