Prove innovative DNA or dig an economic moat

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Prove innovative DNA or dig an economic moat

Published: 11 Sep. 2024, 19:55

Lee Sang-jai
The author is a deputy director of economy and industry news at the JoongAng Ilbo.

Samsung Electronics, Korea’s bellwether stock, is undergoing a mortifying bout. The common shares closed Tuesday at 66,200 won ($49.3) apiece, down 1.93 percent from the previous session. Its market cap sank below the 400-trillion-won threshold as a result of the sixth consecutive session slide. The stock lost nearly a quarter of its value from its annual peak of 87,800 won set on July 10.

The plunge owes largely to foreign and institutional investors. Domestic and foreign institutions cashed out of the stock worth more than 6 trillion won over the last month. Retailers are joining the exit. According to the company’s first-half report, minority shareholders totaled 4.24 million at the end of June, a 25.1 percent decline from a year earlier. Brokerages are rolling back the target price for the stock. Early last month, iM Securities cut its target for Samsung Electronics to 97,000 won from 101,000 won. KB Securities also lowered the price to 95,000 won from 130,000 won a month ago.

There had been a hoopla about the stock heading toward 100,000 won amid the summer bull. But the euphoria was short-lived as the stock tumbled fast to 70,000 won and now to the 60,000 won territory. Its daily swing of 3 percent is blamed for the market swoon.

There are many factors. There are concerns about a global economic downturn from a U.S. slowdown and bubbles over the AI boom. Morgan Stanley in its latest report predicted the entry of the semiconductor industry into a downcycle phase. With no signs of upside potential for the global economy, sales of smartphones and consumer electronics — supplementing operations of the chip behemoth — are also expected to be slow.

Korean stocks tend to be susceptible to external factors. Still, the poor performance of Samsung raises questions about its future competitiveness. A stock reflects the sentiment of a company’s future corporate value. It must appeal with the company’s unrivalled innovative DNA or an economic moat — the ability to defend its advantages against competitors. Apple with the iPhone and OpenAI with ChatGPT set the examples as the former, while Nvidia’s domination of AI chips, foundry leader TSMC and ASML, which monopolizes the supply of core equipment for advanced chipmaking, stand for the latter.

Samsung Electronics is undoubtedly a superb company. It tops global sales of memory chips, smartphones and TVs, armed with excellent human capital, leadership and brand power. But it lacks a distinctive innovative DNA or superiority in a certain item. It could be described as a reliable manufacturer rather than an innovative tech leader and a steady dividend stock rather than a growth stock.

The company deserves the downgrade. Its decisions on facility investment have been slow. Research units serve more to facilitate mass productions. Factory lines tend more to inventory control. In short, its focus is on the immediate bottom-line. The chipmaker fails to narrow the gap with leading competitors in foundry and system chip operations. The only “emergency actions” are to compel executives to come to work over the weekends and cut the budget for dining.

The brain drain is another damper on corporate prospects. Samsung Electronics is being mocked as a “chip academy” as it loses talents to its domestic rival SK hynix as well as U.S. competitors like Micron and Intel. It has become a reliable channel for skilled workers. It’s easy to find queries on bus transportation between Dongtan, which is close to Samsung Electronics factories, and Icheon, where the SK hynix plant is based, as well as mortgage loan conditions in Icheon. During its heyday, Samsung Electronics’ executives were chased by multinational companies and was deemed the academy for CEOs.

Samsung must look inwards to come up with an upward momentum for its stock. It must develop eye-catching novel technologies and the CEO must make the pitch personally before shareholders. The company must provide incentives for young employees and recruit brilliant talents. The government and the legislature must do all they can to help the country’s top player. The bills aimed at supporting the chip industry and expediting power supplies for the mega chip cluster in Yongin are gathering dust in the National Assembly. We should not settle for Samsung Electronics being a training academy.