Samsung admits struggles with AI chips, issues rare apology to investors

The company's CEO promised major changes after admitting delays in key chip deliveries.

SEOUL:

Samsung Electronics, the world's largest memory chip maker, has issued an apology following disappointing financial results.

The company’s newly appointed head of the semiconductor division, Jun Young-hyun, acknowledged the challenges ahead and promised significant changes to improve the organisation.

In a candid statement, Samsung reported lower-than-expected revenue and profits, sparking concerns about its competitiveness in the chip industry.

The company admitted to delays in delivering a critical type of chip essential for training artificial intelligence (AI) models.

This has allowed rival SK Hynix to take the lead in the high-bandwidth memory (HBM) market.

Additionally, Samsung has struggled to keep pace with Taiwan Semiconductor Manufacturing Co in producing custom chips.

Jun noted that there were "inventory adjustments" from unspecified customers and increased competition from older Chinese memory chip makers.

Following the announcement, Samsung's shares dropped by as much as 1.8% on October 8, marking their lowest level since March 2023.

The stock has fallen more than 20% this year, reflecting growing investor concerns.

“These are testing times,” Jun said, taking full responsibility for the situation.

He acknowledged that there are worries about Samsung's technical competitiveness, with some experts warning of a potential crisis for the company.

This downturn is particularly challenging given Samsung's long-standing position as a market leader and the surge in demand for AI hardware, which has benefited competitors like Hynix and Micron Technology.

Samsung is now under pressure to evaluate its organisational culture and operations.

Earlier in October, the company laid off an undisclosed number of workers in Singapore as part of a global workforce reduction.

With around 147,000 employees based overseas, Samsung has more than half of its total workforce, which is over 267,800.

On October 8, Samsung announced a smaller-than-expected increase in its preliminary operating profit for the September quarter, estimated at around 9.1 trillion won (approximately $6.8 billion).

This was partly due to one-time performance bonuses. Revenue also came in below expectations, at 79 trillion won (about $59 billion).

A detailed financial statement, including net income and departmental breakdowns, is set to be released on October 31.

Samsung is now in a position where it needs to catch up to SK Hynix, which has taken the lead in producing HBM chips used with Nvidia’s AI accelerators.

The company’s next goal is to secure certification for its most advanced HBM3E chip lineup, which has the highest profit margins.

“At Samsung, we have a deep and proven history of overcoming difficulties and turning them into key opportunities,” Jun emphasised.

He added that the focus will be on strengthening long-term competitiveness rather than relying on short-term fixes.

HBM CHIPS DELAYED

Samsung said in a statement the start of sales of its high-end HBM3E chips to a major customer has been "delayed relative to our expectations".

It did not elaborate on the issue. Samsung said in July it would start mass-producing the chips during the July to September period.

Earnings declined in the company's memory chip business as Chinese rivals increased supplies of "legacy" products and some mobile customers adjusted inventories, offsetting solid demand for HBM and other chips used in servers, Samsung added.

Samsung's contract chip manufacturing business, which designs and produces custom-made chips for other companies, likely continued to lose money in the third quarter as it is struggling to compete with leader TSMC , opens new tab, which counts Apple , opens new tab and Nvidia among its customers, analysts said.

Samsung's chief Jay Y. Lee told Reuters on Monday that he is not interested in spinning off the contract chip manufacturing business as well as its logic chip designing operation.

Samsung said one-off costs such as provisions for "incentives" and the unfavourable local currency also contributed to the chip earnings decline.

Earnings in its mobile division improved from the preceding quarter on solid sales of its flagship smartphones, while earnings at its display unit grew as its customers, which include Apple, launched new models.

Samsung will announce detailed earnings results on Oct. 31.

In May, Samsung abruptly replaced the chief of its semiconductor division, handing the reins to Jun in a bid to overcome a "chip crisis".

Samsung is also cutting as much as 30% of overseas staff at some divisions, Reuters reported in September, underscoring the challenges it faces.

Its U.S. rival Micron , opened a new tab last month forecast first-quarter earnings ahead of Wall Street estimates and reported its highest quarterly revenue in over a decade on the back of booming demand for its memory chips used in AI.