Samsung — walking on the edge: problems of the Korean giant

Why electronics revenue has been falling steadily for the past five years

The beginning of 2021 for global manufacturers of household appliances, smartphones, and computers turned out to be more successful than the same period in 2020. Samsung was doing even better than before the pandemic. According to Reuters, the company's mobile business generated a profit of 4,4 trillion wons (~$3,9 billion) in the first quarter of the year, which is by 66% more than a year earlier. Nevertheless, it's not all rosy, analysts say. For example, for the last five years, the South Korean tech giant has been losing revenue in electronics. Why Samsung is walking on the edge, read in the author's article for our publication by Artur Safiulin, a columnist of Realnoe Vremya, economist with many years of banking experience.

Walking on the edge of the Korean giant

Today I would like to talk about another representative of South Korea — the technology giant Samsung. This company has long been in the public eye, having achieved tremendous success in the field of electronics, starting with household appliances and ending with advanced mobile and other devices. The company is a recognised leader in all these segments, and, at first glance, everything looks rosy and cloudless. But there are certain points where the company is a little late with development. Let's get this straight.

The market has long been discussing the company's problems — electronics revenue has been falling steadily for the past five years. The company manages to keep operating profit at the same level, and the management assures that there is no technological lag.

Samsung, being one of the chaebols, that is, a former, in fact, state corporation, is always under the close attention of the government of the country, which just loves to set tasks for the company and waits for their implementation. Korean state capitalism is the unique phenomenon, when it seems that absolutely private holdings are already marching in a row under the direction of the state.

Samsung will invest $17 billion in the development of the US semiconductor industry

The company was given two tasks: the first — to diversify the business and implement a plan called Non-memory Korea — to shift from the production of memory chips to a wide range of products.

Samsung is among the “big three” along with Intel, TSMC (Taiwan), which together produce more than half of the world's microelectronics. The plan was to produce other chips, and the share of such production was supposed to reach 25% of the total revenue of the company, in fact, now this figure is only 7%. Demand for these products is falling due to the crisis caused by the pandemic. The main consumers were the following: Korean automakers, which reduced the production of cars; Samsung itself, which has to adjust the plans for the release of mobile devices; Apple, for which Samsung supplied many components and which built its own component base with its own supply chains. Competition from manufacturers from China is growing.

The second task was to become the world leader in the production of the coronavirus vaccine. The company has large research and production facilities. Samsung supplies medical materials, equipment, technologies, and provides various services in this area. The company's biotech division has been showing excellent results over the past few years. Nevertheless, the development of the vaccine did not go well, Korea does not participate in the race, the blame is placed on the company.

As punishment for the failure of both tasks, the president of the country ordered Samsung to invest $17 billion in the development of the American semiconductor industry as a confirmation by the Korean state of the “inviolability of the reinforced concrete US-South Korean alliance”. The funds will be used to build a plant in Texas.

Let's now talk about the technological gap and why such talks have appeared. The reason was the visit of the head of Samsung to the Dutch city of Eindhoven. In addition to the famous football club, this city is the birthplace of Philips, another giant of its kind. In 1984, ASML separated from it — the world leader and almost monopolist in the design and production of lithographic equipment for microelectronics. Photolithography is a key process in the production of semiconductor chips. The head of Samsung came for equipment for photolithography in deep ultraviolet (the very nanotechnology), what are known as step scanners. The competitor in the “big three”, TSMC, takes most of the scanners from ASML (up to 70%), and many saw the visit of the head of Samsung as a gesture of despair. In general, the production of semiconductors is a very expensive process, and even companies like Samsung can not afford the full cycle-from the design to the production of all electronic components for their products.

TSMC — a nightmare for a Korean company

In general, TSMC is a nightmare for a Korean company, with which there is always a fierce battle for the contract production of chips — that is, any small company can design the right chip and order its production on the side, usually from someone from the “big three”.

Shares in ASML were acquired by both Samsung and TSMC, 3% and 5%, respectively. Intel immediately caught up, buying as much as 15%. You can imagine how much money ASML makes, given the importance of its products and the scale of the battle for them.

TSMC is going to spend $100 billion on the development of its production in the next three years, while Samsung has an amount half as much, which is the same cost of $17 billion for a plant in the United States, which will be tied to contract production for American companies. From the US, Samsung needs technology and a market, not the presence of production in the territory. All this puts the company in a vulnerable position — they can miss the pace of the race and stay far behind the competition in terms of profitability, losing investment attractiveness in the stock market. Samsung does not really want to remain a supplier of memory chips alone.

If the company were a purely private business, perhaps, the shareholders would not be very upset about this, but Samsung faces a global challenge for the prestige of the country as a whole — whether South Korea will be able to produce its microelectronics in full, without having to order from the side.

In South Korea itself, the company has many detractors from among other large financial and industrial groups (chaebols), who will be happy to participate in the division of the company's attractive assets in the country. Rumours are circulating that the government intends to divide the company into several parts as part of the fight against monopolies. It will be interesting to watch the development of events further.

For Samsung, the moment of truth has come, and the next two or three years will show the vector of the company's further movement. All or nothing.

By Artur Safiulin

The author's opinion may not coincide with the position of the editorial board of Realnoe Vremya.