Samsung is in Crisis

This episode is brought to you by Ground News. Hi, welcome to another episode of ColdFusion. Samsung's management has stated that the company is in crisis. However, Samsung is more than just a company.

It's a dynasty where leadership is handed down through the generations. Samsung basically runs Korea. They alone account for 20% of South Korea's entire GDP. Few companies anywhere in the world have such a dominant impact on their home country's economy. It's so influential that some jokingly refer to South Korea as the Republic of Samsung.

Consumers in the U.S. and other parts of the world may view Samsung as just a phone or electronics brand. However, in South Korea, Samsung is on a whole different level. The company is ubiquitous, with its hand in nearly every industry one can think of. Samsung has 80 subsidiaries, with its flagship being Samsung Electronics. They dominate sectors such as construction, real estate, food production, finance, life insurance, and healthcare.

But they also build armored vehicles, oil tankers, have a clothing and entertainment branch, and even run hospitals. When I was in Korea last year, I even saw Samsung-branded cars. It's hard to believe that such a company started by selling vegetables and dried noodles. At the start of 2024, Samsung Electronics, the crown jewel of the empire, was valued at $400 billion. Then, starting in July of 2024, a sudden panic hit the company's stock, and foreign investors frantically began selling off their Samsung shares.

They lost $122 billion in value. In just a few months, almost half the company's market cap was wiped out. This kind of drastic drop is concerning for any company, let alone one that's tied so heavily to the GDP of an entire nation. So what's behind the panic? While we all know that stock markets can be fickle these days, and even a rumor can initiate a selling process, there is more happening behind the scenes.

Samsung has reshuffled some of its management and implemented a six-day working week for executives to get its house in order. However, this raises a major question: Are there significant problems within Samsung?

Or is this just overblown market sentiment? In today's episode, we investigate what's going on with Samsung, the management changes, and what this all means for one of the world's most influential companies. Before diving in, we should remember that Samsung is run differently from companies in the West. Samsung is what's called a chaebol, or family-owned conglomerate that's passed down through generations. That's like if Zuckerberg were to hand over his empire to one of his children.

The Samsung family is the most powerful in Korea. In fact, Miki Lee, the producer of the Korean movie "Parasite," was a Samsung heiress. She was also instrumental in pushing Korean culture into the mainstream. But back to Samsung; being a chaebol company means that a lot of control remains within the Lee family, the company's founders. This concentration of power has created its own set of challenges.

Over the years, there have been a number of corruption scandals and legal battles that have tainted Samsung's image. As Jeffrey Kane, author of *Samsung Rising*, puts it, "Every leader of Samsung has been in and out of court. So far, they have been either accused, convicted, or jailed for tax evasion, bribery, embezzlement, or perjury." One of the largest scandals happened in 2017. The company's heir, Lee Jae-yong, became embroiled in bribery scandals. Lee was charged with offering $38 million in bribes to four companies run by a friend of the president at the time. Interestingly, one of the companies was in Germany and provided horse riding training to one of the daughters of the president's friends. In return, Lee was to receive government help for a corporate merger that would give him more control within Samsung. This scandal shook both public and investor confidence, but by 2022, he was out of jail and back as Samsung Electronics' executive chairman.

So why was this? Well, the Korean government basically stated that Samsung was too important for the government to mess with. South Korea's most powerful business leader, Lee, emerged from a detention center just outside Seoul, a free man. A judge ruled that it was hard to see the reason, appropriateness, and necessity of arresting him at that time. Later that year, Lee was convicted on a drug charge.

The leadership of Samsung has a bit of a question mark surrounding it. But that's not all. Samsung is also known for its rigid hierarchy. When things are good, this structure works well. However, insiders say it fosters a culture that stifles innovation and makes it difficult to adapt to rapidly changing market demands.

A factor that would soon come into play is the discussion of Samsung's $122 billion market value loss. When we talk about this loss, we're really referring to Samsung Electronics. It's important to make that distinction because Samsung operates a massive conglomerate and has a range of divisions under its belt. At the core of Samsung Electronics' businesses are two divisions. One is the Device Experience Division, which includes smartphones, TVs, refrigerators, and other home appliances.

The other division is the Device Experience Division, which includes smartphones, TVs, refrigerators, and other home appliances. The other division is the Device Solutions Division, which focuses on semiconductors and display panels. Samsung Electronics, specifically its semiconductor and consumer electronics divisions, plays the biggest roles in the company's market performance. So when Samsung Electronics fell 32% from its high, this seemed to be more than just the CEO fluffing about. So what gives?

