On the day that Apple Inc. posted record revenue and a week after Taiwan Semiconductor Manufacturing Co. announced a mammoth spending hike, the one company at the intersection of both the chip and smartphone sectors gave us disappointing earnings and a tepid outlook.
As a consolidated entity that spans the gamut of hardware, Samsung Electronics Co. is unparalleled. It’s a global leader in almost every market where it competes. Break it down product by product, though, and you start to see cracks in the armor.
Samsung blamed a stronger Korean won, weaker memory-chip prices and heightened competition in smartphones when announcing results Thursday that lag behind both peers and expectations. Management sought to keep investors happy with news that it will boost dividends over the next three years.
While certainly a major player in logic chips, the type that fill TSMC’s fabs year after year, Samsung’s semiconductor business is chiefly composed of memory — a sector that’s extremely sensitive to imbalances in supply and demand and the wavering prices that this entails. Semiconductors accounted for 52% of operating profit last year, so when this division suffers, the entire company feels the pain. Also hurting that unit is the high cost of capex, which hit almost $30 billion last year as Samsung expands capacity and chases TSMC along the bleeding edge of technology.
Its other major earnings driver is IT and Mobile, the department that makes both smartphones and networking equipment. Phone sales dropped 11% in the fourth quarter from a year prior. By contrast, Apple’s iPhone revenue climbed 17%.
Compared to both Apple and TSMC, Samsung’s offerings in the areas it dominates do have direct competitors. Any new iPhone’s biggest rival is the previous model, rather than an Android alternative. And TSMC’s irreplaceability puts it at the center of global geopolitics. But each new Samsung Galaxy has a direct challenger in a device from Huawei Technologies Co., Xiaomi Corp. or even Alphabet Inc.’s Google Pixel range. And memory chips are such a commodity that, although the South Korean company is the king, the components it churns out can easily be substituted.
Samsung needs to learn from its competitors to stay on top. Apple has built up not only a cult following, but an ecosystem that makes it cumbersome to swap out an iPhone for an Android alternative. And TSMC’s massive capacity and brute spending power in non-memory manufacturing means its clients can’t survive without the Taiwanese company.
Brilliance and technology mean that Samsung isn’t going to disappear anytime soon, but long-term survival depends on finding layers of uniqueness that make its clients addicted. –Bloomberg