Samsung’s ‘chip crisis’: AI ambitions hit by unprecedented worker unrest

Samsung Electronics is wrestling with an escalating labour crisis that is complicating its efforts to catch up with rivals in the booming market for semiconductors used in artificial intelligence systems.

The Korean technology giant pleased investors earlier this month with its expectations that second-quarter operating profits would increase by almost 1,500 per cent year on year, as the global memory market rebounds from a prolonged slump.

But the stronger-than-expected guidance came amid growing worker unrest and setbacks in chip production that have seen it fall behind rivals in areas identified as essential for future growth. Samsung shares have risen about 7.5 per cent this year, against a 65 per cent rally for smaller domestic rival SK Hynix.

Samsung is trailing SK Hynix and US chipmaker Micron in developing high-bandwidth memory (HBM) chips, a crucial component of AI systems, and is yet to pass tests required to qualify as an HBM supplier to the industry leader Nvidia.  

“This is extremely concerning for a company that has historically been the leading memory manufacturer,” said Myron Xie, an analyst at chip consultancy SemiAnalysis. “HBM is a very profitable product so Samsung is missing out on a big opportunity.”

Samsung has also failed to make a dent in TSMC’s dominance of the global foundry business — the market for contract manufacturing of processor chips — despite optimism that big customers would seek to reduce their dependence on the Taiwanese chip giant amid heightened geopolitical risks.

“While customers would like a second foundry alternative, the number one priority for customers is the quality of the technology and being able to have a stable source of supply, which Samsung foundry hasn’t delivered,” said Xie.

In May, Samsung chair Lee Jae-yong abruptly installed a new head of Samsung Electronics’ chip division, industry veteran Jun Young-hyun, who promised to “renew the atmosphere internally and externally” to address a “chip crisis” at the company.

But a Samsung chip engineer, speaking on condition of anonymity, told the Financial Times that they “didn’t see many changes even after our chief was replaced”.

“The internal atmosphere is gloomy as we fall behind SK Hynix in HBM and fail to catch up with TSMC in foundry,” the engineer said.

“People are feeling unhappy about their pay in general as they think they are treated worse than their peers at SK Hynix,” they added. “Many people are thinking of leaving the company to join our competitors.”

The growing worker discontent was exposed last Monday, when an estimated 6,500 members of the National Samsung Electronics Union, which has seen its ranks grow from 10,000 to more than 30,000 in the space of a year, launched an unprecedented three-day strike.

The company, which unveiled its latest foldable smartphones on Wednesday with enhanced AI features, is also under severe pressure from Apple and lower-cost Chinese rivals in the mobile sector, while Chinese competitors are also threatening to erode its market share in the display and home appliance sectors.

“Workers’ morale is low, discouraged by smaller financial rewards,” said a researcher at Samsung’s smartphone business, also speaking on condition of anonymity. “They feel helpless because management seems directionless.”

“I had been accustomed to sales growth all my company life, but this is the first time that I see falling growth,” added a Samsung home appliance salesperson, who also did not wish to be named. “People in my team are feeling a sense of crisis.”

Samsung denied the NSEU’s claims that the three-day walkout had disrupted chip production. But on Wednesday, the union announced it would continue with an “indefinite strike” that would target production lines, including those used to manufacture HBM chips.

“Management has no intention of dialogue,” the union said in a statement. “We have clearly identified line production disruptions and the company will regret this decision.”

Samsung said in a statement to the FT that it “remains committed to engaging in good faith negotiations with the union”, but otherwise declined to comment on personnel matters. However, analysts said the strike would complicate efforts to make up lost ground on SK Hynix in the HBM race.

According to one Samsung investor, the rivals are now locked in fierce competition for a limited supply of Korean engineering talent. Both companies declined to comment on the talent battle.

Samsung last week announced a cross-division team dedicated to HBM development efforts and should eventually close the technology gap on SK Hynix as the industry moves to future generations of HBM chips, according to CW Chung, an analyst at Nomura.

“Once you take the wrong strategy and develop the wrong chip, its ripple effects will last about three years,” said Chung, noting that the wider memory upcycle would continue to drive the company’s profitability in the meantime. “But the worst seems to be behind the company now.”

Samsung argues that, as the only company with capabilities in cutting-edge foundry and memory chips, as well as next-generation “advanced packaging” techniques, it will be well placed to take on a burgeoning alliance between SK Hynix and TSMC, which are working closely together on the next generation of AI chips.

“Our commitment to technological advancement and scale of investment have been core to our success and will continue to be so,” the company said. “We are confident and excited at the opportunity to navigate the current landscape and solidify our leadership position.”

But Xie from SemiAnalysis said that “being a one-stop shop is of little value to chip design companies when Samsung is best at none of the above aspects”.

“Given Samsung has seen its technology capabilities erode in multiple areas of its business, it seems there are problems that stem from the company’s leadership and culture,” he added. “A cultural reset may be long and painful, but it may be the best thing for the company in the long term.”