It is no secret that Samsung’s profits continue to go down from their record profits of a couple of years ago; brought down mostly due to the slip in sales of their smartphone. Some of the slip was brought on by their own doing – uninspired design and bloated software – but some of it caused by more competition. The companies from China and India are churning out the low-end phones, that are both cheap to buy and high in quality – once a Samsung staple for those emerging nations now ready to buy millions of smartphones. Samsung’s main competitors in the U.S., companies like HTC, LG and Sony, are turning out high quality devices with features that once only Samsung provided, not to mention the new threat from a larger iPhone.
While Samsung has no intention of abandoning the smartphone or tablet market, they decided to sink their R&D money into what is making them the most money – memory and logic chips. There are very few actual chip foundries throughout the world, so most all smartphone manufacturers must purchase these from an outside source, so why not Samsung…already the top memory chip producer in the world. In order to expand this business, Samsung will be spending close to $15 billion in a new chip facility in Pyeongtaek, roughly 47 miles south of Seoul, creating 150,000 new jobs, which is about one-third of the city’s entire population. IM Investment analyst Lee Min-hee said, “Right now the only part of the company that is bringing in steady profits is the semiconductor division, so it looks like the company will keep investing in the business.”
No decision has been made yet on whether the new plant will manufacture memory chips or semiconductors, as Samsung, very aware of the cyclical nature of the business, does not want to oversaturate the market. Even so, shares of domestic rival SK Hynix Inc. fell more than 8-percent after Samsung’s announcement, and yet the plant will not even be producing chips until 2017 – but the market is now bracing for the increase in Samsung’s market share. Analysts have said that Samsung is not trying to destroy the industry cycle, but simply trying to maximize profits from their semiconductor business and because they have made this a three-year project, the $14.7 billion investment spread out, will not cause an increase in cash outlay, because that would be their normal spending for chip R&D.
It looks like Samsung will hedge its profits on the chip business, knowing full well that their smartphones are going to continue to take a hit. Their new metal design, the latest Alpha series and the innovated Note Edge, might help them to regain some of their market share…what do you think? As always, we would love to hear from you on our Google+ Page.