This morning a Reuters headline caught my eye: "Samsung sees strong earnings, shares jump." At first, I found that news a little surprising. In the face of a nasty, virtually worldwide economic slowdown, Samsung has found a way to produce strong earnings. I would suggest a few ways to explain Samsung's good news.
First, here are some details from that Reuters article:
South Korea's Samsung Electronics (005930.KS), the world's top maker of memory chips and flat screen TVs, forecast second-quarter earnings well above market estimates, driving its shares up more than 4 percent on Monday.
"It looks like all key businesses -- semiconductors, LCD and mobile phones -- outperformed expectations," said Lee Min-hee, an analyst at Dongbu Securities.
Technology Is Necessity
Some people might think this is obvious, but I didn't. Even in the throes of an ugly recession, people are still buying technology. Technology is expensive; money is tight. But it must not matter.
People will spend thousands of dollars on that new sleek LCD TV or hundreds on other gadgets. In past rough recessions, people might have considered technology an expense that could be put off for a year or two until things get better. Samsung's news seems to indicate that consumers might have a different outlook now.
Even In A Recession, Quality Matters
In fact, it's not just that consumers will spend money on cheap or bargain technology: they'll spend it on the good stuff. Also from that Reuters article:
Technology companies around the world have seen their earnings and valuations hit by the global downturn, which has prompted consumers to cut back spending on electronics goods.
Yet, Samsung is feeling the squeeze less than many of these other companies. Meanwhile, most of its products are at the top of its class. Its LCDs rank as the best in the market. That means quality must matter enough to people to pay a greater price -- even in a recession.
I think one of two phenomena explain this. The first possibility is that people do not largely shift away from their brand allegiance during a recession, despite tighter resources. This means either advertising firms really are that successful, or people experience strong product differentiation and consume accordingly.
The other is that people might actually shift to purchasing higher quality products during a recession, because they worry about cheaper products not lasting as long and actually costing more ultimately. For example, that $700 TV might be cheaper than that $1200 TV, but what if the cheaper version only lasts three years, while the more expensive lasts six?
I'd lean more towards the former theory than the latter, but I have heard some economists and business people argue for the second theory.
South Korea May Be Today's Japan Of A Few Decades Ago
Remember back a few decades ago when Japanese companies like Toyota and Sony were leading the pack in quality and innovation? These days, the more I read, the more convinced I am that those names have been replaced by Hyundai and Samsung.
Personally, I would purchase products from these two South Korean brands before those two Japanese brands. The South Korean brands tend to get higher consumer quality grades than their Japanese counterparts, but also have a slightly lower price tag. The Reuters article supports the notion that Samsung is pulling ahead of Sony, at least in the TV space:
Samsung ranks ahead of Japan's Sony (6758.T) in televisions and trails only Finland's Nokia (NOK1V.HE) in mobile phones.
That South Korea is becoming a dominant world player in technology should not really be surprising. Economic theory of developing countries and world trade predicts that once a country's businesses plateau, eventually a developing nation will take over. This serves as one of the reasons why Toyota overtook the U.S. automakers. That's good news for South Korea now, but probably bad news for South Korea in a few decades when China will likely take its place.