Samsung’s changes come as chip and smartphone growth faces challenges

Samsung's changes come as chip and smartphone growth faces challenges

SEOUL — Visiting a semiconductor factory in early January, Samsung’s de facto chief Lee Jae-yong gave a pep talk for the year — and pleaded for the South Korean tech giant that he feared he had stagnated.

“We should emerge as a new Samsung,” said Mr. Lee, the 53-year-old grandson of Samsung’s founder. “Together we can unlock a new future.”

Tuesday, Samsung Electronics Co.

, heeding Mr. Lee’s advice, began a new chapter: its three co-CEOs were replaced and its mobile and consumer electronics units were merged into a single unit. Consolidation could better position Samsung to create a cohesive ecosystem, much like rival Apple Inc.,

considering how smartphones can serve as a digital fulcrum that connects the company’s many gadgets and devices.

It turned out to be a turbulent year for Mr. Lee and Samsung. A few weeks after his January speech, Mr. Lee was imprisoned again for having bribed the former South Korean president, before being granted parole in August. Samsung took advantage of a global chip shortage to post quarterly revenue and recently made its biggest investment in the US to date.

Lee Jae-yong, the de facto leader of Samsung Electronics, remains associated with another lawsuit that could result in more prison terms.


Yonhap/Zuma Press News

The corporate overhaul comes at a critical time for Samsung, the world’s largest maker of smartphones, semiconductors and TVs. It relies too heavily on memory chips as a profit engine, when the glory days of mobile devices are probably over. Samsung, for years, has admitted its struggles to reinvent itself to tap into new areas of growth.

Although the two new CEOs are veteran Samsung executives, the appointments are a bet the reshuffle will produce new business ideas and strategies, said Kim Kyeong-jun, chairman of CEO Score, a corporate research firm based in Seoul.

“The company recognizes that it will not be able to navigate successfully into the future without a generational change in management,” Mr. Kim said.

Kyung Kye-hyun, 58, will lead the company’s power plant components business, having previously served as CEO of another Samsung subsidiary that makes other types of tech parts. Han Jong-hee, 59, and a veteran of Samsung’s TV business, will lead the combined mobile and consumer electronics unit.

The merger of the smartphone unit with the home appliance division reflects Samsung’s desire to develop a full-fledged Galaxy device ecosystem that spans from its mobile devices to other consumer electronics, said Sanjeev Rana , a Seoul-based senior analyst at CLSA.

“Today everyone has a mobile phone and everyone has a television. The hardware part is almost finished. The competition is now moving away from devices to building ecosystems,” Rana said, citing Apple as a benchmark.

Over the years, Samsung entered into external partnerships because its internal efforts to create rival software services failed. Spotify Technology HER

has been the default music streaming service on a range of Samsung products, including TVs and smartphones. Mobile applications used on some high-end Samsung smartphones can be used on personal computers running Microsoft Body

operating system.

Samsung moved to a three-CEO system in 2013, when the viability of phones, appliances and components was more on an equal footing. But now, technology components account for about three-quarters of Samsung’s operating profits.

For now, semiconductors are supporting Samsung’s financial performance, even though the industry is cyclical. This year, propelled by pandemic shifts in work and play, revenue rose for DRAM and NAND flash memory, the two main types of memory, and where Samsung is the biggest player. But buyers who have stocked up on inventory won’t need as much memory in 2022, according to TrendForce, a Taiwan-based market researcher.

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DRAM and NAND flash memory revenue growth jumped 36% and 22%, respectively, this year. But next year, DRAM will be stable, while NAND flash memory will only increase by 7%, estimates TrendForce.

Meanwhile, Samsung is engaged in a three-company race to manufacture high-end chips under contract with Taiwan Semiconductor Manufacturing. Co.

and Intel Corp.

This is a capital-intensive business, with Samsung set to spend hundreds of billions of dollars in the coming years. The $17 billion investment in Taylor, Texas, announced last month is just one facet of Samsung’s broader ambitions to expand its chip prowess outside of memory.

Sales of televisions, washing machines and refrigerators have soared during the pandemic. But in its last quarter, Samsung’s consumer electronics unit generated revenue of about 14.1 trillion Korean won, the equivalent of about $12 billion, though it didn’t only generated 0.76 trillion won in operating profit.

The smartphone industry has matured in wealthier markets, slowing down what used to be a lucrative business. The remaining pockets of growth are in developing countries. In the high-end market for smartphones costing $1,000 or more, far fewer consumers are trading in a Samsung Galaxy device for an Apple iPhone, or vice versa. In recent years, Samsung has faced major challenges from Chinese rivals who have released phones that match the South Korean company on features but are much cheaper.

The smartphone industry has matured in wealthier markets, slowing down what used to be a lucrative business. Galaxy smartphones on display in Seoul.


Seong Joon Cho/Bloomberg News

The global smartphone industry shrank 7% in the third quarter from a year earlier, driven by component shortages, according to International Data Corp., a technology market researcher. But Samsung, which held on to the top spot, faced a bigger drop than the industry as a whole, with shipments falling 14%.

“Stagnant growth, outdated agendas for the future, these are things that Samsung leader Lee Jae-yong wants to change. And to do that, it’s appointing new CEOs,” said Tom Kang, Seoul-based research director at Counterpoint Research. “It’s clear he wants change.”

Mr. Lee’s approval is required for any major move at Samsung. But even after his parole in August, Mr Lee, also known as Jay Y. Lee, is still not safe as he remains linked to another trial that could result in a prison sentence. Some of Mr Lee’s supporters have urged the South Korean government to grant the Samsung descendant a presidential pardon that would acquit him of all his legal troubles.

It would help pave the way for Mr Lee to officially take over as Samsung chairman, a position that has been vacant since his father died in October 2020. But a pardon is unlikely from the South Korean president. Moon Jae-in, whose five-year term ends next year, said Mike Cho, a corporate governance expert and professor of business at Korea University in Seoul.

“Until he settles all the legal issues, Lee Jae-yong is unlikely to assume the chairmanship,” Cho said.

Write to Jiyoung Sohn at [email protected]

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