It's no surprise, then, that some investors are beginning to wonder whether Korea's biggest company has peaked. Samsung's stock is up just 6% so far this year, while Korea's benchmark Kospi index has jumped 36%. Three years ago, the blue chip accounted for nearly a quarter of the capitalization of the Seoul exchange; today it makes up just 10%. "Samsung is at a crossroad," says Kang Shin Woo, chief investment officer at mutual fund manager Korea Investment Trust Management. "The market has been reassessing Samsung."
The profit picture isn't pretty. On July 13, Samsung announced that operating income for the second quarter fell 36% year-on-year, to $993 million--its worst performance since 2001. Executive Vice-President Chu Woo Sik attempted to put a positive spin on the news, saying "the pain is behind us." But analysts aren't buying it. Even while most predict a rebound in the current quarter, the consensus is that operating profit for the full year will be less than half its 2004 peak of $13.1 billion.
So is Samsung going the way of Sony Corp. (SNE
)? The Japanese giant once wowed the world with cutting-edge gizmos like the Walkman but then fell victim to complacency. Samsung might be guilty of the same sin in its chip business, the source of more than 70% of earnings last year. Three years ago, it began shifting emphasis away from memory for PCs to the flash chips widely used in digital cameras, music players, and other devices. But Samsung lost its focus on the tech break-throughs that had made it a leader in PC memory, and now that business is under attack from crosstown rival Hynix Semiconductor (HXSL
), Japan's Elpida Memory, Germany's Qimonda (QI
), and Taiwanese upstarts. The result: a supply glut and a 67% drop in profits for Samsung's chip unit in the second quarter, to $360 million. "If you liken it to a 400-meter race, Samsung used to run way ahead of the pack," says Jay Kim, an analyst at Seoul brokerage Hyundai Securities Co. "Now it is neck-and-neck with rivals."
Samsung's edge in LCD panels may also prove short-lived. The company's manufacturing joint venture with Sony looks like a success: Samsung has remained in the black while others are bleeding red ink. But competition will only intensify as a wave of new factories comes online in the next few years. Although its margins in LCDs rebounded to 9% in the second quarter, from 3% in the first, "the glory days when margins topped 20% or even 30% are over," says Song Myung Sup, technology analyst at CJ Investment & Securities in Seoul.
The third pillar of the company's strategy--cell phones--appears fairly stable. Samsung has overtaken be-leaguered Motorola Inc. (MOT
) for the No. 2 spot in handsets, after last year ditching its strategy of focusing on high-end phones to offer cheaper models in developing markets. Yet even there it has yet to prove it can control costs the way industry leader Nokia Corp. (NOK
Samsung's top brass say the malaise is temporary. In fact, a newfound sense of urgency appears to be permeating head-quarters. A key goal these days is finding new growth engines, though experiments with logic chips and printers have had little impact on the bottom line. Now, Chief Executive Yun Jong Yong is heading a task force charged with identifying new lines of business. Its members, says Executive Vice-President Chu, are "obsessed with the mission day and night." By Moon Ihlwan