Samsung’s big defeat: chip failure, what’s the next step

Someone once said that Koreans cannot live without three things in their lives: death, taxes and Samsung. This shows the status of Samsung in the lives of Koreans.

As Samsung’s most well-known subsidiary, Samsung Electronics holds up half the sky in Samsung’s revenue. Samsung Electronics’ smartphones, screen panels, semiconductors, home appliances, etc., wherever Samsung Electronics is deeply involved, the scale has entered the world’s top three queues. As a world-renowned consumer electronics brand second to none, it can be said that Samsung Electronics is a big hit.

However, the current situation of Samsung Electronics is not peaceful. A few days ago, an online news reported that Samsung had merged 11 branches and offices in the Chinese market into five, and the number of layoffs reached one-third. The departments that were laid off were mainly sales and marketing.

On October 31, Samsung Electronics officially released its financial report for the third quarter ended September 30, 2019. Samsung Electronics’ Q3 operating profit reached 7.8 trillion won (approximately US$6.7 billion), down 56% year-on-year, and was “cut in half.” Samsung Electronics’ operating profit has fallen for four consecutive quarters year-on-year.

Samsung Electronics’ three core pillar industries are all declining, profits are greatly reduced, the advantageous industries on which they depend are being squeezed, and the chip manufacturing and mobile phone business that have a significant impact on it have also suffered major setbacks. Samsung Electronics seems to be experiencing “Waterloo” style rout.

Smashed by a proud chip

Chips have contributed most of Samsung’s revenue for most of the time, and are the main source of Samsung’s net profit. Today, the decline in chip profits has also become the vanguard of Samsung’s revenue shrinking. This is the core source of the current predicament of Samsung Electronics. In terms of short-term impact, the current shrinking of Samsung Electronics’ chip business is mainly due to the industry recession brought about by the shift of industry cycles.

The decline in Samsung Electronics’ profit in the third quarter was mainly due to the continued weakness of the memory chip market. The continued decline in memory chip prices resulted in a sharp decline in the profit of the memory business year-on-year, a 77.7% year-on-year drop.

The semiconductor industry has always been subject to “Moore’s Law”. The semiconductor cycle changes from increasing orders to rising prices, from rising prices to falling orders, from falling orders to falling prices, and finally from falling prices back to increasing orders. This cycle has formed The four stages of recovery, expansion, peak and recession.

The current wave of cycles benefited from the large-scale application of mobile smart terminal phones, which caused the previous sales of memory chips to surge, forming a wave of dividends, causing the price of memory chips to rise, and then the number of orders fell. The market has fallen into a new period of recession again, and this time starts in 2019.

For most of 2017 and 2018, Samsung’s quarterly profits set a record because of the surge in global chip demand. Last year, more than 75% of Samsung’s profits came from the chip business.

However, the oversupply of semiconductors has dragged down prices, and has also brought Samsung’s continuous record-setting profits to an abrupt end. The global semiconductor cyclical recession in 2019 has become a direct cause of the oversupply of Samsung’s semiconductors. Affected by the global economic downturn, the automotive industry, which has strong demand for semiconductors, and consumer electronics have slowed or even stopped growing, reflecting the oversupply on the supply side that led to price drops.

In 2019, the semiconductor industry experienced its biggest recession in 10 years, and its output value is estimated to decrease by about 13% annually. Among them, the recession of the memory market and panel industry is the most obvious.

In 2019, the global memory market showed an oversupply. Under the pressure of high inventory, the quarterly price continued to bottom out, with an average annual decline of nearly 50%. The panel industry, one of the pillar industries of Samsung Electronics, is affected by the sluggish demand, and the panel industry is also experiencing a wave of downturns.

The semiconductor storage industry, as another dominant industry of Samsung Electronics, is affected by the price cycle. Samsung Electronics’ revenue has repeatedly broken new lows this year. The plummeting prices of DRAM and NAND Flash have made Samsung Electronics one of the three largest companies in South Korea. Samsung has lost ground in its advantageous industries this year.

And Samsung’s chip manufacturing is its core revenue business, which plays a decisive role in the entire Samsung Electronics. When the chip industry is booming, chips are Samsung Electronics’ “cornucopia” and “money cow”; however, with the deep downturn in the industry and increased external risks, the decline in profits caused by the decline in chip prices will inevitably make financial reports difficult. Desirable.

