By EVAN RAMSTAD And JUNG-AH LEE
SEOUL–Samsung Electronics Co. said Friday it will fold its flat-panel display business back into its semiconductor business, uniting its component-manufacturing operations just as the display business appears likely to be unprofitable for some time to come.
The two operations last year accounted for 44% of Samsung's revenue and 70% of its operating profits. But the display component business has been in a cyclical downturn and lost money in the first quarter and likely the second. The immediate effect of the combination will be to hide the display unit's difficulties in the more strongly performing chip operation.
But the move also positions Samsung, the world's largest technology manufacturer by revenue, to address a larger structural issue that executives rarely discuss: that the customers of its component businesses compete with the other divisions of Samsung, which make cellphones, TVs, computers and other consumer-electronics gadgets.
Combining the component operations under a single management is potentially a step to splitting them off as a separate company from the consumer products operations.
"The latest move seems to be Samsung's strong attempt to shift its focus fast to a more advanced display technology—OLED (organic light-emitting diode)—from conventional LCD displays," said IBK Securities' Nam Tae-hyun.
Samsung Mobile Display, a joint venture between Samsung Electronics and sister company Samsung SDI Co., has more than 95% of the OLED display market. These displays, brighter and more energy-efficient than their LCD counterparts, are widely used in mobile phones.
OLED is seen as a potential successor to LCD technology for TVs, but making large OLED screens remains very costly. Samsung Electronics's investment in the technology will rise to 5.4 trillion won ($5.1 billion) this year, nearly four times the 1.4 trillion won spent last year.
In a statement, Samsung said that merging LCDs back in to its semiconductor operation "is aimed at enhancing cooperation and generating synergy…in technology development, production, procurement and client management."
The combined operation will be led by the president of Samsung's semiconductor operation, Kwon Oh-hyun. The president of Samsung's LCD business, Chang Won-kie, was named an assistant to the Samsung chief executive Choi Gee-sung.
Samsung split the chip and display businesses in 2004, when liquid-crystal displays, or LCDs, were rising as the dominant technology for flat screens and the unit was hugely profitable.
The split occurred as technology for making LCDs, which was similar to semiconductor manufacturing in many respects, began to diverge as screens became larger. Samsung's LCD operation since then has vied with another South Korean firm, LG Display Co., to be the world's largest maker of flat screens by output and revenue.
But a cyclical downturn that began in LCD business a year ago has grown worse even as manufacturers, including Samsung, have continued to invest in new factories. Samsung's LCD division posted an operating loss of 230 billion won, or $215 million, in the first quarter and analysts expected a deeper one for the just-ended second quarter. Samsung will release its second-quarter earnings guidance next week.
The expected opening of several new LCD factories in China next year, coupled with continuing weakness in the global economy—which has damped demand for TVs—will continue to hurt the performance of flat-panel manufacturers.
Since its operating profit hit a record 5.01 trillion ($4.7 billion) in the second quarter of 2010, Samsung's profitability has been weakening as tumbling prices of flat panels and TVs started biting into its margins. Its first-quarter net profit this year was down 30%, to 2.78 trillion won.
Write to Evan Ramstad at email@example.com