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Sense of Crisis Felt at Samsung Electronics despite Its Best-Ever Performances
Crisis amid Best-ever Performance
Sense of Crisis Felt at Samsung Electronics despite Its Best-Ever Performances
  • By Michael Herh
  • July 27, 2017, 17:45
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Samsung Electronics recorded the highest-ever operating profit In the second quarter of this year, exceeding that of Apple which has the world's largest market capitalization.
Samsung Electronics recorded the highest-ever operating profit In the second quarter of this year, exceeding that of Apple which has the world's largest market capitalization.

 

In the second quarter of this year, Samsung Electronics recorded the highest-ever operating profit exceeding that of Apple which has the world's largest market capitalization. Nevertheless, a sense of crisis is being felt inside Samsung. This situation stemmed from internal problems such as the absence of a group control tower after the dismantling of the Future Strategy Office and an external issue that the government discussed a rise in the corporate tax.

Samsung Electronics announced on July 27 that the company chalked up operating profit of 14.1 trillion won (US$12.6 billion) in the second quarter of this year. The figure was the highest among non-financial companies in the world. However, the absence of vice chairman Lee Jae-yong who is the highest decision maker at Samsung casts a dark shadow on Samsung. Large-scale investment plans have virtually vanished at Samsung.

"A large investment in the semiconductor industry a few years ago made Samsung what the company is today. Now is the time to prepare for the future, but now Samsung’s business activities are virtually put on hold," said a senior Samsung Electronics official.

The disappearance of Samsung’s large-scale M&A announcements is also largely due to the absence of its owner. Samsung shelled out 9 trillion won (US$8.1 billion) last year to acquire Harman, a global electronic auto parts company, and secured competitiveness by acquiring 10 small and large companies over the past five years. However, Samsung Electronics's investment has not been made since the vice chairman Lee's arrest. Current investments were like the implementation of agendas that were planned in the past.

For example, Samsung Electronics is planning to invest a total of 30 trillion won (US$27 billion) in the expansion of Pyeongtaek Line 1 in Korea by 2021. The semiconductor giant is also preparing for the future semiconductor market by investing 6 trillion won (US$5.4 billion) in the Hwaseong plant to secure new lines optimized for cutting-edge infrastructure. The planned investment amount for the next five years is to the tune of 50 trillion won (US$45 billion). But this investment plan was already planned and there is virtually no additional investment activity these days.

"It is important to note that recent news reports focusing on Samsung Electronics have disappeared. Large-scale investments and mergers and acquisitions were the main themes of such news reports. The disappearance of such articles is evidence that Samsung is not moving," said a high-ranking official in the Korean business world.

Samsung Electronics failed to land an order for 7 Nano Snap Dragon Processors from Qualcomm in the first half of this year. Samsung Electronics lost the order to Taiwan’s TSMC. Samsung Electronics needs to find new customers to replace its largest customer which accounts for 40% of foundry semiconductor sales.

There are also many external threats. First, since the inauguration of President Moon Jae-in, the new government is pushing for corporate tax hikes for ultra-large companies. On the same day, the government and the ruling party discussed an amendment to the tax law with the aim of raising the corporate tax and income tax on ultra-large companies.

A plan to increase the rate of the corporate tax on companies with income of over 200 billion won (US$180 million) from 22% to 25% is in the works. In addition, the National Assembly is discussing issues such as the separated election of directors and auditors, and the introduction of a concentrated voting system. At the government level, there is a strong move to vitalize a stewardship code. These facts mean that there is a possibility of a rapid change in business environments.

Samsung Electronics cannot always be optimistic about its semiconductor business which has achieved all-time record-high earnings. The Chinese government, which has declared the promotion of the Chinese semiconductor industry, announced that the nation will increase the localization rate of semiconductors by investing US$150 billion by 2025. Analysts are forecasting one after another that the current semiconductor super cycle will peak in 2018. The US’s trade pressure is mounting against Korea every day. US President Donald Trump said he wanted to revise the Korea-US Free Trade Agreement (FTA), and lawsuits were filed against Korean consumer electronics companies in the United States.

"In order to respond to rapid changes in the IT industry, it is vital to secure new growth engines through securing advanced technology through M&As and strategic investment, but it is expected that Samsung Electronics will have difficulties due to uncertainties in internal and external management environments,” said a representative of Samsung Electronics during the earnings announcement on the day.