Is Samsung prepared for its A.I. breakthrough, or is it still facing some challenges?

The advent of ChatGPT has sparked a surge in the stock prices of microchip manufacturers, the essential components powering artificial intelligence. There is a strong belief in the potential of generative A.I., attracting significant investments. Among the prominent beneficiaries of this rally is Nvidia, Silicon Valley's leading supplier of A.I. chips, with its shares skyrocketing nearly 200 percent this year.

Samsung Electronics, the South Korean tech giant, aims to capitalize on this trend. Widely known for its consumer products, Samsung boasts the world's largest memory chip business and the second-busiest semiconductor foundries, which fabricate customized microchips for other companies.

Foreign investors have poured $8 billion into Samsung shares on the South Korean stock market this year, marking the highest foreign purchases in Samsung since 2000, according to data from CLSA, an investment firm in Hong Kong. This surge contrasts with the sell-off in the previous three years when foreign investors divested more of the company's stock than they acquired.

At a recent event in California, Samsung outlined its "vision in the A.I. era." The company aims to compete with Taiwan Semiconductor Manufacturing Company (TSMC), a leading chip manufacturer. However, the trend has favored TSMC recently, with the firm securing approximately 60 percent of total revenues in the global foundry business, while Samsung only holds 13 percent. This gap has widened since 2021, as some of Samsung's clients, including Nvidia, shifted their business to TSMC.

Samsung invested $7.4 billion in the first quarter of this year, particularly in its chip business, despite experiencing a significant 95 percent drop in profits. A portion of this investment is directed towards serving the A.I. industry. The company is also expanding chip production in Pyeongtaek, South Korea, and a factory in Texas. Over the next two decades, Samsung plans to collaborate with the government on a $230 billion project to establish a chip-making "megacluster" in South Korea.

The optimism surrounding Samsung's prospects in the A.I. space centers on its memory chip business, which typically constitutes around half of the company's operating profit in an average year. These memory chips are crucial for A.I. servers, which often require four times the memory (DRAM) compared to traditional servers. Samsung commands approximately 45 percent of the global DRAM market and is the only major memory company increasing production despite industry-wide memory price declines.

While some analysts believe Samsung's investments during the downturn will pay off once the memory sector rebounds, skeptics question whether the company can achieve the same level of indispensability in generative A.I. as it has in smartphones and high-resolution televisions. Samsung lost out on a high-powered memory chip contract to SK Hynix, and the company's lag in HBM technology (high-bandwidth memory) might be symptomatic of broader issues. Some experts suggest that Samsung should prioritize research investment over market share and focus on technological leadership to regain its position.

Samsung acknowledges that it has made progress in advanced semiconductor technologies and can provide comprehensive solutions in the evolving landscape of A.I. and other technologies. However, Samsung's own executives have offered a more sober assessment, with the president of Samsung's semiconductor division acknowledging that the company lags behind TSMC by up to two years. Despite this, Samsung remains committed to making its memory chips a crucial component of A.I. supercomputers by 2028, aiming to outperform TSMC within five years.