Samsung Electronics Co. Ltd.

Dec. 21, 2004
Investors including Intel bet on the manufacturer's high-tech future.

Samsung Electronics Co. Ltd. more than doubled its profits in 1998, thanks to a rebounding market for semiconductors, a restructuring program, and a diversification strategy. A weak won helped lift global sales at the electronics maker, which exports 70% of its goods. Another advantage: the company's focus on developed markets in the U.S. and Europe. Net profits for fiscal year ended Dec. 31, 1998, for the flagship of South Korea's second largest chaebol conglomerate more than tripled. The company forecasts sales will increase by 10% in 1999, and analysts predict profits could take off, based on strong sales of personal computers. "We view Samsung Electronics very positively. Its earnings-growth potential is quite high," remarks Chong-hwa Jon, an analyst at Salomon Smith Barney, Seoul. Samsung has new growth areas such as thin-film transistor liquid-crystal displays (TFT-LCDs) and telecommunications equipment that balance out the memory-chip market's volatility, he says. In 1996 the world's largest memory-chip manufacturer -- the electronics arm of Samsung Group -- saw the price of its 16-Mbit dynamic random-access memory (DRAM) chip fall to $6 from $48 in 1995. Because chips account for more than one-third of its sales, the Seoul-headquartered manufacturer's profits dropped to $200 million in 1996 from $2.9 billion a year earlier. Then came the Asian crisis. By late 1997 the value of the won against the dollar had collapsed, pushing up the cost of the company's foreign loans. By the time the International Monetary Fund doled out its assistance packages, economic problems had quashed demand for Samsung's consumer goods. The electronics giant responded to the double whammy with a restructuring program to eliminate underperforming units and reduce its debt. By 1998 it would slash its workforce by 25%. "Samsung Electronics has been the most aggressive among Korean companies in reducing its workforce and restructuring its debt," observes Jon. Last year alone the company paid off overseas loans worth $4.9 billion and managed to lower its debt-to-equity ratio to 198% from 296% in 1997. The company sold $1.5 billion worth of assets including 34 businesses and 43 units. Among those were what the company calls "low-value-added activities" such as its Power Device Div., which Fairchild Semiconductor Corp. purchased for approximately $450 million last December. While exiting certain businesses, executives entered others considered "high-value-added non-memory activities," such as logic chips. In 1998, for example, Samsung joined Compaq Computer Corp. to form Alpha Processor Inc. to sell a high-performance computer processor Alpha chip. The Korean company also drew notice from Intel Corp., which announced in January it would invest $100 million in the manufacturer. Samsung said Intel's cash infusion would go toward fabrication, assembly, and test sites for its next generation 72-Mbit Rambus DRAM chips. "It's an interesting deal from two perspectives," relates Salomon's Jon. "Intel promotes Rambus DRAM as the industry standard, and it also secures a supply to the next-generation technology." During its turnaround, Samsung continued to devote 8% of sales to research and development. It funneled these funds toward semiconductors, but also to new areas in which Samsung wanted to develop strengths: wireless communications, high-definition television, and liquid-crystal displays. "Samsung, which put a lot of capacity [for TFT-LCDs] in place two years ago, really is coming through strongly this year and has a huge cost advantage over companies in Japan that have labored under the high value of the yen," explains Alan Bell, an analyst with Schroder Securities Ltd., London. Still, despite analysts' rosy predictions and Intel's vote of confidence, the manufacturer faces challenges. As part of the Korean government's "Big Deal" reform of conglomerates, Samsung Electronics was negotiating to take over the electronics arm of Daewoo Group. Although the deal now is in question, integrating the two businesses, which have little in common, would have ensnared the attention of management sorely needed elsewhere. What's more, shareholder activists want the restructuring efforts to cut deeper.

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