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Operating Profit Ratio of 60 Percent

Posted April. 10, 2005 23:11,   


“Operating profit ratio of 60 percent (amount of operating profit divided by revenue). The company earns 60 million won profit for every 100 million in product sales”

This is not a story for an online game or software company. This is the first quarter (January to March) financial estimate for the flash memory division of Samsung Electronics.

It is significantly exceptional for a company or business division to accomplish an operating profit of more than 50 percent all over the world. The average profit ratio of Korean manufacturers is five to 10 percent, and if the profit ratio exceeds 10 percent, the company is evaluated as a highly profitable company.

Samsung Electronics flash memory division’s significantly outstanding performance is due to the fact that the company is substantially monopolizing the market based on the excellent technology leadership.

Skyrocketing Demand for Flash Memory –

The semiconductor business started towards a downturn after its peak in the second quarter of last year because the personal computer (PC) business, which is the biggest consumer of semiconductors, has been unexpectedly sluggish. As a result, the DRAM spot price of 256 Mb DDR 400 MHz plummeted by 34.5 percent to $2.60 this March from $3.97 last December.

However, the demand for flash memory is rapidly increasing, and the market is showing a supply shortage. The price of 2GB (gigabyte) Nand flash memory slightly increased from $17.90 in early December last year to $18.10 early this April, resulting in reversing the common notion that semiconductor prices decrease as time passes. This is because the storage space of MP3 players, digital cameras and camcorders, in which flash memory is used, is rapidly increasing.

For instance, the main flash memory product for MP3 players was 256 MBs (megabytes) up to last year, but is gradually changing to 512MB, 1GB, and 2GB.

The Secret of the 60 Percent Operating Profit Ratio –

Daewoo Securities researcher Jeong Chang-won said, “Revenues and operating profits of Samsung Electronics semiconductors are expected to be 4.6 trillion won and 1.52 trillion won (a profit ratio of 33 percent) respectively.”

By segment, the profit ratio of DRAM semiconductors decreased from 40 percent in the fourth quarter of last year to 30 percent, while that of flash memory is expected to increase from 40 percent to 60 percent.

Researcher Jeong explained, “Generally speaking, manufacturing costs of flash memory decrease by 50 percent per year as technology is developed, However, the market price decrease amount was significantly small. The huge operating profit was possible because the Nand flash memory market share of Samsung Electronics is as high as 65 percent.

One month ago, Hwang Chang-gyu, the president of the Samsung Electronics semiconductor division, showed strong self-confidence by saying, “the PC market is going out and the mobile market is emerging.” His assertion was due to Samsung’s strong monopolistic status in the market of large storage flash memory, which has become a necessity in mobile equipment including cell phones.

Do-Young Kim nirvana1@donga.com