Galaxy sales up, but profits down? Chipflation divides Samsung

Samsung Electronics is experiencing a stark internal division in its financial performance, driven by the surge in memory chip prices. While the semiconductor (DS) division is achieving record-breaking profits, the mobile (MX) division is grappling with deteriorating profitability due to the same memory cost increases. This situation creates a paradoxical scenario within the company, where a semiconductor supercycle yields both 'unprecedented operating profit' and 'declining profitability' simultaneously.

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We do not have a structure where we supply memory at a particularly low price just because it's within the same company. We apply the same standards as external customers. This is how we can objectively evaluate the performance of each division and maintain trust with global clients.

The DS division supplies memory chips like DRAM and NAND flash to the MX division at prevailing market prices. Samsung maintains this policy to ensure consistency and customer trust, applying no internal discounts. This internal pricing structure means that the performance of each division moves in opposite directions, like a 'seesaw game,' as memory prices fluctuate. While the semiconductor division's operating profit is projected to exceed 90 trillion won, with an operating profit margin potentially reaching 80%, the MX division faces increased component costs.

Despite a 3% year-on-year increase in revenue for the MX division in the first quarter, its operating profit plummeted by 35% to 2.8 trillion won from 4.3 trillion won in the same period last year. This indicates that rising component costs are directly impacting profits, even as smartphone sales volumes increase. Reports suggest that the mobile division may have incurred its first-ever operating loss in the second quarter, signaling that the once-reliable Galaxy smartphone business is now hindered by escalating memory prices.

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The mobile division's operating profit decreased by 35% compared to the same period last year, even though smartphone sales increased.

The increased component costs are also being reflected in consumer prices. The upcoming Galaxy Z Fold 8 Ultra is expected to launch with a starting price of $2,099 for the 256GB model in the U.S., marking the first time a flagship product line exceeds the $2,000 threshold. Repair parts supplied to Samsung Electronics Service also saw a price increase earlier this month due to rising raw material costs. This divergence in profitability between divisions is fueling internal conflict. The Samsung Electronics Union (Donghaeng), which represents many employees in the mobile division, plans to hold a rally near the Samsung Electronics Suwon campus on July 16th, advocating for 'same company, same rights.'

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The mobile division is expected to have recorded its first operating loss in the second quarter.