In addition, Samsung Electronics launched targeted mid- and low-end mobile phones, which directly reduced its mobile phone sales profits. And these are only part of the problems that Samsung Electronics faced in the third quarter. The decline for four consecutive quarters shows that its business has suffered a deeper impact. At present, this shock is mainly caused by trade disputes and the decline of the core market.

Trade frictions and market landslides are “exacerbated”

Compared with the obvious market factors, the impact of global macroeconomic uncertainties is even greater. This year, the problems caused by trade frictions and other factors on a global scale have continued to ferment in East Asia. The trade frictions between South Korea and Japan are having a great impact on Samsung’s chip manufacturing.

After the Japan-South Korea trade friction, the supply of chip materials directly used for production was cut off by the Japanese side. This is undoubtedly a squeeze blow to Samsung, which relies on chip production and sales.

The semiconductor aspect has always been an important business of Samsung, but the stability of the current industrial chain is insufficient, which affects the semiconductor business. Sensitizer “photoresist” and hydrogen fluoride have implemented extremely strict restrictions, and these three materials are the key materials for manufacturing semiconductors. The current reality is that if these three raw materials cannot be obtained, Korean companies can only maintain their inventory for 3 to 6 months at most. When the inventory is exhausted, the factory may be forced to suspend production.

The semiconductor manufacturing business of high-end chips, memory, flash memory, and storage is an important business of Samsung. However, currently key materials are clamped by Japan, and while output is restricted, it will also be suppressed by competitors.

At present, the main competitors of the chip manufacturing industry, TSMC, Micron, Hynix and other rivals are all eagerly trying to grab market share from Samsung Electronics. The current situation is extremely dangerous for Samsung Electronics.

In the semiconductor foundry business, Samsung Electronics is also far behind its old rival TSMC. In the general environment of the semiconductor industry downturn this year, TSMC, relying on its 7nm process advantages, is still soft when it comes to receiving orders.

According to previous media reports, TSMC’s current 7nm production capacity has been fully loaded, resulting in a substantial extension of the delivery period for new customer orders, from the original 2 months to the current 6 months. At present, only TSMC and Samsung Electronics can provide 7nm production capacity in the market. However, Samsung Electronics has frequent negative information on the 7nm process, and it seems that it may be farther and farther away from large-scale shipments.

In addition, the decline in mobile phone mobile business and IT business is related to the failure of Samsung Electronics in major global consumer markets.

First, it is the collapse of the Chinese market. Samsung is one of the first mobile phone manufacturers to enter the Chinese market. At its peak, it once occupied more than 20% of the Chinese market. With the rise of domestic mobile phones, Huami OV has come to all aspects from product to marketing and channels. In front of Samsung, Samsung, which focuses on high prices and lower cost performance, is gradually declining.

What made it even worse was the battery “explosion door” incident, which made its position in the minds of consumers plummeted. Samsung mobile phones have become a “blocking order” issued by many countries, prohibiting the use of Note 7 on airplanes. At present, Samsung’s share of the Chinese smartphone market has fallen to 0.7%, and it has become a marginal brand.

The loss of the Chinese market has a great impact on Samsung’s mobile business. But more importantly, if no measures are taken, Samsung’s other overseas markets will also be replaced by Chinese manufacturers. In the third quarter, Huawei’s shipments have gradually approached Samsung, and Huawei has not yet entered the North American market, and consumers there have shown strong interest in the latter.

According to the latest report released by market research agency Canalys, the top five mobile phone manufacturers in the third quarter of 2019 were Samsung, Huawei, Apple, Xiaomi and OPPO. However, in terms of growth rate, Huawei’s shipments increased by 29% year-on-year, higher than Samsung’s 11% growth rate, and continued to lead the growth rate of other smart phone companies, further narrowing the gap with Samsung. Although Samsung’s market position as the global leader is still there, it is close to being surpassed by Huawei.

For Samsung’s mobile phone business, it largely relies on overseas markets such as North America and Europe. But in recent years, overseas markets are being challenged by local Chinese mobile phone brands.

In recent years, China’s Huawei, Xiaomi, OPPP, Vivo, OnePlus and other mobile phone brands have risen rapidly, gradually occupying the mid-range mobile phone market, and these brands of mobile phone products are of excellent quality, complete functions, and outstanding cost performance. For Samsung The market share of high-end mobile phones represented by Apple is a threat and is directly reflected in the actual revenue data.

