Samsung’s $41-billion (U.S.) investment splurge should ring alarm bells at its competitors. At least half of the South Korean conglomerate’s planned outlays will probably go to expanding its global lead in smartphones and the chips and screens that drive them. It’s a bold bet in a slowdown; if its bet pays off, Samsung could lengthen its lead over the likes of Apple .
Samsung Electronics hasn’t announced just how much it plans to invest from the parent group’s big number. But if history is any guide, its share should be at least $21-billion for expanding production and R&D. Relative to forecast annual revenue, that’s about 26 per cent more than what Apple plans to invest this year. Competitors should worry, because chances are Samsung won’t put that into microwaves and dishwashers, but rather into its more profitable smartphones and flash memory.
South Korea’s tech companies have made great strides against Japanese and U.S. rivals. A falling currency – the won has weakened 60 per cent against the yen over 20 years – helped the likes of Samsung break into the global consumer electronics market. Now, the company is the world’s largest maker of televisions, memory chips and smartphones. It leads the market for flash memory drives and state-of-the-art digital screens, so it not only competes with Apple but supplies it with parts.
Spending 13 per cent of revenue on capital expenditures and R&D may seem risky in a slowing global economy, but Samsung can afford it. It has an estimated $10-billion in net cash on the balance sheet, according to Daiwa, and forecast EBITDA (earnings before interest, taxes, depreciation and amortization) of $29-billion for 2012. The company’s plans to take advantage of low U.S. interest rates to borrow $1-billion in five-year bonds shows it is considering building a more aggressive balance sheet.
The big risk is that in such a fickle, fashion-driven market as smartphones, even big investment budgets can go into the wrong ideas. Ask Motorola, Nokia or Research In Motion. But given that the smartphone market is still forecast to grow by 34 per cent this year, Samsung deserves the benefit of the doubt.