Samsung's Chip Empire: A Crucial Transformation!

In June 1993, Lee Kun-hee, the chairman of Samsung, presented the "New Management" declaration in Frankfurt, GermanyThis proclamation shook the corporate world, and one phrase stood out: "Everything must change except for your wife and children." This mantra captured his determination to reshape Samsung, which, at the time, had just secured the top position in the DRAM marketHowever, other sectors within Samsung were floundering, with products bearing the Samsung label seen as mediocre at best outside of South Korea.

To demonstrate the corporation's commitment to quality, in March 1995, over 2,000 employees from Samsung Electronics gathered at the Gumi factory, surrounded by mounds of Anycall mobile phonesWith white cloths wrapped around their heads, they chanted slogans such as "Ensure Quality." To follow through on Lee's declaration, they destroyed 150,000 units of faulty mobile phones, worth 50 billion Korean won, with hammers, incinerating them in a dramatic display.

Back in the 1980s, Samsung was lagging behind competitors such as LG and HyundaiLee Kun-hee took the reins during a challenging periodWith a combination of tenacity and vision, he redefined the Samsung empire, significantly investing in semiconductors and mobile phones, which would emerge as its two principal pillars by the 1990sThe tactics he employed not only propelled Samsung to prominence but also made it a global name in technology.

Fast forward over three decades since Lee's bold declarations, and Samsung finds itself in a predicament laden with challengesOnce celebrated as Korea's foremost conglomerate, the company now navigates through a maze of issues that seem to overshadow its former glory.

On the 31st anniversary of Lee Kun-hee's Frankfurt declaration, the current chairman, Lee Jae-Yong, embarked on a business trip across the United StatesMuch like his predecessor, he had a packed agenda, completing over 30 official engagements in just two weeksWhile Samsung has grown larger and arguably better compared to the past, the stark reality is that Lee Jae-Yong faces an uphill battle in a vastly different market landscape.

According to Eugene Investment & Securities, since crossing the 200 trillion won threshold in sales in 2012, Samsung Electronics has experienced a meager average annual growth rate of only 2.3% over the following eleven years

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When evaluated in US dollars, that growth plummets to a disheartening 1%, hardly keeping pace with Korea's GDP growth rate.

A closer examination of Samsung's performance reveals even more concerning trendsIn 2013, the sales figure for Samsung's mobile division was approximately 73% of Apple's salesBy 2023, this figure dwindled significantly to just 22%. While the Galaxy S and Note series once rivaled the iPhone in terms of sales, the total units sold for the Galaxy S23 series barely exceeded 30 million.

Turning to Samsung's semiconductor division, the situation is starkIn 2011, their non-memory segment accounted for 88% of TSMC's salesFast forward to 2023, and this figure has plummeted to 26%. In 2019, Lee Jae-Yong unveiled the "System Semiconductor Vision 2030," planning to invest 133 trillion won to achieve supremacy in the system semiconductor domain by 2030. Four years later, however, the gap between Samsung and TSMC has only widenedAs of 2019, TSMC held a 51.8% market share, while Samsung lagged at 18.5%. By the fourth quarter of 2023, TSMC's market share soared to 61.2%, with Samsung's dropping to a mere 11.3%—a staggering gap of 49.9 percentage points.

The most critical challenge lies with Samsung's core business—memory semiconductorsSince 1993, Samsung has maintained an unassailable position in DRAM and NAND flash marketsYet, the company now struggles to produce high-bandwidth memory (HBM) chips integral to artificial intelligence (AI) productsFast forward to July 2024, a year and a half after the AI frenzy began, and over a year since NVIDIA reached a trillion-dollar market valuationYet, Samsung has yet to become a supplier to NVIDIA for HBM.

This lack of visibility was emphasized in June 2024 when NVIDIA's CEO Jensen Huang responded to inquiries regarding the use of HBM in AI accelerators: "Samsung Electronics, SK Hynix, and Micron will supply HBM to NVIDIA." Huang noted that they are working hard to ensure Samsung and Micron can rapidly undergo testing to begin supplying for AI semiconductor processes

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Nevertheless, it is clear that Samsung has yet to officially supply HBM to NVIDIA and has recently faced hurdles—specifically, HBM failing to pass tests due to overheating concerns.

Huang stated, "That's not the reason for failure; such reports are trivial," acknowledging that progress is being made with Samsung, albeit slowlyIdeally, from NVIDIA's perspective, having multiple HBM suppliers bolsters reliability and negotiation powerHowever, with SK Hynix currently being the sole supplier, the situation is fraught with uncertaintyMeanwhile, Micron, which initially misjudged its technological trajectory, finds itself struggling to catch upAs for Samsung, the former exclusive supplier of HBM to NVIDIA, its failure to meet even basic standards for AI products paints a disheartening picture.

Since 2015, Samsung has heavily invested in HBM development and successfully produced commercial-grade products, even outpacing SK Hynix with its third-generation HBM2EHowever, due to slow market demand growth in 2019, Samsung reduced both investment in and personnel for HBM development.

In July 2024, an internal reorganization created a new HBM development team by merging the existing task force operations under the DRAM divisionThis reshuffling aims to minimize the gap with SK Hynix in HBM production, marking a crucial step for SamsungHowever, numerous other pressing issues threaten to overwhelm the company.

