A Chinese manufacturer is poised to pour $30 billion of investment into the semiconductor business, backed by a government initiative. The movement is a de facto announcement that the Chinese electronics and smartphone-makers will scale back dependency on Samsung Electronics and SK hynix over component procurement.
Though the project is to undergo a certain period of research and investment before commercialization, it is undeniable that the two Korean chipmakers will face tough challenges from a group of newcomers on a mid- and long-term basis.
Further, the Chinese challenge comes amid a slowdown in the earnings outlook of Samsung Electronics, the biggest company in Korea by market capitalization. The securities industry has projected that the operating profit of Samsung would post 4.29 trillion won ($3.66 billion) in the first quarter, a 9 percent fall from the previous quarter.
For SK hynix, a brokerage firm said its first-quarter operating profit is projected to plunge 61 percent on-year to 615.4 billion won, due to low prices of DRAM and stiff market competition.
Amid the worsening profitability, the coming entry of Chinese chipmakers is a critical threat to their Korean counterparts, though the combined market share of Samsung and SK still hovers around 70 percent in DRAM chips and 43 percent in the NAND Flash chip segment.
China’s challenge is also seen in the TV display business. Bearing the brunt of China’s increasing presence in the liquid crystal display market, Samsung’s LCD business is expected to post an operating loss of 400 billion won in the first quarter.
As if reflecting the downward trend of its LCD business, Samsung Display closed five LCD production lines across the country last year while LG Display has stopped operating several LCD production lines in recent months.
In contrast, their Chinese rivals are expanding quickly thanks to support from Chinese central and local governments, such as tax benefits and cheap land to build factories.
Chinese display producer BOE’s market share by shipment almost doubled from 6.8 percent in the first quarter of 2014 to 11.6 percent in the fourth quarter of 2015, while that of LG Display dropped from 25 percent to 23.8 percent over the corresponding period. Samsung Display posted a drop from 21.2 percent to 19.1 percent.
As China steps up its pursuit in semiconductors, displays and smartphones, South Korea lags far behind U.S. information technology giants in the futuristic businesses like artificial intelligence.
It is urgent that the local IT industry seek futuristic growth potential, and the government has to pave the way for them to carry out wider research and development and facilities investments via drastic deregulation.
Simultaneously, the government needs to revive the venture start-up boom by bolstering financial aid provisions. It was lamentable to see the government prioritize a boom in the local real estate market via fiscal expansion and monetary easing over the past few years.