Well, it comes down to three big factors. Number one: missed opportunities in AI. Number two: a chip-making disadvantage. And number three: missed opportunities in AI.

And number three: some chaotic leadership changes. Let's break these down, beginning with missed opportunities in AI. If you look online, most media outlets point to Samsung's inability to keep up with AI as a major factor behind the stock crash.

So, is there any truth to this allegation? Well, the short answer is yes. When generative AI took off, there was an AI gold rush. Basically, everyone on the internet hates generative AI, but the fact of the matter is that it can generate a lot of money for those companies that position themselves correctly. Microsoft, Google, and especially NVIDIA went all in.

Nvidia, which supplies the GPUs that power AI ventures, saw its value skyrocket past $1 trillion. So where does Samsung fit into this picture? Unfortunately, nowhere. They've been on the sidelines. As a major semiconductor player, Samsung has lagged behind in its high-bandwidth memory production.

High Bandwidth Memory, or HBM, refers to special chips used in high-end graphics systems like the Nvidia H100, the very same graphics systems that power AI. The latest generation of high-bandwidth chips is called HBM3E, offering transfer speeds in the range of terabytes per second. In an extremely high-profile deal, Samsung was supposed to manufacture these special memory chips for Nvidia, chips crucial for Nvidia's AI efforts. However, in one of the biggest blunders of the year, reports indicate that Samsung completely fell flat. Their chips couldn't meet the strict requirements for heat and power efficiency that were necessary, resulting in a tough setback.

Falling short of a major client like this comes with consequences, and for Samsung, this was costly. Meanwhile, competitors like SK Hynix have swooped in to take advantage and now hold a strong lead in the high-bandwidth memory market. They are currently the exclusive supplier of these chips to NVIDIA. If we take a look at this graph for the high-bandwidth memory market, just at a glance, we can see that Samsung's flat white line is consistently at the very bottom, trailing well behind its smaller competitors in the high-bandwidth memory space. Samsung knows they're falling short, so they published a recent apology acknowledging missed targets and struggles in high-performance AI memory.

Investors were further disappointed with Samsung's latest quarterly profit, which was $900 million below expectations. They still made $6.78 billion, and that's nothing to sneeze at. However, falling short by nearly a billion doesn't exactly make investors jump for joy. Samsung was in panic mode, and Vice Chairman Jun-young Hian's recent statement blatantly admitted that their failure to meet market expectations has fueled concerns over Samsung's technological competitiveness and future direction.

This "crisis," as Samsung management calls it, even led the company to enforce a six-day workweek for its executives in an attempt to regain lost ground. In short, Samsung, which manufactures chips, was caught napping as AI chip hardware took off, and investors aren't happy. The company is also facing critical challenges in the smartphone chip sector. Their Exynos chips have been a thorn in Samsung's side. For years, Exynos processors have been criticized for issues like overheating, poor battery efficiency, and subpar performance compared to Qualcomm's Snapdragon chips.

In fact, Samsung has lost so much faith in their Exynos chips that they often choose Snapdragon over Exynos when it comes to their own flagship Galaxy series devices sold in crucial markets, especially in North America. The big competition for Samsung is, of course, TSMC, the Taiwanese giant that has absolutely mastered chip making. Samsung's semiconductor business is a massive operation, with sales totaling almost $60 billion in 2024 alone. However, they have consistently found themselves one step behind TSMC. Their Taiwanese competition has the ability to produce chips with greater efficiency, more power, and fewer defects.

Their pedigree has allowed them to secure big-name contracts with Apple, NVIDIA, and AMD. In contrast, Samsung has grappled with lower yields and production delays. As time passes, the gap in technical ability between the two companies keeps growing. In Q1 2024 alone, the top 10 semiconductor foundries generated a collective $29.2 billion in revenue, and TSMC dominated the market with a staggering 61.7% market share. Meanwhile, Samsung had a meager 11%, which is quite concerning in comparison.

And if Samsung can't close this gap soon, they risk losing even more ground to TSMC. Meanwhile, Samsung had a meager 11%, which is pretty concerning in comparison. If Samsung can't close this gap soon, they risk losing even more ground to TSMC and, with it, billions of dollars in potential revenue. To make matters worse, TSMC is no longer the only competitor. Samsung is also facing pressure from fast-rising Chinese competitors, who are quickly catching up in sectors outside of U.S. sanctions.

