15X Samsung Profits (But Workers Strike)

South Korea’s Samsung Electronics has reported that it expects its profits for the three months to June 2024 to have increased by a massive 15-fold on last year. 

AI Driving Chip Prices 

Samsung is the world’s largest memory chip, smartphone and TV maker and the company’s (predicted) profit jump to $10.4 trillion from $670 billion last year is attributed to semiconductor prices being driven by the artificial intelligence boom. 

The predicted 15-fold increase in profits to June follows a 10-fold increase in the first quarter. 

Reversed Inventory Writedown 

Also, Samsung reversing the writedown of the value of its chips / regaining the value of its chips in its books, due to improved market conditions and demand for chips, appears to have been a key contributing factor to the huge surge in predicted profits. 

Demand For High-End DRAM Chips Driving Prices Up 

Samsung’s semiconductor sector is expected to have achieved its second straight quarterly profit, improving upon the previous quarter with the boost coming as memory chip prices recover from their decline between mid-2022 and late-2023, which was caused by a drop in post-pandemic demand for electronic devices. 

Analysts also credit the rising chip prices to the strong demand for high-end DRAM chips (Dynamic Random-Access Memory chips), such as the high bandwidth memory (HBM) chips used in AI processors, along with chips for data-centre servers and AI-enabled gadgets. DRAM chips are widely used due to their high speed and efficiency. 

For example, during the second quarter, memory chip prices increased, with DRAM chips for tech devices rising by around 13 to 18 per cent. Also, prices for NAND Flash chips (which retain data even when the power is turned off) for data storage increased by 15 per cent to 20 per cent (TrendForce). 

Not All Good News 

Although Samsung’s profits may be surging due to demand for and rising prices of its AI chips, the company is facing some other potentially serious challenges. For example: 

– Labour disputes and worker strikes: Samsung is facing potential labour unrest following a planned three-day and a call for an indefinite strike by over 30,000 workers, including key chip plant workers, all members of The National Samsung Electronics Union (NSEU), which represents nearly a quarter of Samsung Electronics’ workers in South Korea. The union is demanding a more transparent system for bonuses and time off. 

– Competitive pressures. Samsung has some fierce competition in the AI chip market. Its latest high bandwidth memory (HBM) chips have struggled to gain certification from Nvidia, a major player in AI hardware and the issue has placed Samsung behind its smaller (also South Korean) rival, SK Hynix, which has become the leading supplier of HBM chips. 

– Rising operating costs. The company is dealing with increased operating costs in its mobile business, due to higher parts costs and elevated expenses for marketing and development of AI services. 

– Market volatility. The broader semiconductor market is experiencing fluctuations due to macroeconomic trends and geopolitical issues. While demand for AI applications remains strong, these external factors are introducing uncertainties that could affect business conditions in the latter half of the year. 

– Technological advancements. As with all tech companies, Samsung is under pressure to maintain its technological edge. The development and mass production of advanced technologies such as 3nm and 2nm chips are crucial for staying competitive and the company is working on enhancing its technology leadership in memory and foundry operations. Nevertheless, it still faces challenges in ramping up production and ensuring high yields.  Investors are also awaiting news of whether Samsung’s latest fourth-generation HBM chips will receive approval to supply Nvidia (the world’s most valuable company last month) after they failed earlier tests because of heat and power consumption problems. 

What Does This Mean For Your Business? 

Samsung’s extraordinary profit surge, driven by the booming AI and semiconductor markets, shows Samsung’s robust position in the semiconductor industry, particularly in AI-driven applications. However, despite the huge profit forecast, the company faces notable challenges, including potentially labour disputes and intense competition, especially in high-end memory chips. Samsung’s ability to navigate these issues while continuing to innovate will be critical for sustaining its market dominance and profitability. 

Samsung’s success is also likely to put pressure on competitors to accelerate their own innovation and production capabilities. Companies like SK Hynix, which have already made strides in high-bandwidth memory (HBM) chips, must now continue to advance their technologies to maintain their competitive edge. This competitive landscape drives technological advancements, benefitting the broader industry but also intensifying market rivalry. 

For the businesses that rely on semiconductors, e.g. those in the electronics, automotive, and data storage industries, the rising prices and demand for memory chips are unwelcome news. Manufacturers face increased costs for components, most likely prompting them to explore more cost-efficient supply chain solutions or pass on the increased costs to consumers. Collaboration with semiconductor suppliers and investment in alternative technologies could, however, mitigate some of these impacts. 

For us as consumers, the rising prices of memory chips look likely to lead to higher costs for consumer electronics, including smartphones, laptops, and other gadgets. However, the improved capabilities of AI-driven devices might offset some of the pain of the price increases, i.e. consumers could benefit from enhanced performance and new features in their tech products, driven by the advancements in semiconductor technology. 

Looking ahead, despite the impressive predicted profit figures, Samsung’s path forward currently appears to be fraught with challenges. The company clearly needs to resolve pressing labour disputes amicably to avoid production disruptions. Also, gaining certification for its HBM chips from industry leaders like Nvidia is crucial for maintaining its competitive stance in the AI market. Samsung’s continued investment in advanced technologies, such as 3nm and 2nm chips, will be vital for future growth. The company’s strategic focus on AI and high-performance computing, however, positions it well for more success, but it must remain agile in addressing both market opportunities and challenges.