Samsung Lifting Off on Ideal Product Mix
By Kim Yoo-chul
Samsung Electronics is aiming to reap $400 billion in global sales in 2020, which has been regarded as "too ambitious" even by some company executives.
The sales target, if realized, would rank the company in the global top 10 in terms of total revenue and be enough to make Samsung the world's top information and technology (IT) company.
Behind the confidence, is Samsung's unique and ideal business portfolios. It runs component businesses such as memory chips and flat-screen panels, while the company also sells consumer products to customers.
Samsung is the world's biggest producer of computer memory and flash memory chips, which are used in PCs and high-end digital devices such as mobile phones.
It is also leader in liquid crystal display (LCD) television sets, while also supplying most LCD panels among other LCD manufacturers.
Samsung only trails Nokia in the global handset industry. It has a significant market gap with followers ― LG Electronics, Motorola of the United States and Sony-Ericsson.
"Samsung is better positioned in terms of its products mix. When its volatile component businesses ― chips and LCDs ― suffer from a market downturn, its TV and handset units are helping the company keep the bottom line," Park Hyun, an analyst at Prudential Investment, said.
For example, Samsung's memory chips and LCDs remained in red territory for two consecutive quarters from the fourth quarter of last year to the first quarter of this year hit by the industries' downturn.
But it was able to earn profits thanks to a strong contribution from its handset unit.
"We have more room for steady growth, while securing our bottom line thanks to a portfolio combining component and consumer-product businesses," a company spokesman Kim Choon-gon said.
With proven chip and flat-screen technologies, Samsung is taking aggressive moves in advanced TVs dubbed "LED TVs," while it has just launched its own mobile platform, "Bada," (ocean in Korean) to better penetrate the rapidly growing Web-browsing enabled smartphone market.
"The interesting point is that Samsung was attaining control of the memory chip and LCD panel markets as it had already realized economies of scale in those segments," Park Young-joo, an analyst at Woori Investment, said.
"With cash coming from these segments, it could invest in other promising areas such as the bio- and healthcare-related businesses," he added.
Samsung has also said it will look to solar cells as one of its next cash cows.
The company plans to invest about 500 billion won in the biotech medicine business over the next five years.
Biosimilars are versions of biopharmaceuticals whose patents have expired.
"With solar-cells, biosimilars is one of the businesses we aim to strategically. We are planning to participate aggressively," another company spokesman said.
Buoyant Moves in Profit
Analysts are picking Samsung Electronics' shares as a "top pick" citing enhanced earnings momentum.
Citi raised its target price on Samsung Electronics by more than 14 percent to 1.030 million won, while it also increased its 2009 and 2010 operating profit estimates for the company by 2.6 percent and 15.2 percent, respectively.
"While we remain largely unchanged for the LCD and handset division, we revise up memory division earnings as we have become more positive on shipment growth in fiscal 2010," the U.S.-based brokerage wrote in a recent memo to clients.
Samsung, which earned 4.23 trillion won in operating profit in the third quarter, is near to reaping 100 trillion won in annual sales and 10 trillion won in operating profit for the entire year.
The company is planning to increase its capital expenditure on memory chips and LCDs by over 40 percent to 8.5 trillion won from this year's estimated 6 trillion won, helped by steadily rising demand for consumer electronics in most markets.
Meanwhile, more TV makers including Japan's Sony and Vizio of the United States are jumping into the rapidly growing "LED TV" market, in which Samsung has captured 80 percent.
In mobile phones, the company will boost its portion of smartphones out of total production.
Currently, Samsung aims to sell 250 million mobile phones next year, up 20 percent from this year.
"Samsung will benefit the most among other IT-focused players over the next few years amid signs of strengthening in the global economy. With vast chip and LCD output, it will invest more in other areas," So Hyun-chul, an analyst at Shinhan Financial, said.
But it is expected the South Korean company might face a technical correction on its shares, though analysts and company officials have no doubts about Samsung's long-term growth potential.
Merrill Lynch has downgraded the memory chip sector on a possible inventory correction, although Samsung and other European and Taiwanese chipmakers are upbeat about recovery prospects.
Meanwhile, another supply glut could be looming in the upcoming quarter as companies including Samsung Electronics, LG Display, Sharp of Japan and AU Optronics of Taiwan ramp up production from new lines in China.
China's flat-panel industry is booming and the country could overtake North America to become the world's largest LCD TV consumer in 2011, representing 21.3 percent of the global market.
After several months of strong LCD sales, some analysts say the industry could face a repeat down cycle next year if demand dwindles, although sector leader Samsung typically suffers less than smaller rivals in a down cycle.
Samsung is also looking to put more energy into the smartphone segment, where Nokia eats up most of the pie.
With its Android-powered phone called Droid, Motorola is hoping to regain past glories in the market, while Sony-Ericsson is also looking at a bigger share.
"Challenges are ahead for us. But that's not in our traditional businesses. That's in Samsung's future growth engines. With our leadership in component businesses, we will do more consumer-related business to achieve our ambitious 2020 goal," Woo Jong-sam, a senior vice president of Samsung's public relations team, said.