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Samsung reports record sales amid questions about the future


Oct 30, 2020

The company said its operating income for the last quarter rose 59% from a year earlier.

The stream of obituaries addressed to Samsung Electronics chairman Lee Kun-Hee after his death over the weekend mainly consisted of his most defining quote: “Change everything except your wife and kids.”

Lee’s rant against what he saw as complacency during a senior management meeting in 1993 reflects the demanding leadership that helped the company grow from a little-known cheap TV maker to a tech giant.

Questions are raised about what will happen next as Samsung, South Korea’s largest company today, begins an era led by Lee’s son and corporate heir Lee Jae Young.

Younger Lee has been in charge of the work since his father suffered a heart attack in 2014. It now faces tremendous pressure for Samsung to move from its core hardware business to an increasingly diverse technology and service.

At the same time, Lee is distracted by a protracted legal battle over his financial crimes charges related to a massive corruption scandal. He also needs to raise money to pay astronomical inheritance taxes to consolidate his control over the business empire left behind by his father.

At least financially, Samsung looks to be in great shape.

The company said Thursday that its last quarter operating profit hit a two-year high of 12.35 trillion won ($ 10.89 billion), up 59% from a year earlier, thanks to strong sales of computer memory chips, smartphones and devices.

Revenue rose 8% to 66.96 trillion won ($ 59 billion), a record quarterly high.

“Even as the COVID-19 pandemic continues globally, the opening up of major economies has led to a significant increase in consumer demand,” Samsung said in a statement.

Samsung said it expects earnings to fall in the current quarter as demand for computer chips slows and competition in smartphones and consumer electronics increases.

However, its double strength in parts and finished goods means that it has benefited immensely from two major realities of 2020 – the coronavirus pandemic and the protracted U.S.-China trade war.

Samsung’s semiconductor business has rebounded sharply from a sluggish 2019 fueled by strong demand for PCs and servers as virus outbreaks forced millions of people to stay and work from home.

Meanwhile, the Trump administration’s sanctions against China’s Huawei Technologies have hit one of Samsung’s biggest competitors in smartphones, smartphone chips and telecommunications equipment.

Washington also cracked down on some Chinese semiconductor manufacturers over industrial espionage allegations, diminishing Samsung’s competition in the DRAM chip market.

“It really couldn’t have been better,” said Yang Woo Kim, managing director of SK Securities.

“While Huawei’s shrinking place in the global smartphone market will eventually be filled by companies such as Oppo, Vivo and Xiaomi, they will buy Samsung app processors (for their devices),” he said.

The most important long-term question for Samsung is whether it will grow further than just a giant in memory chips, smartphones and display screens.

Unlike Apple, which makes lucrative profits from its ecosystem of software and services running on its devices, Samsung has yet to develop an effective business model for collecting and using customer data to create services. This is in part due to Samsung’s lack of native software for its Android smartphones from Google.

In the semiconductor space, Samsung says it is looking to move beyond its dominance in memory chips that are used to store information. Over the next decade, the company plans to invest over $ 100 billion in higher-margin logic chips designed to serve a wider range of functions.

The advanced chip market is expected to skyrocket in the coming years thanks to developments related to fifth generation (5G) wireless services, artificial intelligence, networked computing and self-driving cars, analysts say.

It is unclear whether “Samsung will come out as a major actor or be a minor one,” as the industry is changing under the influence of new technologies, said CW Chang, an analyst at Nomura.

“Samsung has to be very ambitious to succeed, like in the old days when it promised to surpass Nokia in mobile phones even though it didn’t even have a market presence back then,” he said.

“Samsung’s strengths lie in its scale and manufacturing capacity, but its future increasingly depends on forming global partnerships to enter new technologies and markets, especially in the service sector,” said Kim of SK Securities.

Since coming to power in the person of his father, Lee has promoted the goals of “open innovation” to stimulate cooperation with international companies and research groups and acquire new technologies through mergers and acquisitions. According to Kim, so far he has little to show from this.

The elder Lee had a reputation for making bold strategic decisions while wielding absolute power and control on the board of directors. According to Kim, Samsung’s future global partners would like the company to continue to act quickly and aggressively on long-term investments while betting on new opportunities.

Extending the Lee family’s control over Samsung and its subsidiaries will come at a cost. Choi Namkung of Yuanta Securities estimates that inheritance tax alone will be around 10.9 trillion won ($ 9.6 billion). Collecting money to pay taxes can take years and can result in a group shake-up.

Including 4.18% of the late Lee Kun-Hee, the family owns 5.79% of Samsung Electronics. The company’s shareholding system is complex and some of Samsung’s subsidiaries collectively own larger stakes, but the Lee family also owns stakes in these companies, allowing them to control the group.

Lee Jae Young’s legal troubles stem from accusations that he offered millions of dollars in bribes to former president Park Geun Hye and one of her longtime confidants to secure the merger of two Samsung subsidiaries in 2015 to strengthen his control over Samsung Electronics.

The merger went through despite objections from shareholders who said the deal was unfair to the Lee family.

Lee was released in February 2018 after the Seoul High Court overturned major convictions, mitigating and suspending his sentence. The Supreme Court later returned the case to the High Court, claiming that the amount of bribes allegedly offered to Lee was understated.

Lee was charged by prosecutors last month with stock price manipulation, accounting fraud and other merger crimes in 2015. Lee’s lawyers denied wrongdoing, claiming that it was part of “normal business activity.”

In South Korea, top officials often punish corruption and financial crimes in a condescending manner, and judges often cite concerns about the country’s economy.

But Samsung’s business is likely to run smoothly even if Lee is jailed again, said Park Sanggin, a professor at Seoul National University.

In his 11 months in prison, there were no clear signs of problems.

“(South Korean conglomerates) never had governance problems while their leaders were in prison,” as they could still communicate their governance decisions from the cell, Pack said.

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