A perfect storm hits Samsung

Fiscal year 2023 can be classified as an annus horribilis for Samsung Electronics. On Wednesday the company reported an annual 34% decline in operating profit for the last quarter as sluggish demands for its TVs and other consumer electronics products offset hard-won gains from a slowly recovering computer chip market. Operating profit was measured at 2.8 trillion South Korean won ($2.1 billion) for the three months through December, compared to 4.3 trillion ($3.2 billion) from the same period last year. Its operating profit for the full year 2023 was at 6.5 trillion won ($4.8 billion), which marked an 85% decline from 2022 and represented the company’s lowest since 2008, when global markets were weathering a financial crisis.

The South Korean technology giant said it expects its business to improve throughout 2024, forecasting larger demands for semiconductors that power artificial intelligence features increasingly used in smartphones, personal computers and other products. However, macroeconomic uncertainties could continue to affect its business in the near-term.

After losing 2.3% of the smartphone market share, the Korean giant handed over to Apple the crown that it had held for 12 years. As if this were not enough, Intel relegated it to second position as the main supplier of semiconductors on a global scale and, for the first time in three decades, it also suffered year-on-year operating losses. Despite the blows that the company has taken on various fronts, analysts prefer not to descend into catastrophic rhetoric, as they believe that the slump is temporary and due above all to the slowdown affecting the semiconductor memory sector, an industry valued at $162 billion that registered “one of the worst declines in history” in the last 12 months, according to the American consulting firm Gartner.

Crucial to the economy

Samsung plays a crucial role in the South Korean economy. The company, founded in 1938 by Lee Byung-chul, has represented a significant percentage of the Asian country’s GDP since the 1980s. That proportion, which has been increasing as Samsung consolidated its leading business position globally, reached 18.3% in 2021, according to figures from the central bank and the antitrust agency.

“The global macroeconomic slowdown and inflationary pressures have increased consumer caution, which has affected sales of Samsung products and items from other manufacturers that use its components,” said Ben Wood, chief analyst at CCS Insight, a British technology market research company. In the midst of this situation, the global smartphone market experienced a 3.2% decline in sales in 2023, the year with the lowest annual volume in a decade, according to preliminary statistics from the International Data Corporation (IDC), based in the United States. The main surprise came from Apple, which took 20% of the market share and managed to snatch from Samsung the throne it had occupied since 2010.

Chip problems

This paradigm shift is not only a result of iPhones putting greater pressure on Samsung’s high-end models; It is also a direct consequence of the problems in the semiconductor industry. Manufacturers, who increased chip production to ensure supply during the pandemic, have found themselves with excess inventory after the rise of teleworking. This situation, added to the weak demand for electronic devices, has caused the prices of integrated circuits to plummet.

According to Gartner data, in 2023, semiconductor sector revenue contracted 11.1% year-on-year, dragged down by the poor performance of the memory market. Samsung, which had led the ranking of chip suppliers for two years, gave up its position to Intel after its profits in this division contracted 37.5% year-on-year.

The global collapse in sales in 2022 and early 2023 had a devastating effect on Samsung’s Device Solutions division, the main business branch of the South Korean conglomerate, responsible for manufacturing semiconductors and supplying other brands. Samsung is the world’s largest manufacturer of memory chips used in electronic devices to store temporary data and allow quick access to information by the processor.

Given the excess stock, Samsung began to reduce the production of memory chips last April, which has allowed at least the DRAM (dynamic memory) business to become profitable again (it has a market share of around 40%), although NAND Flash memory operations continue in the red (its share is 34%). Cuts by Samsung and other suppliers have already had positive effects on the market: DRAM chip prices rose between 18% and 23% in the fourth quarter globally, while NAND Flash prices rose between 10% and 15%, according to TrendForce.

Experts say Samsung’s results will improve this year, thanks to the recovery in chip prices and the boom in demand for high-bandwidth memory semiconductors, key to the operation of large generative artificial intelligence models, like ChatGPT. The Japanese financial services firm Daiwa Capital Markets expects “a notable rebound in the profits of memory manufacturers in the second half of 2024 and the first half of 2025,” while the Japanese investment bank Nomura indicates that exports of South Korean memory chip companies will exceed 100% year-on-year in the first half of 2024. The Hong Kong bank HSBC, for its part, predicts a “huge recovery in Samsung’s profits” throughout 2024.

Wood, of CCS Insight, highlights that, despite the downturn, “Samsung remains in an enviable position as one of the largest consumer electronics companies on the planet.” By 2024, this expert highlights the great commitment that the firm is making to artificial intelligence, which, in his opinion, “will help it differentiate itself from the competition.” Samsung recently introduced the new high-end Galaxy S24 series, in which it has comprehensively introduced generative artificial intelligence. “This development will revive consumer interest in its products,” says Wood, who adds that “the rise of folding phones [a category in which Samsung is a notable leader] will also give it a boost.”

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