Just a few years ago, Samsung Electronics stood as a leading force in the global semiconductor race, dominating one chip sector and eyeing Taiwan’s TSMC in the battle for supremacy in another.
But recent stumbles – including its failure to capitalize early on the artificial intelligence boom – has left it outmaneuvered, experts say, as the company struggles with deepening market share losses.
Samsung’s second-quarter operating profit plummeted 55% to 4.7 trillion won ($3.4 billion), down from 10.4 trillion won ($7.5 billion) a year earlier, though its revenue increased slightly compared to the same period last year.
Operating profit for its chip division, historically a cash cow that used to account for two-thirds of its total profit, shrank by nearly 94% from April to June compared to a year ago.
It blamed the worse-than-expected performance on inventory value adjustments, low utilization rate for its contract chipmaking business and continued fallout from US export controls on advanced AI chips to China – a key market for Samsung.
Thursday’s disappointing earnings report reignites concerns about the future of the embattled South Korean tech giant.
Samsung warned investors of its dismal performance in its earnings projection earlier this month.
The results come on the heels of a $16.5 billion deal with Tesla, announced this week, to produce its new chips – a move expected to boost Samsung’s outlook.
Looking ahead for the second half the year, Samsung said it plans to proactively meet the growing demand for high value-added and AI-driven products and continue to strengthen competitiveness in advanced semiconductors.
How Samsung lost its edge
South Korea’s largest conglomerate has run into significant headwinds in recent years across both of its key revenue streams: the manufacturing of memory chips, which help devices store data, and logic chips, which power data processing and computation.
Once the industry’s leading memory chipmaker, Samsung has lost ground to rivals like South Korean SK Hynix and American Micron Technology, particularly in the fast-growing market for high bandwidth memory (HBM) sector. HBM, made up of stacks of DRAM memory chips (dynamic random access memory) used for short-term data storage, are essential for AI processors developed by companies like Nvidia and AMD.
Meanwhile, Samsung’s logic semiconductor business trails industry leader TSMC both in cutting-edge chip technologies and market share.
In the first quarter of this year, SK Hynix overtook Samsung to lead the global DRAM market, while TSMC extended its dominance in logic chips with a 68% market share, compared to just 8% for Samsung, according to market research firm TrendForce.
Sanjeev Rana, head of Korea research at CLSA, a brokerage firm, said a series of “missteps” by Samsung – most notably management’s failure to anticipate the surge in AI demand – has contributed to its current struggles.
“They were slow to recognize the coming AI revolution, and they bet on some other products, other technologies, which, in hindsight, didn’t turn out to be very good bets,” he said, explaining that Samsung overlooked the potential of HBM initially.
As a result, Samsung has so far missed out on being a supplier for its most advanced high-bandwidth memory product to Nvidia, which accounts for nearly 80% of global HBM demand last year, according to Rana. The product has repeatedly failed Nvidia’s performance tests, though he expects the company to clear them in the next two months.
While Samsung announced in June that it managed to secure orders from AMD and Broadcom, rivals SK Hynix and Micron have already begun delivering samples of more advanced memory chips to customers.
At the same time, Samsung’s logic chip business – once central to its ambition to rival TSMC – is also under mounting pressure. Despite tens of billions of investments over the past few years, the company has been unable to secure meaningful orders for its advanced chips, leading to underutilized facilities, Rana said.
Last year, CLSA estimated that Samsung’s contract chipmaking business posted an operating loss of 5.6 trillion won ($4.1 billion). That figure is expected to rise to 6.6 trillion won ($4.8 billion) this year.
US restrictions on the sale of advanced chips to China have also taken a toll on Samsung’s revenue, as shipments to Chinese clients and projects were forced to pause pending regulatory review, said Joanne Chiao, an analyst at TrendForce.
But with some chips now having cleared the review process, the second quarter is expected to be the most affected period, she added.
A potential turnaround thanks to Tesla
Tesla offered Samsung a lifeline this week. Its CEO Elon Musk announced that the electric vehicle company has tapped the Korean chipmaker to make its new chips for self-driving cars and humanoid robots in a $16.5 billion deal.
“Samsung’s giant new Texas fab will be dedicated to making Tesla’s next-generation AI6 chip,” he said in a post on X. “Samsung agreed to allow Tesla to assist in maximizing manufacturing efficiency. This is a critical point, as I will walk the line personally to accelerate the pace of progress.”
Samsung’s shares surged more than 6.9% to reach their highest level since September following news of the deal.
Tesla currently sources its AI4 chips, which power its advanced driver assistance systems called Full Self-Driving (FSD) software, from Samsung, but it enlisted TSMC to produce its AI5 chips, according to Musk.
The deal came after Samsung postponed the operational start of its chipmaking plants in Taylor, Texas to 2026 from its original schedule of 2024, as it struggled to win customers for the project.
Ray Wang, research director focusing on semiconductor industry at Futurum Group, called the deal with Tesla “significant,” saying it could boost Samsung’s struggling profitability and validate its capabilities in producing advanced chips.
The agreement will also help increase utilization of its Texas facilities, improving the company’s return on investment, he added.
Rana said that although mass production for the Tesla project won’t begin until 2027, the deal is a boost to market sentiment and represents “a big word of confidence.”
“The management has done a lot of restructuring for this business in the last 12-15 months or so, so I think they now understand what the problems were, and they have made some efforts to resolving those issues,” he said. “Things will get better from the second half (of the year).”
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