Make Sammy Great Again: Surprise – Samsung chucks cash at manufacturing

Only losers pay, er, sell retail

Analysis Samsung has pledged to splurge $160bn on technology investment over three years, as the global smartphone market matures.

decline

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In March, Samsung became the world's No.1 semiconductor manufacturer, knocking Intel off the top spot for the first time since 1992. The chaebol restructured earlier this year, promoting fresh talent. And last week the giant said it expected a ($13.3bn, $9.9bn net) operating profit for the quarter ended June 30. While that does represent lowest profit growth since the Korean firm started racking up the wins in Q1 2017, it hardly matches the crash that followed the fiery Note 7 debacle. So where's the crisis?

Mostly, the bearish sentiment comes down to phones. After several buoyant years, the market is maturing (and falling off a cliff in some countries). And that's bad on two fronts for Samsung: devices and components. So much of Samsung's fortunes are tied to smartphones.

At Samsung, strong semiconductor sales have been compensating for a slowdown in the phone business for some time, with crypto miners adding 20 per cent to chip volumes this year. Eighty per cent of Sammy's profit comes from semiconductors. But as the global device market slows, so does the demand for the phones and the stuff that goes with them. And Chinese competitors have been looming for some time.

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It's over four years since we warned: "Samsung should be very concerned at what Huawei might be demonstrating in two to three years' time. So should everyone else."

Samsung took a big margin hit to stay competitive some years ago, but the price competition from Huawei and others is only intensifying. The price difference between "good enough" and "premium" is now vast, but in reality, they're converging.

Samsung - and for that matter, Apple too - have failed to introduce compelling new features each year. So staying with your trusty old model looks more appealing, Budget models are no longer substandard "Landfill", and the spiralling cost of the flagships only makes consumers think twice about upgrading.

The answer?

Actually, despite the headlines, it's much more of the same. Samsung is doubling down on manufacturing by investing the bulk of the $160bn - some $138bn - in manufacturing plants and "external" startups. Semiconductor and displays investments will create "up to 40,000 jobs".

The remaining $22bn will go into pure R&D for AI, components for 5G and cars, and biopharmaceuticals. Compared to the billions being thrown by the singularity-obsessed Softbank CEO Masayoshi Son, that's peanuts. But Son's Vision Fund now resembles a rich inheritee who has run out of ways to spend the cash, as the Son himself admitted this week, acknowledging that VF's strategy "looked like investing on a whim without any consistency" - though he of course insisted it is not). Samsung's goal is more modest, staffing up to 1,000 AI researchers around the world, according to Reuters.

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If Professor Geoffrey Hinton, the father of Deep Learning, and Gary Marcus are correct, we've hit a brick wall. Or to mix metaphors, the low hanging fruit of "AI" had already been picked when Google's hefty cloud was married to the machine learning tricks Hinton developed in the 1980s, and serious improvements are no longer being seen. Just as I cautioned at Westminster last year.

But it's probably a prudent move. Although Samsung got badly burned with its Viv purchase (the technology behind Bixby was not ready for prime time), it's cheaper to wait and see, and acquire. Like almost every white goods manufacturer, Samsung says it wants to embed AI in every consumer product, like its Family Hub Smart Fridge (oh yes), when perhaps all it needs is a decent low cost speech engine.

In fact the two rivers of cash, one big, one little, are not so dissimilar. Samsung BioLogics is a contract drug manufacturer. The hardware components side is a contract manufacturing business. Both are hedges. For when Samsung can't successfully retail products, it can make them for other people.®




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