Just a few years ago, Samsung Electronics existed as a major force in the global semiconductor race, dominating one chip sector and focusing on Taiwan's TSMC in the battle of another chip sector.
However, recent stumblings, including the fact that they weren't capitalized early in the artificial intelligence boom, have missed it as the company struggles to deepen its market share losses, experts say.
Samsung's second quarter operating profit plummeted at 4.7 trillion won ($3.4 billion) from 55%, down from 10.4 trillion won ($7.5 billion) the previous year, although slightly higher than the same period last year.
Operating profit in the chip sector was Cash Cow, which historically accounted for two-thirds of total profit, shrinking nearly 94% from April to June compared to a year ago.
It condemned worse than expected performance on inventory value adjustments, lower utilization of contract chipmaking business, and continued fallout from US export controls of advanced AI chips to Samsung's key market, China.
Thursday's disappointing revenue report rekinds concerns about the future of South Korean tech giants.
Samsung warned about the disastrous performance of investors in its earnings forecast earlier this month.
The results were announced to produce new chips shortly after the $16.5 billion contract with Tesla announced this week.
Looking forward to the second half of the year, Samsung said it plans to continue to actively meet the growing demand for high value-added and AI-driven products and strengthen its sophisticated semiconductor competitiveness.
Korea's biggest conglomerate has recently encountered major headwinds in both its production of memory chips, which helps to manufacture both its main revenue streams, memory chips, and logic chips, which provide data processing and calculations on a power source.
Samsung, the industry's leading memory chip maker, has lost its position as a rival, such as South Korea's SK Hynix and American Micron Technology, particularly in the fast-growing market in the high-bandwidth memory (HBM) sector. HBMs consist of stacks of DRAM memory chips (dynamic random access memory) used for short-term data storage, are essential for AI processors developed by companies such as NVIDIA and AMD.
Meanwhile, Samsung's Logic Semiconductor Business Trail trails the industry leader TSMC in both cutting-edge chip technology and market share.
In the first quarter of this year, SK Hynix overtook Samsung to lead the global DRAM market, but TSMC has expanded its logic chip domination with a market share of 68%, compared to just 8% of Samsung's.
Sanjeev Rana, head of Korean research at the securities firm CLSA, said Samsung's series of “failures” (most notable management teams did not predict a surge in AI demand, which contributes to the current struggle.
“They were slow to recognize the coming AI revolution, and they bet on some other products, other technologies. It didn't turn out to be a very good bet in hindsight,” he said.
As a result, Samsung has missed so far as to be Nvidia's most advanced high-bandwidth memory products supplier. This product has repeatedly failed Nvidia's performance tests, but we hope that the company will clear them in the next two months.
Samsung announced in June that it was able to secure orders from AMD and Broadcom, but rivals SK Hynix and Micron have already begun delivering more advanced memory chip samples to customers.
At the same time, Samsung's logic chip business, which is at the heart of its ambition to rival TSMC, is under pressure. Despite investing in hundreds of billions over the past few years, the company is unable to secure meaningful orders for advanced tipping, leading to underutilized facilities, Lana said.
Last year, CLSA estimated that Samsung's contracted chipmaking business recorded 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 selling advanced chips to China also hit Samsung's revenues as shipments to Chinese clients and projects were forced to undergo pending dispute suspensions.
However, she added that the second quarter is expected to be the most impacted period as several chips have cleared the review process.
Tesla provided Samsung with a lifeline this week. CEO Elon Musk has announced that the electric car company has tapped on the Korean chip maker to create new chips for self-driving cars and humanoid robots in a $16.5 billion deal.
“Samsung's huge new Texas Fab will be dedicated to creating Tesla's next-generation AI6 chip,” he said in a post on X.
Samsung's stock has skyrocketed over 6.9%, reaching its highest level since September, following the news of the deal.
Tesla is currently procuring AI4 chips. The AI4 chip enhances an advanced driver assistance system called Samsung's Full Self Drive (FSD) software, but according to Musk, it has registered TSMC to produce the AI5 chip.
The deal came after Samsung delayed the operation of its chipmaking plant in Taylor, Texas, to 2026 from its original 2024 schedule as it struggled to acquire customers for the project.
Ray Wang, research director focused on the semiconductor industry at Futurum Group, called the Tesla contract “important,” saying it could boost Samsung's struggling profitability and verify the production capacity of its advanced chips.
The deal will also help increase Texas facilities and improve the company's return on investment, he added.
Lana said mass production of the Tesla project will not begin until 2027, but the deal will encourage sentiment to be sold and represents “a big word of confidence.”
“I think management has done a lot of restructuring for this business over the past 12-15 months or so, so now I know what the problem is. “Things will get better from the second half of (this year).”
