Samsung sees profits fall in chips, displays

Rival SK hynix, LG Display eat into Samsung share

By Kim Yoo-chul

The competitiveness of Samsung Electronics, the world's biggest technology company by revenue, mostly lies in semiconductors and displays ― long-time cash-generators for the firm.

Today's corporate success is thanks to its firm commitment to push memory chips and displays as Samsung believes those businesses are ideally-positioned to bring profit in the shortest time based on "economies of scale."

Chips and displays are cash-intensive. As its chairman Lee Kun-hee initiated those businesses, Samsung has strong pride and an undisrupted edge in the components.

For Samsung Electronics, it may be a shame if a rival beats it in terms of profitability.

But it actually needs to improve its semiconductor and display businesses as rivals are gradually overtaking the long-time global leader.

For the first three months of this year, SK Group's chip affiliate SK hynix defeated Samsung Electronics in terms of profit margin, upsetting Samsung's top management.

In a filing to the Korea Exchange, SK hynix reported 3.7 trillion won revenue during the first quarter, generating 1.05 trillion won in operating profit, shooting it to a 28.2 percent profit margin.

In contrast, Samsung's chip business generated 9.39 trillion won in revenue with an operating profit of 1.95 trillion won, meaning the profit margin was 20.7 percent.

Throughout last year, the profit margin reported by SK hynix was 24 percent; however, that by Samsung was 18.4 percent.

Market analysts and officials said it's not fair to compare Samsung and SK hynix due to business territories that each are involved in.

For example, SK hynix mostly produces pure memory chips, while Samsung Electronics manufactures logic chips. Meanwhile, Samsung also has a greater exposure to flash-type memory chips compared to SK hynix.

"A direct comparison between Samsung and SK doesn't make sense as Samsung shifted its focus towards logic chips, while SK is the winner as a new market paradigm prevails. But one thing is that Samsung's semiconductor business is being challenged and profitability isn't that strong as it was before," said So Hyun-chul, an analyst at Shinhan Financial, adding Samsung is urged to improve its non-memory chip business for corporate sustainability.

"The logic chip business continues to underperform. We estimate logic chip profit was actually slightly negative during the first quarter. This year should be a transition year for Samsung's system logic chip-making division," said Mark C. Newman, a senior analyst at Sanford Bernstein, an independent research unit of Alliance Bernstein of the United States.

LG taking over Samsung in displays

The situation isn't much different in displays.

Simply put, the profitability of Samsung's display business is worsening.

During the first quarter, Samsung Display reported 6.1 trillion won in revenue; however, it reported 80 billion won in operating losses for the first time in two years.

In contrast, Samsung's biggest rival LG Display reported 94 billion won in profit during the quarter, extending its winning streak for the eight consecutive quarters.

Samsung Display blamed such disappointment on moves by Samsung Electronics' mobile division, the biggest client, to diversify its display-sourcing channels to Chinese and Taiwanese firms and price falls in small- and medium-sized OLED displays to be used in smartphones and tablets.

Unlike LG Display, which is focusing on large-sized OLEDs and LCDs with ultra high-definition (UHD) picture quality, Samsung is pushing strategies to sell more OLED panels for various mobile products.

As the smartphone market is heading toward saturation point, Taiwanese and Chinese firms are churning out mobile-fit OLED panels, threatening Samsung's display business.

"Premium UHD and curved TV product line up expansion should help improve the TV panel average selling price, while OLED should benefit from the Galaxy S5, in addition to new applications such as tablets, low and mid-end smartphones, and wearables," said Newman.

Although the semiconductor and display panel businesses are highly cyclical according to the market situation, analysts and company officials said Samsung needs to get its two key traditionally-strong businesses on the right track and find greater stability.

"It's not good to see Samsung's chip and display businesses on a bumpy road. Those businesses are the pride of Samsung," said a senior researcher at Samsung's chip factory in Yongin, on the outskirts of Seoul.