Sam­sung fac­ing grow­ing threats de­spite record prof­its

Muscat Daily - - BUSINESS -

Seoul, South Korea - Sprawl­ing South Korean con­glom­er­ate Sam­sung Elec­tron­ics has re­cov­ered from a hu­mil­i­at­ing re­call fi­asco and the ar­rest of its de facto leader with re­mark­able speed, an­a­lysts said, af­ter the tech gi­ant stunned in­vestors with record­break­ing prof­its.

But the world’s top smart­phone maker, one of the huge fam­ily-run chae­bols which dom­i­nate the South Korean econ­omy, will be con­fronted by tougher chal­lenges in the fu­ture as Chi­nese ri­vals take aim at its semi­con­duc­tor busi­ness and ques­tions emerge over the firm’s lead­er­ship.

Sam­sung took ob­servers by sur­prise this week when it posted a fore­cast-beat­ing 14.1tn won (US$12.6bn) in op­er­at­ing prof­its in the sec­ond quar­ter - a 73 per cent jump from the pre­vi­ous year - putting it on course to bet­ter ri­val Ap­ple for the first time.

Con­sen­sus fore­casts of Ap­ple’s op­er­at­ing prof­its, due to re­port this week, are es­ti­mated at around US$10.6bn.

Sam­sung said huge sales of its new Galaxy S8 smart­phone and de­mand for its mem­ory chips were be­hind the jump in the April-June pe­riod and pre­dicted an­other block­buster re­port for the cur­rent quar­ter to Septem­ber.

The firm has been bat­tling to over­come an em­bar­rass­ing re­call last year of its flag­ship Galaxy Note 7 smart­phone over ex­plod­ing bat­ter­ies, which cost it bil­lions of dol­lars and dealt a se­vere blow to its rep­u­ta­tion.

“I would ar­gue Sam­sung turned that cor­ner pretty quickly, at least from a fi­nan­cial point of view,” said Jan Daw­son, chief an­a­lyst at Jack­daw Re­search.

Daw­son noted the 28 per cent in­crease in sales in Sam­sung’s mo­bile di­vi­sion, con­trast­ing it to the 15 per cent drop the firm saw dur­ing the third quar­ter of last year when the re­call cri­sis was at its peak.

‘Ready to be picked’

The big­gest driver of the rapid re­cov­ery was Sam­sung’s semi­con­duc­tor busi­ness, which raked in 8.03tn won in op­er­at­ing profit in the sec­ond quar­ter, up 204 per cent from the pre­vi­ous year. Sam­sung pro­vides chips to other com­pa­nies in­clud­ing Ap­ple.

Ge­of­frey Cain, au­thor of an up­com­ing book on the Sam­sung em­pire, said the firm was sim­ply rid­ing the wave of ‘huge in­vest­ments in strate­gic in­dus­tries like chipsets and OLED pan­els’ it made years ago.

“Sam­sung has plan­ta­tions of fruit ready to be picked, even if a few like its Note 7 went rot­ten,” Cain said.

Ris­ing global de­mand for semi­con­duc­tors has pushed prices high to Sam­sung’s ben­e­fit, said Chung Sun-Sup, an ex­pert who runs the web­site Chae­ that tracks the cor- po­rate as­sets and prac­tices of South Korean con­glom­er­ates.

“The com­pany will en­joy the global semi­con­duc­tor boom over the next few years,” Chung said.

But the big­ger chal­lenge for Sam­sung is what hap­pens af­ter the har­vest, as the firm faces ques­tions over its ‘untested’ leader and the grow­ing threat from Chi­nese ri­vals.

The firm’s de facto leader Lee Jae-Yong is in cus­tody af­ter a Fe­bru­ary in­dict­ment over a na­tion­wide bribery scan­dal that top­pled then-pres­i­dent Park Geun-Hye.

The lead­er­ship vacuum will not af­fect day to day op­er­a­tions of the Sam­sung em­pire, Chung said, largely due to the com­pany’s dis­persed man­age­ment struc­ture.

But with a hand­ful of its key ex­ec­u­tives bat­tling al­le­ga­tions of bribery, Sam­sung’s abil­ity to take ma­jor de­ci­sions on long-term busi­ness in­vest­ment will be com­pro­mised.


Lee is ac­cused of brib­ing Park and her se­cret con­fi­dante with mil­lions of dol­lars to seek gov­ern­ment favours to smooth his suc­ces­sion to the Sam­sung em­pire. He has de­nied any wrong­do­ing.

A court rul­ing on Lee’s case is ex­pected be­fore Au­gust 27, when his ar­rest war­rant ex­pires.

But even if Lee re­turns to work, Cain said the Sam­sung heir ‘re­mains untested on the mar­ket’.

“Few peo­ple out­side Sam­sung truly know what he’s ca­pa­ble of, be­cause his suc­ces­sion has al­ways been guar­an­teed,” he said.

Lee has ef­fec­tively been at the helm of the group since his fa­ther suf­fered a heart at­tack in 2014.

But Sam­sung’s suc­cess rid­ing on its semi­con­duc­tor busi­ness will face in­creas­ing head­winds, an­a­lysts warn, as it faces rapidly emerg­ing Chi­nese ri­vals spend­ing bil­lions of dol­lars to dom­i­nate the global chip mar­ket.

“The Chi­nese chipset mak­ers are study­ing, mim­ick­ing and play­ing catch-up in the realm of semi­con­duc­tors,” Cain said, com­par­ing the prac­tice to what South Korea had done to Japan pre­vi­ously, and how Japan caught up with the United States in the 1950s and 1960s.

To be­come the next Sam­sung is the ul­ti­mate dream of these Chi­nese chipset mak­ers, Cain said, adding: “It’s en­tirely fea­si­ble, and Sam­sung should be ter­ri­fied.”

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