On top of these market challenges, internal strife is manifesting as worker unrest within Samsung ElectronicsThe company recently witnessed its first significant union strike in 55 yearsOn June 7, 2024, the national labor union of Samsung Electronics staged a 'leave of absence' as an act of protestBy July 8, they reached a unanimous decision to strike for two days, demanding wage increases, additional time off, and improvements to the performance bonus system.

The union, representing approximately 30,000 employees or 24% of Samsung's workforce, reported over 6,540 members participated in the initial protests

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Law enforcement estimated around 3,000 joined the assemblyFollowing management's silence during the strike, the union escalated their actions to an indefinite strike on July 10.

Before Lee Jae-Yong's public announcement in May 2020 abolishing the long-held policy of "no union management," Samsung had pursued a philosophy that believed sufficient wages alone would negate the necessity for unions, claiming it fostered more efficient managementHowever, this stance drew widespread criticism for infringing upon labor rights.

The Samsung labor union, established in November 2019 under the banner of the Korean Confederation of Trade Unions (KCTU), primarily consists of employees from the device solutions division, responsible for semiconductors, making it the largest of Samsung's five unionsYet, without a majority of overall employees, their bargaining power is limited.

Outside observers, including labor rights activists, criticized the disparity between employee contributions and executive rewardsAs highlighted by union leader Sun Yu-mok, "Previously, the logic for rewards was straightforward; with good performance, there would be compensationNowadays, only executives seem to enjoy the fruits." He added that while it is accepted that staff shares the burden of losses through lower bonuses, a call for transparent metrics is essential.

Performance bonuses currently constitute a significant portion of employees' wages, yet the ambiguity surrounding their calculation creates an atmosphere of uncertaintyWorker dissatisfaction intensified amid last year's semiconductor division losses, which deprived them of performance bonuses exceeding 50% of their base salary while executives received other compensatory rewards.

Another significant focus of the strike is the improvement of working conditionsThe second wave of protests highlighted the outdated 8-inch wafer production line at the Faq Xin plant, which primarily caters to traditional semiconductors for appliances and automobiles

Most other 12-inch production lines at Samsung feature automation, utilizing overhead cranes for transporting bulk wafers, yet this specific 8-inch line operates manually.

On July 13, as the strike approached its sixth day, participants shared images illustrating the toll of their demanding conditions, highlighting deformities and chronic pain as a product of overexertion and inadequate treatmentTheir collective sentiment in the chat was clear: change was imperative.

Data from the union suggested that, on the first day of the strike, operational efficiency on the 8-inch production line plummeted from 80% to 18%. Many striking workers are women between the ages of 20 to 40, calling for improvements that transcend mere salary increases or additional time off—demanding recognition as individuals rather than machine parts.

It's noted that while most modern 12-inch production lines are automated, Faq Xin’s process still requires workers to manually handle heavy 3 to 5-kilogram semiconductor wafersOperated around the clock, these lines divided into three shifts see workers standing eight hours a day and physically executing their processesThe strain from these extreme labor demands has left many workers suffering from a slew of ailments.

Despite designated break times, the relentless schedules hinder their capacity to eat or use restroom facilitiesOne employee remarked on the difficulties faced, stating, "To avoid severe bladder infections, I refrain from drinking water or coffee before shifts."

For shift workers who labor day and night, adequate rest is crucial yet often unfulfilled due to understaffing and oversight in managing yearly leave entitlementsEmployees shared frustrations about navigating an inadequate leave system, making it crucial to "win" in informal games of chance to secure time off.

Samsung's Faq Xin plant is not a newcomer in the public eyeThe tragic story of Hwang Yu-mi, a 22-year-old Samsung employee who died from leukemia shortly after joining in 2007, shed light on the perilous conditions within the company

Following a lengthy battle for justice, it emerged that over 320 employees at that facility encountered health issues, with 118 fatalities as a result of toxic exposure.

Samsung continues to deny any wrongdoing regarding these claimsA spokesperson recently stated that they offer robust support for claims made regarding workplace injuries, affirming the positive measures taken to mitigate issues surrounding worker safety.

This stark contrast between Samsung's ongoing struggles and its rival SK Hynix is notableHaving been established for over two decades, Hynix has not faced similar large-scale strikesFollowing a tumultuous merger in 1999, Hynix resided within its specialized structure, relying heavily on collaboration and solidarity amongst its workforceThe Hynix union's creation during financially trying periods fostered a communal resilience, which has only fortified their position within the company.

Faced with adversity, Hynix's union has participated in solutions centered around wage freezes and non-negotiated agreementsIn return, the company refrained from conduct like mass layoffs, showcasing a collaborative path forward, even going as far as initiating a "wage-sharing model" which directs a portion of heightened profits toward partnering firms.

In contrast, Samsung's response has become increasingly untenableAs the fresh leadership under Lee Jae-Yong faces an explosion of accumulated issues in the aftermath of Lee Kun-hee's passing, the complexity of this monumental operation is laid bareThe challenge of remedying these multifaceted challenges is monumental, and relying solely on emergency leadership changes amounts to little more than a temporary psychological fix.

Reflecting on Lee Kun-hee's revelations in 2010, he remarked, "Most products and businesses Samsung launches today will vanish within a decadeWe must start over, for time is not a luxury." Even amidst record smartphone shipments in 2013, he reiterated the call for transformation, emphasizing the crucial need for innovative thrusts to lead industry trends.

In the thriving semiconductor market, it's evident that no castle built is everlasting

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