Samsung seeks to reassure markets about semiconductor competitiveness

Samsung Electronics has reassured markets about the competitiveness of its semiconductor business, after a series of warnings from investors, analysts and employees that the Korean company was losing its technological lead.

The South Korean conglomerate is the world leader in the memory chip market and has ambitions to close the gap with its main rival Taiwan Semiconductor Manufacturing Company in the foundry sector, where companies are contracted to produce chips designed by others.

Illustrating the company’s importance to the global economy, US President Joe Biden toured its Pyeongtaek semiconductor plant during a visit to South Korea in May.

But earlier this year the company lost its two biggest foundry customers, Qualcomm and Nvidia, to TSMC, according to analysts, who suggested the companies were disappointed by Samsung’s inability to deliver stable volumes. of 4-nanometer and 5-nanometer chips that make up computer central processing units.

TSMC captured 54% of the foundry market in the first quarter of 2022, more than three times Samsung’s market share, according to market researcher TrendForce.

Last year, Samsung announced a 171 billion won ($151 billion) investment plan for foundry chips by 2030. But its Taiwanese rival plans to invest up to $44 billion this year, compared to $12 billion estimated by Samsung, according to Seoul-based SK Securities.

And in D-Ram, traditionally Samsung’s strength, rivals Micron Technology and SK Hynix have been quicker to unveil some of the more advanced chips. D-Ram technology provides short-term storage for graphics, mobile, and server memory chips.

Problems with its flagship Galaxy S22 smartphone, launched in February, suggest the South Korean group is also falling behind Apple in hardware competitiveness, while performance and sales of Samsung’s Exynos 2200 mobile processor chips, launched this year have been disappointing.

Investors including hedge funds Petra Capital Management and Dalton Investments have raised concerns about what they describe as Samsung’s rigid corporate culture under Lee Jae-yong, vice chairman and executive de facto from Samsung.

They say the company has prioritized rapid development and cost savings over quality and innovation.

“Designing their own chips requires creativity and engineering prowess, but Samsung’s risk-averse culture has deepened under Lee Jae-yong’s leadership, with engineers shunning new attempts at innovation” said Chan Lee, managing partner of Seoul-based Petra Capital Management.

In April, a junior engineer who worked in Samsung’s semiconductor technology development team wrote a letter to company management complaining that Samsung researchers were under enormous time pressure to achieve “impossible” goals to develop new technologies and products, and that “a sense of failure” permeated the organization.

“It seems that the upper decision-maker is not able to grasp the root cause of the problems,” added the engineer. “I’ve heard a lot of stories of ‘crisis’ but I think this moment is more dangerous than ever.”

“The cultures of a design house and a fab are critical to success. These genius engineers need proper motivation, direction and leadership,” wrote Dylan Patel, chief analyst at SemiAnalysis, in a recent report. He attributed Samsung’s problems to a “toxic” culture in which different business units blame each other “in the face of mistakes” for its weakness in the non-memory sector.

Samsung’s share of the smartphone app processor market has nearly halved since 2019 and ranked fourth last year at 6.6%, compared to 37.7% for Qualcomm, 26.3% for MediaTek and 26% for Apple, according to market research firm Strategy Analytics.

“[Samsung’s] technological advantages all crumble,” Patel wrote. “Samsung is slipping on all aspects of technology development, including the one area where they have historically crushed all competitors, D-Ram.”

Samsung Electronics reported weaker-than-expected operating profit for the second quarter of 2022 as inflation dampened consumer demand for electronics.

It is also bracing for a drop in demand in response to rising global prices following the pandemic-driven surge in the tech sector over the past two years.

But company executives say its memory business still enjoys a technological advantage over competitors, citing its faster adoption of extreme ultraviolet lithography technology for memory chip production and its dominant D-Ram market share. by about 40%.

Kang Moon-soo, vice president of Samsung’s foundry business, described market concerns over the loss of key customers as “exaggerated”, telling analysts in April that he had an order book for the five coming years, i.e. eight times last year’s turnover. of the company.

Analysts said TSMC’s faster transition to mass production of 4nm and 5nm chips has affected the Korean company’s ability to produce cutting-edge chips in sufficient volumes for its most important customers.

But Samsung told the Financial Times it was now able to produce stable quantities of the chips and would “maximise” supply. An executive told analysts on Thursday that the company was “reorganizing” its chip design business to bolster its long-term competitiveness.

Earlier this week, the company held a ceremony to celebrate its first delivery of 3-nanometer chips, after beating TSMC to bring the next generation of memoryless chips to market.

“Samsung still has a chance to attract customers again if it can increase the rate of return on advanced chips,” said James Lim, an analyst at California-based hedge fund Dalton Investments. “No one wants to take the risk of relying entirely on TSMC.”

Samsung also said it strives to create an “inclusive defiance culture” through “open communication” with employees. He said he continues to talk to employees about the company’s vision and business direction.

There is optimism within the company that Lee, a descendant of the company’s founding family, will receive a pardon from Chairman Yoon Suk-yeol next month.

Lee was paroled last year, having served 60% of his sentence for bribing former president Park Geun-hye to secure control of Samsung Electronics for her family.

But he remains subject to restrictions on his employment and business activities, which complicate his ability to effectively oversee the management of the sprawling Samsung conglomerate. Presidential pardons are traditionally granted before South Korea’s Independence Day in mid-August.