Tokyo Electronics giant Samsung saw its division’s earnings collapse in the third quarter amid falling demand for memory chips. However, the meager numbers were overshadowed by a personal detail: The de facto company boss Lee Jae Yong, also known as Jay Y., was officially promoted to chairman of the board of directors this Thursday after his prison sentence, ban from office and pardon.
“Now is the time for us to take on bolder challenges,” Leee said in a message to employees. “Our survival depends on future technologies.”
The world’s largest memory chip manufacturer has thus filled the important position that had not been filled since Lee’s father, Lee Kun Hee, suffered a heart attack in 2014. First, piety prevented Lee Junior’s official freestyle, after the death of his father, legal problems.
Lee was sentenced to a long prison term in the bribery scandal involving former President Park Gyun-hee. Although he was released early on probation, he was only allowed to officially work in the group again after a pardon this year.
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The Board of Directors justified its choice with the “urgent need for stable management and leadership in an increasingly deteriorating global business environment”. At Samsung, the chairman, as a representative of the founding family, is traditionally responsible for landmark decisions.
And they are needed right now. The conglomerate’s current profit engine, the chip division, is under increasing pressure with rising inflation, the slowing economy and the US-China trade dispute, as the balance sheet for the third quarter presented on Thursday showed.
Samsung chips division cuts profit in half
Samsung posted record sales for a third quarter and expects a new sales record for the full year as other parts of the business continue to grow. But the key chip division, which most recently generated about 30 percent of sales and more than two-thirds of group profits, similar to rivals SK Hynix and Micron Technologies nearly halved its operating profit year-on-year to 5.1 trillion won, the equivalent of 3.6 Billion euro.
It only contributed half of the group’s operating profit between July and September. Samsung was able to increase its sales by 4.2 percent to 76.8 trillion won (53.8 billion euros). However, operating profit fell 31.4 percent to 10.85 trillion won as a result of the flagging chip division, while net income fell 23.6 percent to 9.39 trillion won. The profit margin slipped from 21.4 to 14.1 percent, the return on equity from 17 to 12 percent.
The important chip division almost halved its operating profit compared to the previous year.
(Photo: via REUTERS)
Samsung mainly blamed the falling demand for this. In many industrialized countries, high price increases lower consumer sentiment, in China the real estate crisis and corona lockdowns. Many corporate customers would therefore reduce their inventories more than expected.
This depresses the prices of memory chips, which are the main product of Samsung’s semiconductor division. The still young contract manufacturing of semiconductors, the so-called foundry business, steadily increased sales and profits even in the seventh year after its founding.
Samsung plans to continue investing heavily
Management expects demand to recover in the second half of 2023, driven by demand for data center chips and new smartphones. However, Ben Suh, the vice president responsible for investors, warned that “macroeconomic uncertainties persist”.
However, unlike many of its rivals, Samsung does not intend to drastically reduce its investments. Han Jin Man, vice president for the memory chip division, announced that he would not want to touch the “infrastructure”, for example new clean rooms for factories of the coming chip generations. At best, savings should be made in production facilities.
“Right now, demand is shrinking, but we need to strategically prepare for long-term growth,” Han said. Samsung has particularly high hopes for chips for electric cars. After memories for data centers and mobile devices, they are to become the third mainstay of the memory chip division by 2030.
The US chip war against China poses problems for Samsung & Co
The growing tensions between China and the US pose a major risk. President Joe Biden not only banned the export of higher-quality chips and production equipment that use US patents to certain Chinese companies this month. He also banned US citizens from working for the Chinese chip industry.
These measures pose a threat to Taiwan’s major chip industry in East Asia, but especially to Korean chipmakers Samsung and SK Hynix. Not only do they produce a large part of their memory chips in China, but they also obtain important components for their domestic plants from their neighbors.
>> Read also: US sanctions put Chinese chip companies under pressure
In order not to jeopardize the production of goods destined for the West in China, the US government granted the corporations an exemption. But Samsung’s Korean rival SK Hynix admitted on Wednesday what other companies are also likely to be considering: plans for the worst-case scenario – an abrupt end to the China business.
“As a contingency plan, we are considering selling the factory and equipment or moving to South Korea,” Kevin Noh, chief marketing officer, said on a conference call. However, he stressed that it was really just a contingency plan and SK Hynix is continuing in China produce wool.
Samsung did not comment on the China business on Thursday. But SK Hynix isn’t the only company addressing risk. According to media reports, the Japanese car manufacturer Honda also set up a working group to develop countermeasures for the loss of the large sales and component market.
Samsung patriarch Lee is therefore more important than ever for the group. However, it is not yet certain that he will be able to remain in office for long. Because he is still in court for accounting tricks in the merger of two subsidiaries in 2015. With the merger, he strengthened his grip on the large Samsung group, which is dominated by his family through box investments.
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