First of all, the top three mobile phone manufacturers from China have achieved a market share of 37.3% in the global market from 32% in the third quarter of last year to 37.3% in the third quarter of this year. The main core market is the market share of Chinese manufacturers. The share continues to expand.

The gradual loss of these core markets has caused new difficulties for mobile phones and IT businesses. These factors have further exacerbated their internal crisis. Behind the big crisis, the new 5G technology has become the key to overtaking by corners. In this regard, Samsung has spared no effort.

5G benefits and non-memory new businesses become “life-saving straws”?

As a core area focused by many communications and electronics giants, 5G business is also an important area for Samsung to seize the commanding heights of the industry in the future. Many areas around 5G chips, system semiconductors, and smart terminal Internet of Things are the core areas of Samsung’s focus.

The transformation of the consumer electronics industry to 5G has become a glimmer of hope for the technology industry. It will not only stimulate the demand for smart phones, but also boost the field of advanced memory chips. These chips can handle massive amounts of information in a range of connected devices, from cars to robots.

At present, Samsung has launched five 5G smartphones globally, including the A series and the Fold series including the Galaxy note 10 5G version, which is popular overseas. With the acceleration of 5G commercial use, a new wave of “replacement” has arrived, providing new smart chips for 5G smart phones, which can boost the current weak internal memory chip business and also stimulate the growth of mobile services. Therefore, 5G is seen by Samsung Do the most important strategy at the moment to speed up the layout.

In addition to launching 5G smartphones to promote demand for its memory chips, Samsung has also strengthened its business layout in the non-memory field. In the past 5 months, Samsung has taken a series of measures to accelerate the growth of its non-memory business. Its purpose is to develop the layout of the 5G field as soon as possible while looking for new business growth points.

Samsung has taken a series of measures in the past 5 months to accelerate the growth of its non-memory business. Among them, include the development of 3 nanometer process in the field of foundry, investment in the development of neural processing unit (NPU), and strengthening the cooperation plan with AMD in the field of GPU. In addition, Samsung recently announced the industry’s first mobile image sensor that can shrink images to 0.7μm (micrometers).

In fact, according to statistics, the size of the global system semiconductor market in 2019 was US$321.2 billion, which is twice the size of the memory market of US$162.25 billion. Samsung expects to increase its market share in the system semiconductor market to reduce its dependence on the storage business. Currently, Samsung’s memory business accounts for 70% of its total semiconductor sales.

According to the views of the Korean market participants, Samsung’s system semiconductor development strategy is mainly focused on improving the mobile application processor (AP) and memory of the Internet of Things (IoT), including automobiles. The advantage of the second place, after relevant integration, is expected to reach the leading position in the industry in 2030.

In addition, Samsung also plans to use NPU in its mobile processor, and increase the number of experts and researchers related to deep learning by 10 times to develop and improve the processing speed of artificial intelligence. This part will be used by Samsung in the intelligent It is a great weapon to compete with Huawei in the mobile phone market.

However, with the opening of China’s 5G, a series of smartphones that match it will also be available. Samsung, which has failed in the Chinese market, will also encounter China’s Huami OV and other mobile phone manufacturers in other parts of the world. The market reversal situation remains to be seen.

Another more serious problem is the stalemate between Japan and South Korea in the trade dispute. The supply problem for Samsung chip manufacturing is still a very difficult problem.

The trade friction between Japan and South Korea has directly caused the supply of key chip production materials to be cut off, which directly affects the supply of future chip production. The current Japan-Korea trade negotiations are still deadlocked, and the three key chemical materials that have a huge impact on Samsung Electronics’ semiconductor supply cannot find a substitute in the short term, and they will inevitably continue to affect their production and supply issues for a period of time in the future.

Chip manufacturing is stuck, which will have a chain reaction for “Samsung,” which relies on chips for its livelihood. If this situation cannot be improved in the future, it is unclear whether Samsung’s 5G strategy can be implemented. Whether 5G can become its life-saving straw depends on when chip manufacturing can resume supply or find a suitable alternative.

In short, at the digital intersection of 5G, Samsung faces new opportunities and needs to meet new challenges. Whether it can continue to lead the trend in the future, we need to observe its follow-up actions.

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