How to make the most of Samsung Electronics' $40B U.S. investment

Tech

Published: 15 May. 2024, 07:00 Updated: 15 May. 2024, 14:18

How to make the most of Samsung Electronics' $40B U.S. investment

Shelley Jang, director at Fitch Ratings [FITCH RATINGS]

[INTERVIEW]

Downsides outweigh upsides for Samsung Electronics' $40 billion U.S. investment in Texas from a business point of view, according to Shelley Jang, a director at Fitch Ratings, primarily covering tech and telecom companies in Korea.

Although the Korean electronics behemoth received the biggest CHIPS Act subsidy from the U.S. government relative to investment size at $6.4 billion, the same amount of capital expenditure could have been spent elsewhere for a better return.

"Being able to recover a certain percentage of an investment is an advantage because the Korean government doesn't offer a subsidy of that size, first of all," said Jang in a recent interview with the Korea JoongAng Daily.

"But that also obliges Samsung to share the profit. Considering that condition in the long term, I don't think that it is the best option for companies in general."

The U.S. CHIPS and Science Act was written into law in 2022 in a bid to lure advanced chip supply chain players to U.S. soil in an apparent move against China. The act included a whopping $39 billion in direct grants for chipmakers building facilities in the United States, but came with a few strings attached.

The act requires recipients of more than $150 million in subsidies to share any profit exceeding the firms' initial projections, and also mandates that beneficiaries share some trade secrets of the chipmaking process.

Most importantly, the law limits the recipients' expansion of facilities in China to ensure that the grants don't ultimately benefit the United States' economic adversary.

"Diversifying production is a necessary step for Korean companies, but is United States the best option? Not really. There is a screening of confidential information, and the inability to efficiently utilize investments already made in China is also a downside," she said while also touching on the not-so-favorable labor market in the United States, where it has become hard to hire skilled workers, as a risk.

Against the odds, however, Samsung Electronics' hefty commitment is seen as a type of safety net for future scenarios.

"A strong alliance with the United States is the only fundamental driver for the investment decision," she said.

"Offsetting the unquantifiable disadvantage that could come about in the future through this solid commitment is what should be maximized in order for Samsung to make this investment decision beneficial to them."

HBM competition

Jang forecast SK hynix to gain the upper hand in the burgeoning competition for high bandwidth memory (HBM) chips, a type of premium dynamic random-access memory (DRAM) that has become essential in AI processors, until at least next year.

"It will take at least two years for Samsung to catch up with SK hynix in HBM," she said.

"Credibility is crucial in the world of AI chips. HBM accounts for approximately 30 percent of Nvidia's GPU, showing that it's that important of a processor, [so] it should be less risky for Nvidia to do business with a reliable partner, SK hynix."

HBM was a niche DRAM market that only accounted for a single-digit share in memory chipmakers' sales.

On the back of the AI boom sparked by ChatGPT in 2022, however, its demand has skyrocketed, with its sales forecast to account for 30 percent of revenue by next year, according to TrendForce data.

SK hynix snatched a golden opportunity, taking a firm lead in the business by becoming the sole supplier of HBM3 to Nvidia, an unrivaled top player in the world of AI chips.

Samsung Electronics, meanwhile, is still in the verification process.

Jang said SK hynix's BBB rating by Fitch could be adjusted upward due to its smooth-sailing HBM business.

"HBM, unlike general DRAM, is usually supplied to clients on long-term contracts, which could relieve volatility in earnings, serving as a positive factor for the credit rating," she said.

Samsung Electronics, which has long maintained its AA- rating, is likely to remain in the "very high quality" bracket.

"We evaluate a company's ability to generate cash and how stable it can sustain it, and with Samsung Electronics, the stability falls a little due to the cyclical conditions of the chip industry. Nonetheless, their financial condition is very good, which is why they got a double-A rating. No matter how much money it loses, it has the fundamentals to endure," she said.

"In order for Samsung to elevate its rating, it needs to break away from the cyclical element of the chip industry to make its [cash flow] more predictable."

BY JIN EUN-SOO [jin.eunsoo@joongang.co.kr]