These are legacy chips used in cars, airplanes, home appliances, and consumer electronics. By the third quarter of 2024, Samsung's performance was already taking a hit. Memory chip demand was coming in weaker than expected, and all of this was the complete nightmare scenario that Samsung had been dreading. As the challenges piled up on all sides, behind the scenes, Samsung had been scrambling to address its internal issues by reshuffling leadership. In May 2024, they announced the removal of Kyung Ki Hyun as chip head and brought on Joon Young Hyun to head the core semiconductor business and steer the ship in a new direction.

This decision came well before the stock sell-off by investors that started in July, indicating that management knew the company was struggling and needed to change. However, this reshuffle in leadership is not just about gaining a fresh perspective; it is a response to mounting pressure to address a long-standing history of internal mismanagement. The company has undergone multiple leadership revamps over the years, with three new CEOs appointed in 2021 across its major divisions. The frequency of these leadership changes signals instability and may suggest a lack of a clear long-term strategy. According to ZDNet, the recent shuffle is just the latest attempt to revamp leadership, but it has not produced clear results.

This internal chaos may only add to Samsung's perception of instability. All of these issues—AI stagnation, chip struggles, and corporate chaos over the years—have created a perfect storm that slashed Samsung's stock into a bear market. So, what can Samsung do to turn things around? For starters, as already mentioned, they've brought in Joon Young-hyun to lead the semiconductor division. Joon previously headed Samsung's battery and energy solutions arm and played a significant role in the memory business.

He now has the task of navigating the semiconductor crisis. The hope is that his background will help stabilize this vital division, especially as global demand fluctuates. They are also making some tough, cost-cutting decisions. There are layoffs planned across Southeast Asia and Australia that could impact 10% of jobs in the region. It's a harsh move, but they see it as necessary to stabilize the ship.

I would like to see their bonuses, though. Overseas, that represents more than half of Samsung's entire workforce. The markets where job losses are occurring this time, we're hearing, are Australia, New Zealand, and also Southeast Asia. About 10% of the workforce in those markets could end up being affected, though the numbers are likely to vary among each subsidiary as well. Samsung's Device Solutions division, which handles memory and systems, recently reported a 40% profit drop from the previous quarter. In response, Samsung plans to scale down its foundry operations by up to 50% by the year's end.

And this is to adapt to weaker demand from key clients in the U.S. and China. Meanwhile, they're reshaping their investment strategy, trimming non-core projects to focus on core areas like semiconductors and display technology. They've also hinted that more actions could follow, though the specifics are still under wraps. Now, let's take a step back and assess whether the stock market collapse is overblown or just a panic. Yes, they've lost $122 billion in market value, and upper management is absolutely panicking.

But is it all doom and gloom? Samsung's core strength lies in its diverse portfolio. One sector can be negatively affected over time, but other sectors can keep the ship afloat as a whole. In this case, the most affected business sector is Samsung Electronics. Looking at their recent earnings, it’s a mixed bag.

Revenue came in at $59.3 billion, up 7% from the previous quarter, but operating profit fell by $6.9 billion due to one-off costs, including incentives and issues in the semiconductor division. However, there are some bright spots in their earnings, such as smartphone sales and display technology. While Samsung Electronics has faced challenges, particularly in memory chips and semiconductors, it’s not all bad news. The stock sell-off is more a vote of no confidence in the leadership and direction of the company. The stock market tends to look to the future rather than focusing solely on present conditions, making it a rollercoaster for Samsung lately. Currently, it may not be an extinction-level event, but losing $122 billion in such a short time is a significant blow. As mentioned, if their leadership doesn't steer the ship correctly, they risk further panic. Once again, let’s not forget that stock markets are fickle; they are influenced by many factors, including global economic shifts, sentiment changes, and even short-term events.

Still, the whole "too big to fail" mindset doesn't always hold up. I'm not saying that Samsung is the Nokia of 2013, but clearly, there's some work to do. Ultimately, we have to wait for it and see what happens. Getting informed on the top news stories is more complicated than ever.

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If you liked this episode, feel free to check out anything else on ColdFusion. There's plenty of interesting content here on science, technology, and business. Also, if you've made it this far and you're one of those original subscribers to ColdFusion, you might remember my Samsung video from about ten years ago. If you were there for that video, thank you for sticking around. I really appreciate it!

Alright, my name is Degogo, and I will see you again soon for the next episode. Cheers, guys. Have a good one. ColdFusion.