Mighty Samsung Weighs Heavy On S. Korea

[Anonymous]

Mighty Samsung Weighs Heavy On S. Korea

This month’s news that Samsung Electronics is encroaching on Apple’s domination of the tablet device market came less than a year after it overtook its US rival to become the leading smartphone maker by unit sales.

Samsung produces most of its components in-house but also sources parts from smaller South Korean companies

Now the world’s biggest technology company by revenues, Samsung looms even larger at home, with last year’s revenue of $149bn equating to 13 per cent of South Korea’s

That economic weight is provoking domestic unease among suppliers trying to avoid excessive reliance on sales to Samsung, politicians concerned about its influence, and competitors who have failed to keep pace with the company’s rapid growth.

While Samsung produces many of its most important components in-house, it also sources many parts from a network of smaller South Korean companies. Their income has risen along with Samsung’s but those rewards come with risks.

“Samsung does not want its contractors to supply parts to Apple or LG Electronics,” says Joo Dae-young, a researcher at the Korea Institute for Industrial Economics and Trade. “It is not easy to diversify their customer base when they are making products tailored towards one big customer.”

Samsung has “given us a lot of help in terms of managing supply chain systems”, says Soulbrain, a producer of semiconductor materials that derives half its revenues from the group. “We continue to increase our R&D spending by about 20-30 per cent annually because Samsung would not use our products if they are not good enough.”

But some investors worry that Samsung’s suppliers have too little bargaining power against their mighty customer. Mark Mobius, executive chairman of Templeton Emerging Markets, says his funds have shied away from investing in these companies amid concerns about Samsung’s propensity to squeeze their margins.

Samsung denies this suggestion, saying: “We firmly believe that enhanced supplier capacity plays a vital role in enhancing Samsung Electronics’ competitiveness and we will continue to strengthen our shared growth management strategies.”

Still, concerns about the national influence of South Korea’s biggest company have contributed to calls to check the power of it and other chaebol conglomerates, a key campaign theme ahead of next month’s presidential election.

Meanwhile, Samsung’s domestic competitors are forced to confront the question of how they fell behind it in the global technology market.

The toughest questions are being put to LG Electronics. An investor who bought shares in both companies a decade ago, examining his or her portfolio in early May last year, would have seen the LG stock comfortably outperforming the Samsung holding. But LG shares have fallen a third since then, while Samsung’s have risen 42 per cent.

The main reason, company insiders say, was that LG was damagingly slow to jump on the smartphone bandwagon – but they argue that the handset division has begun reaping the rewards of a recent “rebuilding” period.

LG reversed recent losses with a strong sales rise in the third quarter of the year. Yet even optimistic analysts do not envisage the company adding more than a few percentage points to its current 4 per cent smartphone market share in the foreseeable future.

One often-cited factor behind Samsung’s success is the synergies and efficiency gained by making key components of its handsets in-house. Profits from sales of memory chips, of which Samsung is the world’s biggest producer, helped fund investment in smartphones; in turn, earnings from the handset division, now Samsung’s biggest profit generator, have ensured continued multibillion-dollar investment in semiconductors.

There has been no such shield for SK Hynix, number two in the world memory chip market, which has posted operating losses in four of the past five quarters. Flagging demand in the personal computer market has pulled down the prices of D-Ram memory, and heavy investment in capacity across the sector resulted in a glut of the Nand chips used in smartphones.

Mark Newman, an analyst at Sanford C Bernstein, says SK Hynix would benefit from a recovery in prices for Dram, where it is the “clear second-place contender to Samsung”, though it has fallen behind the latter in Nand technology.

But Samsung’s annual capital expenditure budget of more than $20bn is far beyond the means of any of its domestic rivals, giving it a formidable head start as they seek to narrow the innovation gap.

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November 15, 2012 at 9:29 AM