October 13, 2017 / 5:33 AM / in 9 months

Breakingviews - Warning signs flash at Samsung after big quarter

HONG KONG (Reuters Breakingviews) - Warning signs are flashing after another big quarter at Samsung Electronics. The South Korean group’s top executive, Kwon Oh-hyun, unexpectedly resigned on Friday following record-smashing forecasts for operating profit. An early lead in memory chips has fuelled blistering earnings growth at Samsung despite legal woes. But as rivals circle, a widening leadership vacuum looks worrying.

The logo of Samsung Electronics is seen at its office building in Seoul, South Korea South Korea, October 11, 2017. Picture taken on October 11, 2017. REUTERS/Kim Hong-Ji

Kwon says the firm is “confronted with unprecedented crisis inside out” – an incredible admission for a departing leader. And the timing of his surprise retirement is troubling. Since the arrest and conviction of family scion and heir apparent Jay Y. Lee this year, the 64-year old Kwon has emerged as a key leader at the $325 billion tech behemoth. He serves as co-chief executive and vice chairman. Besides coordinating company-wide decisions and leading corporate-governance reform efforts as chairman of the board, the company veteran also oversees Samsung’s all-important semiconductor arm.

Thanks to that division, Samsung expects operating profit for the three months to September to top $13 billion, nearly triple the figure from a year earlier. Increasingly powerful smartphones and the rise of artificial intelligence mean electronic devices require ever-larger amounts of data storage.

That has led to a global shortage of two kinds of memory chips, in particular, known as NAND and DRAM. Samsung’s early bets in this space are paying off: full-year earnings are expected to rise 82 percent to 40.9 trillion won ($32.7 billion), according to analysts polled on Eikon.

Yet even Kwon admits the record earnings are the “fruit of past decisions” and that the company is “not even close to finding new growth engines”. To make matters worse, rivals are aggressively investing to boost supply. Global semiconductor capital spending is forecast to jump 20 percent this year, according to industry tracker IC Insights. In 3-D NAND, one of the memory industry’s hottest sectors, analysts at Bernstein reckon that supply will outstrip demand next year, weighing on prices. A vacuum at the top now bodes ill for Samsung.


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