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Concerns rise over Samsung SDS' growing intra-group transactions

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Samsung SDS CEO Hwang Sung-woo / Courtesy of Samsung SDS
Samsung SDS CEO Hwang Sung-woo / Courtesy of Samsung SDS

Efforts to diversify businesses required to lower reliance on group affiliates

By Anna J. Park

Samsung SDS relied on intra-group transactions for more than 80 percent of last year's earnings, raising concerns over the firm's future growth prospects, according to industry officials Sunday.

Data released by the Fair Trade Commission show the IT service unit of the Samsung conglomerate earned 4.2 trillion won ($3.2 billion) last year from transactions with other group affiliates, accounting for 81.5 percent of the company's entire annual revenue and up 3.3 percentage points compared to 2021.

The IT service affiliate's dependence on Samsung Electronics for profits is particularly evident. Over 2.5 trillion won or 39.8 percent of Samsung SDS' entire annual revenue last year came from providing IT services to the world's largest memory chipmaker. Among Samsung SDS' annual earnings from intra-group transactions, Samsung Electronics takes up nearly half ― 48.8 percent ― of the amount.

The heavy dependence on Samsung Electronics for earnings makes Samsung SDS increasingly vulnerable to earnings fluctuations. This is even more troubling because Samsung Electronics is projected to incur massive losses in the following quarters due to a decline in global demand for memory chips.

Samsung SDS' headquarters in southern Seoul / Courtesy of Samsung SDS
Samsung SDS' headquarters in southern Seoul / Courtesy of Samsung SDS
In fact, Samsung Electronics suffered a loss in the first quarter this year. It was the first time in 14 years that the global chipmaker suffered a quarterly loss. Samsung Electronics is expected to suffer another huge quarterly loss in the second quarter of this year. HI Investment projects the quarterly loss at 1.28 trillion won, while SK Securities forecasts a 600 billion won loss, while eBest Investment forecasts a loss of 400 billion won.

While the projected numbers vary, market watchers agree that Samsung Electronics is highly likely to reduce spending on improving system integration (SI), the key business area of Samsung SDS.

"IT solution providers in the SI sector tend to show a heavier reliance on intra-group transactions. Yet, it is necessary to lower the proportion of intra-group transactions by strengthening business diversification," a market insider said.

Samsung SDS managed to succeed in lowering the proportion of intra-group transactions during the late 2010s, after the ratio peaked at 87 percent of its annual revenue in 2017. However, the accelerated pace of digitalization during the past couple of years has raised corporate demand for SI among Samsung subsidiaries, which in turn increased the proportions of intra-group transactions in Samsung SDS' earnings.

Park Ji-won


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