Practicing International Management Case

Samsung's Earnings and the Won

Samsung Electronics is a leading global technology company with one of the top $10$ brands in the world. The company manufactures and sells all

sorts of electronic products, including TVs$,$ smartphones, wearable devices, tablets, digital appliances, network systems, medical devices, and

semiconductors. Samsung is a leader in products designed for the ever$-$expanding Internet of Things

Samsung's subsidiaries engage in many types of business activities, including research and development, logistics$,$ manufacturing, installations,

marketing, sales, and even management of other subsidiaries Samsung divides its subsidiaries into five geographic regions: the Americas,

Europe and the Commonwealth of Independent States, Middle East and Africa, China, and the rest of Asia.

Samsung Electronics began in $1969$ and today spans the globe with more than $270,000$ employees and $237$ subsidiaries. Each year, these

subsidiaries generate revenue of nearly $240$ trillion won $($South Korea's currency$),$ equivalent to around $$200$ billion. Samsung earned a larger$-$

than$-$normal amount of profit from its sale of semiconductors $($computer chips$)$ during the global pandemic when a global chip shortage drove

prices higher. Samsung merged its consumer products and mobile divisions in late $2021$ and early $2022$ to simplify its structure and to reflect its

goal of becoming the world's largest semiconductor supplier.

Samsung Electronics s also working on a digital currency pilot program with South Korea's central bank. The company is testing the digital

currency for efficiency and financial inclusion. The pilot program will explore the issuance and distribution of the digital currency, digital

currency transfers between countries, and digital currency transfers using mobile phones without internet availability.

The amount of business Samsung conducts outside South Korea subjects it to translation exposure due to exchange rate changes between South

Korea's won and foreign currencies, Translation exposure arises quarterly when Samsung translates each subsidiary's financial statements in

strong won creates a translation loss.

foreign currencies into those of the parent company stated in won. Converting foreign currencies into

One gets fewer units of a strong currency when translating other currencies into it$.$ On the other hand, converting foreign currencies into a weak

won creates a translation gain. One gets more units of a weak currency when translating other currencies into it$.$

In the first six months of $2021,$ Samsung Electronics reported a foreign exchange gain of $3\mathrm{.}47$ trillion won on total profits of $16$ trillion won. The

pain arose when Samsung translated its subsidiary earnings from relatively strong currencies into a weaker won. This followed a foreign

exchange loss of $5\mathrm{.}38$ trillion won for all of $2020$ due to a relatively strong won. And this result followed a foreign exchange gain of $3\mathrm{.}16$ trillion

won in $2019$ due to a relatively weak won

Any company translating foreign currencies into a home currency for inclusion in consolidated financial statements also experiences exchange

rate effects. Like Samsung, South Korean carmakers also were dealt foreign exchange losses in $2020.$ That year, Hyundai lost $971$ billion won and

Kia lost $143$ billion won due exclusively to exchange rates. And, again like Samsung, both companies experienced foreign exchange gains in $2019.$

Samsung Electronics is just one business group within the sprawling Samsung conglomerate, or chaebol. Another group, Samsung Heavy

Industries $($SHI$),$ is involved in shipbuilding and regularly conducts business in multiple currencies that is worth many millions of dollars. SHI

ensures that every shipbuilding contract it enters into stipulates the currency of payment. This allows SHI to forecast its future cash flows in each

currency and then hedge currencies accordingly. SHI then writes appropriate buy and sell forward contracts that reduce its foreign exchange

risk $8$

Thinking Globally

$10-8.$ Apart from a weak and strong won influencing Samsung's currency translations, how does each affect Samsung's exports from South

Korea?

$10-9.$ How might an official South Korean digital currency potentially benefit Samsung?

$10-10.$ Why do you think South Korea's government is testing its digital currency with Samsung and not another company?

$10-11$ How exactly does Samsung Heavy Industries buy and sell forward contracts to reduce its exchange rate risk?