Samsung is facing an existential crisis. Over the past year, their quarterly operating profits have plummeted 95% from over $10 billion down to just $490 million. This represents Samsung’s lowest profits since 2009 .
Normally, this drastic of a profit decline would indicate a failing company. However, Samsung’s overall revenue and smartphone shipments paint a different picture. While Samsung’s revenue has dropped from $240 billion to $200 billion, this 16% decline is much more modest than their 95% profit dive. Their smartphone shipments have also slowly declined but no major collapse has occurred in the past two years.
So what exactly is causing Samsung’s profit crisis if their core business remains relatively stable? The root cause stems from issues in the memory chip market combined with the era of peak smartphone.
The Memory Chip Market Crash
Much of Samsung’s profit struggles can be attributed to downturns in the memory chip market. Samsung is the world’s largest memory chip producer, accounting for nearly 60% of their total profits.
Samsung achieved this lead by aggressively investing in fabrication plants over decades. This includes massive investments like a $9 billion chip fab in Austin. However, the volatile memory chip industry has no real brand loyalty or moats.
Consumers don’t care about the chip brand in their devices. They just want the best performance for the lowest price. This causes chip producers to constantly invest more in R&D to stay ahead, with Samsung recently announcing a staggering $228 billion investment in a new fabrication plant.
This cycle leaves chip producers especially vulnerable to market volatility. The pandemic led to supply chain issues that caused chip prices and producer profits to skyrocket. However, oversupply has now led to plunging chip prices, with DRAM prices down 53% this past year. This chip price crash has turned Samsung’s semiconductor profits negative, resulting in a $7 billion loss over 6 months.
With plunging demand and prices, can Samsung’s chip business recover or is a larger existential crisis on the horizon?
The Era of Peak Smartphone
While Samsung should eventually recover when the cyclical chip industry rebounds, their future prospects look less certain as smartphones peak. Though Samsung produces diverse products, they relied on smartphones for much of their profitability over the past decade.
However, global smartphone sales have declined over the past five years as the devices became increasingly commoditized. This trend mirror’s the PC industry’s decline into a low margin, race to the bottom status after a similar sales peak. Giants like Sony and Toshiba exited PC production as profits vanished.
Smartphones seem destined for a similar fate, with brands like LG and HTC already leaving the smartphone business in recent years after losing money. Heck, even Apple no longer reports iPhone sales figures after growth flattened. Commoditization has already sparked intense price competition, evidenced by the disappointing iPhone 15.
Unlike Apple which profits from iPhone usage, Samsung earns money from smartphone sales. As phones become mere commodities, these profits will continue drying up. This current crisis serves as a test on whether Samsung can successfully evolve beyond smartphones into higher growth markets like AI, services, and software.
Can Samsung pull off this difficult transition the way IBM failed to, or will they become obsolete in the era of peak smartphone? Samsung’s future likely hinges on this question.
In conclusion, Samsung is facing a multi-faceted existential crisis. Firstly, the volatile memory chip market has crashed, wiping out their core profit center. Furthermore, smartphones seem to have peaked as a product category. While Samsung’s core business remains stable for now, they urgently need to evolve beyond smartphones to survive long-term. Otherwise, they risk becoming obsolete like the PC makers before them. Samsung’s upcoming moves will determine whether they thrive or become irrelevant in the post-smartphone future.