Choo Kyung-ho, South Korea's finance minister, visited an expansive Samsung Electronics facility south of Seoul last Friday to check out semiconductor production lines operated by the global tech giant, the dominant force in the country's economy and a source of pride for many of its citizens.
"Semiconductors are called the rice of industry, but I think they're a lifeline beyond rice," Choo, who is also a deputy prime minister, told Samsung CEO Kyung Kye-hyun and other executives, using the country's staple food as a metaphor. "If there are no semiconductors, neither our economy, nor our industry can run." His remarks were shared by the Ministry of Economy and Finance.
But the high-profile excursion was overshadowed by an announcement Samsung made the same day, saying it expects operating profit to have plunged 96% to 600 billion won ($463 million) in the first quarter from a year ago and that it is cutting production of its mainstay memory chips amid a global supply glut.
The news was a blow as such a result would mark the first time in 14 years the company's quarterly operating profit has fallen below 1 trillion won. It was also unusual that the guidance figure was less than local rival LG Electronics, which said it expects to rake in 1.5 trillion won in operating profit for the three months through March.
It has also reignited long simmering worries about overreliance on a major company, with some wondering if it is a warning sign for Asia's fourth-largest economy.
The deterioration "is not only a matter for Samsung, but one for all of us," said an opinion piece in the mass-circulation Chosun Ilbo, the country's largest newspaper, one day after the profit warning. It said Samsung and South Korea should not end up like Nokia and Finland when the Nordic country suffered a crisis due to the once highflying handset maker's decline.
Nikkei Asia reached out to Samsung Electronics for comment on such concerns over its potential impact on the economy but received no response by publication time.
To be sure, Samsung Electronics is more than semiconductors, which are known for cyclical ups and downs. Besides being the world's biggest memory chip manufacturer, it was the top producer of smartphones last year and makes a range of other products including household appliances.
But the importance of the company, South Korea's biggest, to the economy can't be overstated given its key role in exports, employment and tax payments. It also anchors the broader Samsung Group, consisting of 60 companies in businesses ranging from shipbuilding to life insurance. The combined revenue of the country's largest conglomerate accounted for 18.3% of South Korea's gross domestic product in 2021, according to antitrust agency and central bank figures.
Nomura expects South Korea may have entered a recession in the first quarter, led by a further contraction in manufacturing amid slowing consumption.
"We expect the economy to more clearly reflect a recession. ... Slowing global demand intensified the export downturn, as weak chip exports continued to offset strong auto exports," Park Jeong-woo, an economist at the Japanese research house, wrote on Monday. Park said Nomura sees seasonally adjusted first quarter GDP declining 0.3%, "supporting our view of a recession."
The economy shrank 0.4% in the fourth quarter of 2022 from the previous three-month period, so a second consecutive contraction would meet the widely accepted definition of a technical recession. The Bank of Korea, the central bank, is scheduled to announce preliminary first quarter GDP figures on April 25.
Moody's Analytics, meanwhile, says that the South Korean economy will struggle throughout this year largely due to troubles in technology sectors.
"With weakness in global demand, the downcycle in chips and electronics, and China's gradual recovery, South Korean exports will struggle until the second half of this year," Dave Chia, associate economist at Moody's Analytics, wrote on Monday.
But BOK Gov. Rhee Chang-yong, the International Monetary Fund's Asia & Pacific director before taking the helm of the central bank last year, counters that the economy is resilient against a tech downturn thanks to its automobile industry and other strengths.
"If other sectors excluding IT grow robustly, if they keep going despite being at a lower level historically, the current growth rate can never be considered bad compared to other countries in the world," Rhee said at a news conference on Tuesday after the bank kept its key interest rate unchanged at 3.5%. The central bank expects the economy to grow 1.6% in 2023, slowing from last year's 2.6% expansion.
As semiconductors, the country's biggest export item, have been in a slump, the auto and electric vehicle battery industries have become more important. Car exports jumped 64.2% to $6.5 billion in March from a year ago, in contrast to semiconductors which saw overseas shipments tumble 34.5% to $8.6 billion in the same period.
Hyundai Motor Group said on Tuesday that it will invest 24 trillion won by 2030 to expand production of electric vehicles as it accelerates its transition away from gasoline-powered cars.
Jung Kyu-chul, a senior economist at the Korea Development Institute, says the government needs to nurture pathbreaking businesses in various sectors to reduce heavy reliance on a single corporation such as Samsung.
"We need more innovative companies in a wide range of fields," said Jung. "We cannot [currently] diversify [the industrial structure] forcefully. The government should reduce regulations to support this," Nikkei Asia reports.
