Samsung Electronics' Woosik Chu likes to say the Korean electronic giant is "a cut above the competition."

It's a boast Chu, Samsung executive vice president of investor relations, can easily back up, although unfolding events in the high-tech industry and the troubled worldwide economy will probably test the Korean company sorely over the next year.

In only a few years, Samsung maneuvered its way to the No. 2 global position in the wireless handset market and became the leading digital TV vendor; the company also raised its profile in the TFT-LCD panel segment.

A more notable chest-thumping moment came for Samsung in the second quarter, when it was the only DRAM and NAND flash memory supplier to post a profit despite severe double-digit price declines in the segment, according to market research firm iSuppli.

There are giant hurdles ahead even for Samsung, however. The global economy is on a downward spiral and economists believe the United States is deep into its first consumer-driven recession, which will hurt Samsung and other major consumer electronics suppliers.

In this climate, not even Samsung's vaunted technology and cost advantage will shield the company from the negative effects of a worldwide economic downturn, Chu acknowledges.

"It's unlikely that we will be achieving a sharp recovery, considering the prevailing softness in global demand and rising costs," he said. "The business environment is not favorable currently."

Robust cash flow

That doesn't imply Samsung will hurt as much as the competition, though. In fact, analysts and company executives believe Samsung will take advantage of the economic slowdown to hone its competitive edge by increasing its R&D and capital expenses.

The company's strong cash position and low debt can contribute to the momentum, pulling it farther away from rivals in the various market segments, according to Standard & Poor's analyst JaeMin Kwon.

"Samsung Electronics' cash flow will remain robust enough to meet the company's substantial capital investment requirements without weakening the strength of its balance sheet," Kwon said.

"One thing is for sure, and that is that the relative gap between us and the rest of the pack will increase even further," said Samsung's Chu.

Samsung has indeed been pulling ahead of the competition in the past five years as it has increased investments in tough market segments based on management's conviction that increased scale could drive down costs and increase profits.

This belief drove the company's strategy in challenging markets like DRAM, where average selling prices have remained under pressure even as bit shipments surged to new record highs almost every year.

By boosting spending and staying ahead in process technology, Samsung has been able to lower its costs faster than competitors and snatch the memory leadership position from Micron Technology and others.

Strong revenue growth, but challenges ahead

A review of the company's annual results showed strong revenue growth over the past few years, with the highest increase occurring in the digital media division, which reported a 31 percent sales surge in 2007 on top of a 28 percent increase in 2006. Even in the distressed telecommunications networking business, Samsung's sales grew 16 percent in 2007 after falling slightly in 2006.

LCD sales have increased more than 58 percent since 2005 and the segment's share of Samsung's total revenue has also increased by several percentage points during the same period.

But Samsung faces some major challenges in the semiconductor business, which continues to fall as a percentage of the company's total operation. Despite strong market share gains attributable to its higher capex and R&D spending, Samsung's IC unit is reeling from pricing pressures that have severely stunted growth at rival manufacturers.

The company's chip business fell as a percentage of total Samsung Electronics sales in 2007 to 20.3 percent, a sharp drop from 24.4 percent in 2006. That decline is attributable primarily to pricing declines that have in recent times occurred at a double-digit-per-quarter clip, according to analysts.

Samsung's exposure to the highly cyclical semiconductor market is a major drawback to the company's otherwise strong credit profile, according to Standard & Poor's Kwon, who asserted the company must necessarily maintain a high cash outlay "for factory expansions and R&D" to stay ahead of the competition.

Samsung's healthy cash flow and strong competitive position "are offset by its exposure to cyclical and capital-intensive businesses," Kwon said. However, he expects the company to "main- tain a net cash position over the next three to five years, backed by its strong cost competitiveness, technological leadership in its core semiconductor business, as well as in its strengthened brand image and marketing capabilities."

That endorsement would please Samsung investor relations' Chu but the company, Chu said, is well-aware it faces numerous "obstacles" from a weak global economy and "our cost structure," which he said the company aims to reduce further.

Part of Samsung's plan for lowering margins in NAND flash and other areas involves the company stepping outside its historical operational strategy by making a bid for SanDisk, from which the company licenses several technologies. The now hostile acquisition offer is highly unusual for Samsung, although Samsung executives said they were making the move to improve their competitive position and lower operational costs.

That's a scary prospect for rivals, some of whom already envy Samsung's current cost structure, especially in DRAM and NAND flash. With margins turning negative at Micron, an even stronger Samsung could spell trouble for the Boise, Idaho-based company.

First, though, Samsung must ride out the gathering economic storm.

By: DocMemory
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