Fun With Data – The Cost of Doing Business

Fun With Data – The Cost of Doing Business
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While inflation is a given for anyone who drives a car or buys groceries, the effect of rising costs on CE businesses can be enormous, particularly for those that sell hardware.   A quick look at Samsung Electronics (005630.KS), the 2nd largest CE company by sales, and LG Electronics (066570.KS), the 6th largest, shows how much costs have risen over the last two years, particularly last year.  Transportation costs in 1Q 2022 are up 40.9% y/y for Samsung and up 47.9% for LG and that increases to 102.3% for Samsung and 139.7% for LG when comparing 1Q this year against 1Q 2020.  For the full year Samsung saw its 2021 spend on logistics increase by 25.8% y/y while LG saw its full year 2021 logistics expenses rise by 62.2%
In past years, transportation costs for CE products were usually a function of demand, with higher cost air freight being used when demand was high and container shipping when delivery time was less critical.  While those factors still exist to a degree, Figure 2 shows the China/Shanghai Container Freight Index, which hit an all-time high early this year, and that has caused both companies to have already spent  about 1/3 of what they spent for the entire last year just in 1Q of this year on transportation & logistics.

China/Shanghai Container Freight Index - Source: MacroMicro

​Raw materials have also been a major burden on CE companies, with Samsung seeing an increase of 24.3% y/y in 1Q of this year, and LG seeing an increase of 15.4% in the same period and this includes a 42% decline in LCD panel prices y/y.  But other components, such as application processors (up 41%), flexible PCBs (up 19%) and camera modules (up 8%) and more basic materials such as copper (up 36.4%), steel (20.4%) and silicon wafers (up 4%) all added to the sharp increase in material costs and reduced profitability.  We have seen some component prices begin to level off but it is hard to predict whether these are changes that indicate a more normalized CE demand environment, seasonality, or the result of a year of pull-ins from CE brands.  China is still pursuing its stringent COVID policies and the war in Ukraine is pressuring global energy and commodity markets, so there is certainly no clear picture as to where CE costs and profitability will wind up for the year.  That said, as we have previously noted, we expect 3Q to be better than 2Q as inventories are built for the holidays, but expect 2H to be only marginally better than 1H.  All in, it is going to be a tough year for most CE companies, especially on a y/y basis so we pay special, attention to costs this year.