By Kim Yoo-chul
Samsung Electronics may be a leading global tech firm but it is still subject to cyclic ups and downs.
Now with its big cash holdings, the Korean firm is trying to do something that has rarely been tried before ― beating the cycle.
Its rationale goes that if it can control this, the company won't need to worry about oversupply and can ensure a steady stream of business. For that, it needs to bulk up its size.
The leading chip and flat-screen manufacturer has obviously learned its lesson in the trough of the previous business cycle.
Samsung posted 910 billion won in losses ― 560 billion won in memory chips and 350 billion won ― in the fourth quarter of 2008. This wasn't so bad, considering the sweeping global recession at that time.
Samsung has tried to go for industrial domination before and ended up with bad publicity. Its aggressive pursuit of increasing output capacity was to blame for the insolvency of Germany's Qimonda.
But that was then. Now, Samsung is making another attempt at the same strategy.
Last week, Samsung executives said it is mulling the possibility of more facility investment capitalizing on chips and flat-screens.
The announcements have been regarded as ambitious at a time when the global memory chip and LCD sectors are approaching another oversupply due to renewed economic uncertainties and a months-long facility expansion.
Stockpiles are expected to form late this year or in early 2011, as there hasn't been any firm signals that Europe's debt problem and weakening demand will rebound soon.
"Samsung is planning to expand our global share in DRAM memory chips to 40 percent by the end of this year," said Cho Nam-seong, an executive vice president at Samsung’s memory division said, adding its DRAM share as the end of June was approaching 36 percent.
"In DRAMs, Samsung will expand by over 40 percent next year, while we aim to maintain a level between 41 percent and 42 percent for the global share in NAND-type flash memory chips," he said.
Samsung is feeling positive over the steady demand for smartphones and premier televisions that use the memory chips as the benchmark to process the data.
DRAM chips are widely used in traditional PCs, while flash memory chips go into high-end handheld devices such as smartphones, car navigation systems and camcorders.
Cho said the portion of its advanced chips using a finer 30-nanometer processing technology will rise to 10 percent throughout this year to maintain profitability even amid the market downturn.
"We've already been on alert over falling profitability in our chip business due to the decline in chip prices. Despite such worries, Samsung will use the uncertainties to widen the gap with our rivals," Cho said.
"It's not the game of chicken that the industry saw few years ago. Thanks to enhanced technologies, Samsung is able to secure its bottom line regardless of the market situation. But that’s bad news for the whole industry and Samsung's competitors," said Jin Sung-hye, an analyst at Hyundai Securities.
"The effect of weaker chip prices would be minimized as Samsung considers its status in technologies and investment. But I agree that’s negative," said Lee Seung-woo, an analyst at Shinyoung Securities.
Samsung doesn't care too much about an oversupply in the flat-screen industry, as it has been boosting sales of 3D and LED-backlit LCD televisions.
"The televisions are the new markets. Although Samsung is expecting more challenges in the latter half, we will increase the panels for the newer TVs," said Robert Yi, Samsung's chief investor relations officer.
Samsung spokesman Kim Choon-gon said it doesn't have any imminent plan to cut production. Samsung’s flat-screen rivals such as LG Display, AUO and CMI have been known to lower their outputs due to slower television demand in China and rising inventories stemming from Europe's troubles.
"One of Samsung's key clients for LCD panels is Sony. Sony is expected to achieve sales of 25 million LCD TVs this year, giving Samsung no reason to cut its output," said a top-ranking industry executive.
"Our top clients are on their way to meeting this year's sales target. We don't have big problems in securing our bottom line in the LCD business if the panel industry falls into another oversupply," said the executive.
Analysts say the global panel industry may suffer from bearish moves in the latter half of this year due to rising inventories from television makers.
DisplaySearch, a market research firm, said the demand for LCD TVs in China will decrease by 7.4 million in the second quarter from 9 million in the first quarter. It also forecast the market in Europe to remain flat in the second quarter compared to the previous quarter despite the World Cup.
"It would be difficult for the panel industry to expect any meaningful price upturns during the third quarter as set makers are busy wiping out their inventories," said Korea Investment, a local brokerage.