Samsung is in Crisis

• This episode is brought to you by Ground News.
• Samsung is facing a significant crisis, emphasizing its crucial role in South Korea's economy.
• The company's leadership dynamics reflect the challenges of a family-owned conglomerate.
• Recent setbacks include missed opportunities in AI and struggles with semiconductor production.
• Samsung's internal reshuffling indicates awareness of its issues, but the future remains uncertain.

This episode is brought to you by Ground News. Hi, welcome to another episode of Cold Fusion. Samsung's management has stated that the company is in crisis. But 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 US and other parts of the world may just view Samsung as a phone or electronics brand, but in South Korea, Samsung is on a whole different level.

The company is everywhere with its hand in nearly every industry you can think of. They have 80 subsidiaries. The flagship is Samsung Electronics. But they dominate construction, real estate, food production, finance, life insurance, and healthcare. They also build armoured 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 dollars. 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 start a selling process, there is more behind the scenes. Samsung itself has reshuffled some of its management and forced a six-day working week for executives to get their house in order.

And that brings about a major question here. Are there major problems with 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. You are watching Cold Fusion TV.

Before diving in, we should remember that Samsung has run differently than 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 are 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 stays 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 Kin, author of Samsung Rising, puts it, every leader of Samsung has been in and out of court thus far. They have been either accused or convicted or jailed for either 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 US$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 get 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, J.Y. Lee, emerged from a detention center just outside Seoul a free man. A judge ruling it was hard to see the reason, appropriateness, and necessity of arresting him at this time. Later that year, Lee was convicted on a drug charge.

So the leadership of Samsung has a bit of a question mark on it. But that's not all. Samsung is also known for its rigid hierarchy. When things are good, this works well. But insiders say it's a culture that stifles innovation and makes it hard to adapt to rapidly changing market demands. A factor that would soon come into play.

When we talk about Samsung's $122 billion market value loss, we're really talking about Samsung Electronics. It's important to make that distinction because Samsung operates a massive conglomerate, as discussed, 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 one is the Device Solutions division, which focuses on semiconductors and display panels. Samsung Electronics, specifically its semiconductor and consumer electronics divisions, play 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:

1. Missed opportunities in AI.
2. A chip-making disadvantage.
3. 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. They tout this 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 recognized the potential of generative AI. But the fact of the matter is, it can make a lot of money for those companies that position themselves right. Microsoft, Google, and especially Nvidia went all in. Nvidia, who supplies the GPUs that powered AI ventures, had their 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 (HBM) comprises special chips that are used in high-end graphics systems like the Nvidia H100, the very same graphic systems that power AI. The latest generation of high bandwidth chip is called the HBM3E, offering transfer speeds in the range of terabytes per second.

In an extremely high-profile deal, Samsung was supposed to make these special memory chips for Nvidia chips crucial for Nvidia's AI efforts. But in one of the biggest blunders of the year, reports indicate that Samsung completely fell flat. Their chips couldn't reach the strict requirements for heat and power efficiency that Nvidia required, and it was a tough blow. 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.

If you 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.

It was $900 million below expectations. They still did make $6.78 billion, and that's nothing to sneeze at. But falling short by nearly a billion doesn't exactly make investors jump for joy. Samsung was in panic mode, and Vice Chairman Jun Young Hyun's recent statement blatantly admitted that their failure to meet market expectations has fueled concerns over Samsung's technological competitiveness and future direction.

This so-called 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, who manufactures chips, was caught napping as AI chip hardware took off, and investors aren't happy.

Beyond AI, Samsung's chip business is also facing critical challenges in the smartphone chip space. Their Exynos chips have been a thorn in the side of the flesh for Samsung. For years, Exynos processors have been criticized for issues like overheating, poor battery efficiency, and subpar performance when compared to Snapdragon's Qualcomm 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's absolutely mastered chipmaking. Samsung's semiconductor business is a massive operation, with sales totaling almost $60 billion in 2024 alone. But they've consistently found themselves one step behind TSMC. Their Taiwanese competition has an 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, the top ten 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%, pretty concerning in comparison.

And 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. And to make matters worse, TSMC is no longer the only competitor. Samsung is also facing heat from fast-rising Chinese competitors. Chinese firms are catching up quickly in sectors outside of the US sanctions. These are legacy chips used in cars, airplanes, home appliances, and consumer electronics.

By the third quarter of 2024, Samsung's stocks' 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 has been scrambling to address its internal issues by reshuffling leadership.

In May 2024, they announced the removal of Kiang Ki Hyun as chip head and brought on Joonyong 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, so it indicates that management knew that the company was struggling and needed to change.

But this reshuffle in leadership isn't just about some fresh perspective. It's a response to mounting pressure to fix a long-standing history of internal mismanagement. The company has been through multiple leadership revamps over the years, with three new CEOs appointed in 2021 across its major divisions. The frequency of leadership changes signals instability and may suggest that there's a lack of a clear long-term strategy.

According to ZNET, the recent shuffle is just the latest attempt to revamp leadership, but without 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—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 brought in Jun Young Hyun to lead the semiconductor division. Jun previously headed Samsung’s battery and energy solutions arm and played a big 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're 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.

Well, there are 150,000 staff overseas, and that's more than half of Samsung's entire workforce. The markets, though, where job losses are occurring this time, we're hearing are Australia, New Zealand, and also Southeast Asia. About 10% of the market or 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 year’s end, to adapt to weaker demand from key clients in the US 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 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, and 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 in the semiconductor division. Their earnings do have some other bright spots, like their smartphone sales and display technology.

In short, while Samsung Electronics has had its challenges, particularly in memory chips and semiconductors, it's not all bad news. The stock sell-off is more a vote of no confidence when it comes to the leadership and the direction of the company. The stock market is looking to the future, not exactly what's going on right now.

So it's been 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 huge blow. And as mentioned, if their leadership doesn't steer the ship right, they might risk more panic. Once again, let's not forget that stock markets are fickle. They're driven by many factors, including global economic shifts, sentiment shifts, 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 and see what happens.

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So what's your take on this? Would love to hear your thoughts in the comment section below.

So anyway, that's about it from me. If you did like this episode, feel free to check out anything else on Cold Fusion. There's plenty of interesting stuff here on science, technology, and business. And also, if you've made it this far and you're one of those OG subscribers to Cold Fusion, you would have remembered my Samsung video about 10 years ago. So if you were there for that video, thanks for sticking around. Really, really appreciate it all.

My name is Dogo, and I will see you again soon for the next episode. Cheers guys. Have a good one!