Samsung profit hits record in wake of humiliating recall

LOW-HANGING FRUIT:Analysts said the company is profiting from previous big investments in new technologies, but faces a threat from emerging Chinese rivals pursuing similar strategies
Sprawling South Korean conglomerate Samsung Electronics Co has recovered from a humiliating recall fiasco and the arrest of its de facto leader with remarkable speed, analysts said, after the tech giant stunned investors with record-breaking profits.

However, the world’s top smartphone maker, one of the huge family-run chaebols which dominate the South Korean economy, could be confronted by tougher challenges in the future as Chinese rivals take aim at its semiconductor business and questions emerge over the firm’s leadership.

Samsung took observers by surprise this week when it posted a forecast-beating 14.1 trillion won (US$12.5 billion) in operating profits in the second quarter — a 73 percent jump from the previous year — putting it on course to better rival Apple Inc for the first time.

Consensus forecasts of Apple’s operating profits, due to be reported this week, are estimated at around US$10.6 billion.

Samsung said huge sales of its new Galaxy S8 smartphone and demand for its memory chips were behind the jump in the April-to-June period and predicted another blockbuster report for the current quarter ending in September.

The semiconductor business, which provides chips to other companies, including Apple, raked in 8.03 trillion won in operating profit in the second quarter, up 204 percent from the previous year, the company said.

Geoffrey Cain, author of an upcoming book on the Samsung empire, said the firm was simply riding the wave of “huge investments in strategic industries like chipsets and OLED panels” it made years ago.

“Samsung has plantations of fruit ready to be picked, even if a few like its Note 7 went rotten,” Cain said.

Rising global demand for semiconductors has pushed prices high to Samsung’s benefit, said Chung Sun-sup, an expert who runs the Web site that tracks the corporate assets and practices of South Korean conglomerates.

“The company will enjoy the global semiconductor boom over the next few years,” Chung said.

However, the bigger challenge for Samsung is what happens after the harvest, as the firm faces questions over its “untested” leader and the growing threat from Chinese rivals.

The firm’s de facto leader Lee Jae-yong is in custody after a February indictment over a nationwide bribery scandal that toppled then-South Korean president Park Geun-hue.

The leadership vacuum should not affect day-to-day operations of the Samsung empire, Chung said, largely due to the company’s dispersed management structure.

However, with a handful of its key executives battling allegations of bribery, Samsung’s ability to take major decisions on long-term business investment will be compromised.

Even if Lee returns to work, the Samsung heir “remains untested on the market,” Cain said. “Few people outside Samsung truly know what he’s capable of, because his succession has always been guaranteed.”

Samsung’s success riding on its semiconductor business will face increasing headwinds, analysts warned, as it faces rapidly emerging Chinese rivals spending billions of dollars to dominate the global chip market.

“The Chinese chipset makers are studying, mimicking and playing catch-up in the realm of semiconductors,” Cain said, comparing the practice to what South Korea had done to Japan previously and how Japan caught up with the US in the 1950s and 1960s.
To become the next Samsung is the ultimate dream of these Chinese chipset makers, Cain said.

“It’s entirely feasible, and Samsung should be terrified,” he added.