Transcription
When you're out shopping for seven megawatt offshore wind turbines, you think Samsung, right? Well, probably not. The brand is much more famous for its phones and flat-screens, but arguably the most important drivers of South Korea's biggest family business are these things. And for the first time in decades, the company's got a massive problem here.
Samsung is under assault from all sides and they are getting stretched thin. Samsung is in this position of playing catch up, and that's difficult to do if you don't have growing revenue, if you don't have expanding profitability. And unfortunately... The chip profits tumbled. Big disappointment. The semiconductor division reporting operating profit of $400 billion won totally missed analyst projections for $2.73 trillion.
Samsung shares have whipsawed in value since their 2020 peak and tanked in 2024, while long-standing rival SK Hynix surged. The crisis is easy to miss. Amid all this, The ultra experience is ready to unfold. But behind the cats and choreography, Samsung's hidden struggle threatens its national identity amongst a population that relies on it like no other.
It is probably the most influential company in Korea because of the importance to the economy. And maintaining that influence may hinge on a piece of technology you probably own but have never even seen. The Samsung Group comprises vastly more than just its flagship electronics empire. You can literally be born in the Samsung Hospital, go to a Samsung school, live in a Samsung apartment, you work at Samsung, you come home, you put your food, which is made by Samsung in the Samsung microwave and turn on your Samsung tv.
It's a company with 400,000 employees all over the world. They make chips, they're in shipbuilding, they make apartment complexes. Samsung is the biggest company in the country. It is the biggest weighted and the Kospi index, which is the local stock market and as well as the biggest contributor to the economy by any study that you can see. Samsung in any given year makes up about one fifth of the country's exports. Imagine there's one company that's selling one fifth of all the goods produced in that country. I mean, that kind of comparison doesn't exist anywhere. You get the idea.
A career without Samsung is a Blackpink show without the superstars or their iconic light sticks. Samsung is so tied to the health and wellbeing of the South Korean economy that you just can't imagine a South Korea without it. So why is such a scenario even being hinted at?
Well, for years now, electronics have driven Samsung and not just these things. Its major product is computer memory, so-called DRAM, or dynamic random access memory. Those chips go into everything from smartphones to the world's largest supercomputers. Samsung Electronics semiconductor business has typically accounted for between 50 and 70% of the company's profit every year and is central to its evolving crisis. So it's worth understanding how these chips work.
Think about DRAM as a coffee cup. Imagine you want to drink as much coffee as you possibly can from the coffee pot, but you can't pour that coffee pot into your mouth, so you have to do it via a cup, right? Depending on the size of the cup, that will determine how much coffee you can drink in one go. Think of DRAM as that coffee cup. What Samsung's chips do is they hold that information ready for when the processor wants it. But what that information is and the kind of processes using it has evolved radically. AI has changed everything.
Samsung, which dominated the memory market for decades, is now struggling to keep up with the latest technology. So what went wrong? SK Hynix. Lead the future. In 2013, SK Hynix and AMD teamed up to develop high-bandwidth memory. It was the first product that was in the market, but at the time it wasn't clear what it was gonna be needed for. It was mainly for the gaming industry that they were kind of developing. It was a niche product, But that's often how things go in the semiconductor world. Build the stuff and let the industry figure out how best to use it.
The chip industry, it operates on these three to five-year cycles. You have to make massive billions or more dollars investments five years ahead of time sometimes. And you know within those five years, a lot can happen. And over the last five a lot did. The release of ChatGPT has really changed everything. All of a sudden there was a surge of demand for HBM chips, which is really ideal for AI applications. Remember this, AI needs vastly more coffee or data and it needs to swallow or process it faster than ever. HBM, high-bandwidth memory made that possible and is now a fundamental component of the accelerators used to train large language models.
At the time, Samsung hadn't invested enough in this kind of chip, which is a type of DRAM, but significantly more profitable than its mass market counterpart. But a smaller local competitor that had teetered on bankruptcy as recently as 2002 had. SK Hynix has come arguably out of nowhere to become a major rival to have unprecedented success against them. SK landed the contract with Nvidia, which is the largest maker of AI chips, these logic chips in the entire world. You'll have seen the headlines about what that's meant for NVIDIA's investors. But the knock on effect for its most important suppliers has been great too. Particularly for SK Hynix. It's reported record quarterly profit that beat expectations driven by its dominance in high-bandwidth memory. SK Hynix's profit has continued to soar to record highs in the last year on the back of the AI boom, inspiring investors to pile into its stock and elevate that to historic levels as well.
SK Hynix is providing about 20% of Nvidia's costs of goods sold. It's the second largest supplier of semiconductors to Nvidia behind TSMC. Samsung is about 1% of Nvidia's cost of goods sold according to our analysis. Samsung is trying to really catch up, but it's very difficult. This year, Samsung was overtaken by SK Hynix in the DRAM market ending its three decade lead. US manufacturer Micron isn't far behind either. And so this is devastating for the company.
The company's Vice Chairman has issued an apology, a rare apology. It was a long one. It was quite an extraordinary mea culpa from the head of the chips division. The way it works in South Korea is that the company is an arm of the nation. It's a private company on paper, but they're expected to represent the interests of the South Korean people. And that's been the case for quite some time.
Samsung got its start in 1938. This was at a time when South Korea as a nation was extremely poor. It was actually one of the poorest countries in the world. They studied as a sort of a very small trading company for dried fish, rice, that type of business. And gradually on and on, they expanded into these more complex industries until they finally got later into shipbuilding into oil rigs. Into the aforementioned offshore wind turbines, and of course into electronics, which are now at the heart of its problem.
So what does Samsung need to do? Well first, it may have to win over the undisputed world leader in AI hardware. Samsung chips have been left out in the cold because they haven't passed the tests required by Nvidia to become a contractor. All they've said publicly is we want Samsung to be better. We hope they'll get there. We are sure they'll get there, but clearly they're not buying from Samsung right now according to the numbers.
Samsung is now mounting an all-out push into next generation HBM4 aiming to close the gap with SK Hynix. On recent earnings calls, Samsung executives have acknowledged as much, but they also say its next generation custom chips have been drawing great interest from the industry, but it'll take some time for the money to show up from sales of those.
Samsung doesn't just design and manufacture its own chips like those Nvidia needs. It also has a foundry business that only manufactures chips other companies design, and this is under intense pressure too, particularly from Taiwan's TSMC, which controls about two-thirds of the global foundry market. The most recent quarter. Samsung has about 8% market share and they're struggling to gain large customers.
There may be some light at the end of a tunnel though. In July, Samsung said it had reached a $16.5 billion pact with Tesla to produce its next but one generation of AI semiconductor. Some say that it's not really significant when you really break it down to annual numbers, but it is a big deal when it comes to its foundry business that a lot of the investors have thought was actually dormant. That foundry battle is one the South Korean company will have to keep fighting alongside the one with SK Hynix in the memory space.
On the logic front, TSMC is just going over the horizon on everybody and is increasingly dominating that very profitable market. I think there is a bit of a lesson that we can learn from all these giants that you know you are successful today, doesn't mean that you are successful tomorrow. Just look at Intel. Intel in 2021 was the world's largest chip maker. Now it's well down the ranks. Samsung is not in the Intel camp yet, but it could be, and that's the concern that Samsung investors have, that Samsung insiders have.