[NEWS ANALYSIS] Samsung is losing ground in key businesses

Samsung Electronics shook up the top brass of its chip divisions in June — halfway through the year — although the reshuffle of executives typically takes place at the end of each year.

Samsung Electronics executives hold up 3-nanometer wafers at the production line located in Hwaseong, Gyeonggi. [YONHAP]

Samsung Electronics shook up the top brass of its chip divisions in June — halfway through the year — although the reshuffle of executives typically takes place at the end of each year.

The tech giant explained that it carries out the appointments whenever necessary but industry insiders say that the move is alarming in the face of plunging profits and a stiff race in chip-making and display technologies.

Samsung Electronics is struggling to woo big semiconductor clients like Qualcomm, Apple and Nvidia away from Taiwanese rival TSMC while the price downturn in the memory chip market led to its worst quarterly result in the first quarter since 2009.

Samsung Electronics reported a 96 percent year-on-year drop in operating profit in the first quarter of this year, posting a 640.2 billion won ($502 million) loss. Much of the drop was attributable to its chip business, which reported an operating loss of 4.58 trillion won. It was the division's first reported loss in 14 years and starkly contrasted to when the business was the company's main revenue stream.

“Samsung recorded an operating profit of 1.2 trillion won in the first half of 2023,” S&P Global Ratings said in a statement released Tuesday. “This is a fraction of the 28 trillion won it earned during the same period last year. The weak performance was largely due to the semiconductor division, where the company reported an operating loss in the first quarter of 2023, the first time since 2009.”

These difficulties were likely inevitable as the memory chip business is innately vulnerable to market fluctuation.

But what is more problematic is that Samsung is also losing steam in developing next-generation memory chip technology.

The company was an undoubted leader in the memory chip business and was ahead of the technology development pack by at least three to four years.

In the case of double data rate (DDR) chips, it constantly nabbed the “world's first” title in the development of the chip's first four generations between 1997 and 2011.

The tables were turned with the development of the fifth generation — DDR5 — with SK hynix earning the title in 2018 before launching the chip in 2020.

Samsung said it successfully developed the 12-nanometer DDR5 chips for the first time in the world in 2021, before mass production began in May 2023.

DDR5, a high-end memory chip product, is said to reduce power consumption while enhancing speed and capacity, making it an essential component for data center servers amid high demand for artificial intelligence.

SK hynix is considered to have an edge in this product, with its 10-nanometer class DDR5 entering a validation process with Intel's latest DDR5-compatible central processing unit (CPU). Intel accounts for 70 percent of the global server CPU market as of last year, according to Counterpoint Research.

In the contract chip fabrication business, it is falling behind TSMC in both market share and technological competitiveness.

Qualcomm once tapped Samsung Electronics to manufacture its flagship Snapdragon chipset but switched to TSMC for its Snapdragon 8 Gen 2 last year.

"Samsung Electronics' concentration on next-generation memory chip technology such as the DDR5 was lacking," said Kim Yang-paeng, senior researcher at Korea Institute for Industrial Economics and Trade.

"It has so much on hand at the moment in the chip business, including the contract manufacturing, that it could not prioritize its memory chip technology development compared to SK hynix, which is only in the memory chip business."

SK hynix also currently tops the high bandwidth memory (HBM) chip market, with this chip a niche but value-added product in the memory chip segment.

SK hynix developed the HBM3 products for the first time in 2021 before mass-producing them last year. Recent data from market tracker TrendForce indicates the company accounts for 50 percent of the market, followed by Samsung Electronics with 40 percent.

"Earning the 'world's first' title may not be everything in the chip business because the quality and the yield rate ultimately decide chipmakers' competitiveness," an industry insider said. "But it is definitely an advantage to a certain point when negotiating with clients and winning them over."

Samsung's concern for its smartphone business is also deepening, with the money-making premium market solidly secured by Apple while its foldable phones, which Samsung aims to make another pillar of its flagship series, continue to face threats from cheaper Chinese rivals as well as newcomers.

Samsung holding the foldables' Unpacked event in Seoul for the first time on Wednesday is also seen as the company's attempt to reassert its originality and leadership in the segment.

A promotional poster for the Galaxy Unpacked event scheduled for Wednesday hangs up on the exterior of Samsung Store's Cheongdam branch in southern Seoul on Tuesday. [YONHAP]

The foldable phone market is still dominated by Samsung thanks to its first-mover advantage gained by launching the world's first foldable phones in 2019. With the foldable phone segment poised to grow amid overall slow demand in the smartphone industry, a slew of latecomers are looking to tap the market, including Huawei, Oppo, Google and Apple.

According to Counterpoint Research, the foldable phone market is poised to expand by an average of 114 percent each year from 2019 to 2025. Chinese manufacturers are expected to increase their foldable phone shipments by 89 percent next year compared to this year.

In the home appliance sector, the electronics giant generated 60 billion won of operating loss in the fourth quarter of 2022 as demand for appliances — TVs in particular — dwindled.

As the first quarter of 2023 opened, the profit remained weak at 190 billion won.

The division’s profitability is not likely to recover soon due to stagnant sales for TVs, refrigerators and washers, and the costs linked with purchasing organic light-emitting diode (OLED) panels from LG Display.

Samsung Electronics was adamant about not migrating towards OLED-based TVs but recently changed its mind to entering a costly supply deal estimated at 2 trillion won.

“We see LG Display’s W-OLED panel shipments for Samsung Electronics’ 77-inch and 83-inch OLED TVs hitting 150,000 units in the second half of 2023 and then surging tenfold to 1.5 million in 2024,” KB Securities analyst Jeff Kim said.

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