Key points:

  • Samsung faced a significant decline in profit, especially in its semiconductor division.
  • The company is struggling with stiff competition from other chip manufacturers, such as TSMC.
  • Heavy reliance on the Chinese market negatively impacts its financial performance.

The South Korean tech giant Samsung Electronics warned of a drop in third-quarter profits compared to market expectations. The company acknowledged its unsatisfactory performance, attributing it to its inability to provide sufficient supplies of high-performance chips to Nvidia amid growing demand for AI solutions.

Samsung faces semiconductor manufacturing challenges

Samsung Electronics reported a substantial decline in profits from its semiconductor business in the third quarter of this year. This was due to delays in the delivery of specialized AI chips to a major unnamed client, while Chinese competitors successfully ramped up production of more traditional chips.

The company’s operating profit fell significantly short of analysts’ expectations, amounting to 9.1 trillion won ($6.78 billion). This is notably lower than both the previous quarter’s figures and expert forecasts, surprising the financial community.

BNK Investment & Securities analyst Lee Min Hee emphasized that the company’s profitability outlook appears highly pessimistic and is unlikely to improve in the coming quarter. He also pointed out Samsung’s lag behind its main competitor, SK Hynix, in producing high-performance HBM memory chips, which are in demand for AI servers. Additionally, the company’s heavy reliance on the Chinese market is adversely affecting its financial results.

Delays in capturing the AI chip market forced Samsung to focus on producing more traditional, low-margin chips, making it more vulnerable to competition from Chinese manufacturers. The decline in demand for smartphones and personal computers is also negatively impacting the company’s financial performance.

The AI chip market is experiencing significant growth, especially after the pandemic-driven downturn. However, Samsung has been unable to fully capitalize on this trend due to delays in producing high-performance HBM memory chips for the industry leader, Nvidia.

Can Samsung survive the competition?

In addition to this, Samsung Electronics reported a further decline in its stock price. After falling more than 20% this year, the company’s shares dropped another 1.3%. The reason for this decline was the delay in starting deliveries of high-performance HBM3E chips to a major client. Although the company announced mass production of these chips from July to September, the project faced unforeseen challenges.

The financial results of the memory chip manufacturing division also fell short of expectations. The growth in shipments of older chip models by Chinese competitors, as well as inventory adjustments by some mobile device customers, negatively impacted the profitability of this segment. Despite stable demand for high-performance HBM chips and other components for servers, these factors failed to offset the losses.

Samsung’s contract chip manufacturing business continues to struggle. The company faces fierce competition from industry leader TSMC, which serves major clients like Apple and Nvidia. Analysts predict that Samsung’s division will continue to incur losses in the third quarter.

Additional factors negatively affecting Samsung’s financial performance included one-time costs associated with production incentives and unfavorable currency exchange rate dynamics.

At the same time, the divisions responsible for mobile devices and displays showed positive results. Steady sales of flagship smartphones boosted the mobile division’s revenues, while increased demand from clients like Apple led to revenue growth in the display division.