July 5, 2019 / 2:10 AM / 3 months ago

Breakingviews - Japan’s testy trade row strikes at Samsung

FILE PHOTO: A visitor uses a mobile phone at the Samsung booth at the Mobile World Congress in Barcelona, Spain, February 26, 2019. REUTERS/Rafael Marchante/File Photo GLOBAL BUSINESS WEEK AHEAD

HONG KONG (Reuters Breakingviews) - Samsung Electronics is caught in a new trade row. Japan has curbed exports to South Korea of vital materials used to make chips and display screens over an old wartime spat. Hardest hit may be the $260 billion handset-maker, which for now is expecting a recovery after a dismal second quarter.

The two countries disagree on how to compensate forced labourers during World War Two. Last year, Seoul’s top court ordered Japanese companies Nippon Steel and Mitsubishi Heavy Industries to pay out individual reparations. Prime Minister Shinzo Abe blasted the legal decisions and accused South Korea of breaching a 1965 treaty.

Tokyo’s retaliation this week hits at a vital tech link and its westerly neighbour’s pressure points. Local companies must apply for permission each time they want to ship to South Korean customers, a process that could take 90 days. Japan accounts for 70%-90% of global production of the three materials, including fluorinated polyimides for smartphone displays, according to local media. That leaves South Korea’s all-important technology and export sectors vulnerable. 

Asia’s fourth-largest economy is already grappling with slowing economic growth. And it is being exacerbated by tensions between its two biggest trading partners, the United States and China, as well as slowing demand for semiconductors used in handsets and servers that power data centres.

The Japan fracas casts a further shadow over Samsung’s anticipated turnaround. The South Korean conglomerate said on Friday it expects operating profit for the three months to June to fall 56% from a year earlier, to 6.5 trillion won ($5.6 billion). A supply glut squeezing memory chip prices, the company’s most important profit driver, is largely to blame. U.S. restrictions on Chinese telecom equipment giant Huawei, a major customer, also have been a drag.

So far, investors have looked past both troubles to the prospects of a rebound in chip demand later this year. Samsung shares are up by nearly a fifth since January. They now trade at 12 times expected earnings over the next 12 months, or nearly double the level of a year ago. If global supply chains keep getting disrupted, though, so too should tech valuations. 

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