[Journalism Internship] Samsung’s faltering dominance puts Korea’s economy at risk

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[Journalism Internship] Samsung’s faltering dominance puts Korea’s economy at risk

Published: 22 Nov. 2024, 11:21

Samsung Electronics’ chip plant in Pyeongtaek, Gyeonggi [SAMSUNG ELECTRONICS]

Ahn Jeonghyeon, Bae Soobin, Kim Yunkyung, Park Joseph

Samsung Electronics’ disappointing earnings in the third quarter have raised raising concerns over the faltering market dominance of Korea’s largest company as rival SK hynix makes strides in the AI semiconductor segment.

Samsung posted its third quarter earnings report on Oct. 31, posting an operating profit of 9.18 trillion won ($6.65 billion), up 277.37 percent from the same period last year.

Despite seemingly robust yearly growth, the figure missed the market expectation of 10.8 trillion won compiled by market tracker FnGuide.

On a quarterly basis, operating profit fell 12.8 percent.

Samsung Electronics' monthly report stated that in the third quarter, semiconductor sector sales reached 29.27 trillion won, up 2.5 percent from the previous quarter, and operating profit decreased 40.2 percent to 3.86 trillion won.

The results fell short of reaching an estimated operating profit of 4 trillion to 5.1 trillion won as collated by the stock market after Samsung released its preliminary results on Oct. 8.

The electronics giant cited weak demand for memory chips, which have been its traditional forte, and delays in commercializing advanced high-bandwidth memory (HBM) chips used in AI applications for the disappointing earnings, as well as continued losses in its semiconductor consignment production, or foundry, business.

Additionally, Samsung incurred a one-time expense of 1.5 trillion won for end-of-year bonuses in the third quarter, impacting profitability.

Samsung Electronics’ chip plant in Pyeongtaek, Gyeonggi [SAMSUNG ELECTRONICS]

“Despite solid demand for servers and HBM, performance in the memory business declined due to one-time expenses, such as incentive compensation and foreign exchange effects, disregarding inventory adjustments by some mobile customers and an increased supply of general-purpose products from Chinese memory companies,” said Samsung in its preliminary results.

Samsung's stock price also has been a testament to the burgeoning skepticism of the company’s market competitiveness.

Samsung Electronics’ share price fluctuated drastically from 87,600 won per stock on July 11 to 55,900 won on Oct. 25, reflecting a significant downturn in investor sentiment.

Amid growing woes over its long-term growth potential, the company's management apologized to investors for causing concerns about its technological competitiveness and prospects.

On Oct. 8, Jun Young-hyun, the new head of the semiconductor business unit, issued a letter acknowledging its lagging innovation and underperformance and apologizing for not being able to fulfill the increasing demand and expectations of their customers and shareholders.

“We apologize for causing concern regarding a performance that did not meet market expectations,” said Jun.

“All responsibility lies with the management leading the business, and the management will take the lead in overcoming the crisis and create an opportunity for a leap forward.”

At the same time, Jun pledged to reinvigorate its core technological competitiveness, narrowing the division’s focus to semiconductor innovation and smartphone evolution.

“These are testing times, but we are confident that we will turn this season of challenge into one of new opportunities,” he said.

While Jun pledged an upturn in the future, concerns are rising about the impact of the company's receding lead on Korea’s economy, given its status the country’s market bellwether.

Lee Seung-woo, head of the Eugene Investment & Securities Research Center, said, “Concerns are growing about whether the foundry field that Samsung Electronics has been emphasizing is truly competitive.

“The sales growth rate over the past 10 years has averaged only about 1 percent per year in dollar terms,” he said, casting doubt on future growth potential.

A primary reason for this shortfall is Samsung’s waning competitiveness in the HBM market, a high-margin segment increasingly in demand for AI applications and high-performance computing.

Here, Samsung has lost ground to SK hynix, which has taken the lead in supplying HBM products to major tech clients. This shift represents a notable challenge for the company, which has traditionally maintained a stranglehold in the memory market.

SK announced that it recorded 17.6 trillion won in revenue and 7.3 trillion in operating profit in the third quarter of this year. This revenue and operating profit are both record highs in line with market expectations.

Compounding the pressure, Samsung’s dynamic random-access memory (DRAM) business faced aggressive price competition from China’s ChangXin Memory Technologies (CXMT), which has disrupted the market with low-cost options.

Samsung acknowledged that while server and HBM demand remained strong, increased DRAM supply from Chinese firms created downward price pressure.

“We are adjusting production volumes downward for general-purpose DRAM and NAND flash in line with falling market demand,” said Kim Jae-joon, a vice president of the memory sector.

This has allowed CXMT to capture a share of the generic DRAM market, adding further strain to Samsung’s earnings.

According to market data tracker TrendForce, “By the end of the year, Chinese memory chipmakers are anticipated to hold a combined 11.8 percent market share of the DRAM category, up from 10.1 percent in the first quarter.”

Morgan Stanley stated in a recent research note that it anticipates CXMT's DRAM output will exceed 10 percent of the global total by the end of the year.

The main suppliers of the DRAM market are Samsung, SK hynix and Micron. With the combination of new fab cost to build DRAM technology, low market demand growth and increasing data storage density, the industry cannot afford a fourth supplier.

In China’s entry into the DRAM market, Jim Handy, an analyst at semiconductor market researcher Objective Analysis, assessed that either Samsung, SK hynix or Micron will exit the industry or be acquired.

Samsung has also attributed some of its challenges to external factors, including adjustments in inventory by certain mobile clients, which have reduced orders.

Falling behind in this critical sector has heightened concerns over Samsung’s competitive stance as the memory market landscape shifts and challenges the company’s historical dominance.

With Samsung’s influence so deeply embedded in Korea’s economy, the company’s struggles have amplified national concerns about economic stability and resilience.

Samsung’s contribution to Korea’s economy has been significant, with annual revenue of 258.16 trillion won last year — equivalent to about 13 percent of Korea’s GDP, which came to 1.99 quadrillion won.

Economy and Finance Minister Choi Sang-mok implied at a press conference on Sept. 24 that he intends to find the root of Samsung’s problem and change it.

Choi continued, “I think the Samsung crisis is a crisis for the Korean industry that we always worry about.” He added, “[Korea] has made leaps forward based on crises, so I think we will be able to do so again.”

BY AHN JEONGHYEON, BAE SOOBIN, KIM YUNKYUNG, PARK JOSEPH [[email protected], [email protected], [email protected], [email protected]]