Samsung fires the first salvo, South Korea's chaebols are "collectively breaking down"

Source: Wall Street CN

Samsung's chip workers have been waiting for this day for a long time.

On May 27, 48,000 Samsung employees voted to approve a compensation agreement—they will receive 10.5% of the semiconductor division's pre-tax operating profit as a special bonus. For some memory chip workers, including retroactive bonuses, the payout could reach up to $416,000. South Korean President Lee Jae-myung made the nature of this matter clear in a cabinet meeting last week: "Even investors only receive dividends from after-tax net profit. How can workers take the money before taxes?"

Even the president felt the workers had "cut in line." But Samsung had no choice but to accept this outcome.

SK Hynix First Cracked the Door Open

The story starts with SK Hynix.

Over the past two years, HBM (High Bandwidth Memory) has become the most scarce component in AI infrastructure. No matter how powerful Nvidia's GPUs are, they cannot function without HBM. SK Hynix has captured the largest share of this market, with Samsung playing catch-up. SK Hynix's profits have subsequently skyrocketed—its full-year operating profit for 2026 is estimated at nearly 250 trillion Korean won, equivalent to approximately $170 billion. Under its policy, 10% of operating profit is directly distributed to employees. This year, the average bonus per employee is expected to reach 600 million Korean won, roughly $430,000, equivalent to 2964% of their base salary.

Samsung's chip workers did the math and started jumping ship.

According to Samsung's union, employees are "leaving in droves" for SK Hynix. It's not just about the money; the gap in pay sends a clear signal: SK Hynix won this round of the AI memory race and can offer such compensation. Samsung is lagging in HBM and cannot. This talent drain, in turn, hampers Samsung's technological catch-up speed, creating a vicious cycle.

By this year, the situation had become untenable. 48,000 workers threatened an 18-day strike. Samsung's DS division reported a Q1 2026 operating profit of 53.7 trillion Korean won, exceeding its total for the entire year of 2025. It could afford the bonuses, but it could not afford the 18-day shutdown.

And so the agreement was signed. Samsung became the second major South Korean company to formally link a fixed percentage of operating profit to employee bonuses in writing.

Pre-Tax Line-Cutting: An Unprecedented Arrangement in Global Corporate Governance

What truly unsettled the business world about this agreement was not the amount, but those two words: pre-tax.

The usual logic is: a company earns money, pays taxes first, then from the remaining net profit, part is retained and part is distributed to shareholders. Employee bonuses are treated as costs, deducted from revenue, separate from profit distribution. Now, Samsung workers are getting a fixed percentage directly carved out from operating profit (pre-tax). Their distribution priority ranks after the tax authorities but before the shareholders.

Kim Ki-chang, a law professor at a South Korean university, said this violates the "long-standing practice of global corporate governance." President Lee Jae-myung put it more bluntly: investors' dividends come from after-tax net profit, so why should workers get paid before shareholders?

SK Hynix actually did the same thing earlier, but it didn't cause such a stir. Samsung's scale is different—Samsung alone accounted for 22% of South Korea's GDP in 2010. What Samsung agrees to effectively becomes the industry standard in South Korea.

The Federation of Korean Industries issued a statement with unusually strong wording: "Samsung's special circumstances should not be generalized by labor groups and spread across the entire industry." This statement itself speaks volumes: they know they can't stop it, so they can only say "don't follow suit."

Three Variables Align Simultaneously: The Chaebol Can't Stop It This Time

The South Korean chaebol system has suppressed labor for decades using three things: opaque profits (workers don't know how much the company makes), weak unions (unionization rate was only 13% in 2024), and limited legal protection (high strike costs, companies can sue for damages).

These three things all showed cracks this year.

The AI chip boom has made the profits of Samsung and SK Hynix completely transparent—every quarter, earnings reports reveal to the world exactly how much these two companies are earning. With the numbers in hand, workers have the leverage to make demands. When SK Hynix's single-quarter profit exceeds some of Samsung's annual totals, workers can say "I want 10%," and management no longer has the "the company has no money" card to play.

The "Yellow Envelope Law" took effect in March, changing the balance of power. This law expanded the definition of "employer": anyone with "substantial control" over workers' labor conditions, even without a direct employment relationship, can be required to negotiate. Within two days of the law's enactment, 100,000 subcontractor union members submitted collective bargaining requests to their parent companies. It also legalized strikes targeting mass layoffs and plant closures. The chaebol's best weapon to suppress unions—"if you strike, I'll close the plant"—has been legally neutralized.

SK Hynix was the third piece of the puzzle. It did the same thing before Samsung, yet instead of being crippled, it emerged with higher profits, more talent, and better stock performance. This shattered the chaebol's most important psychological barrier: "No one has done this before." Now someone has, and they've done it well, and other unions are watching.

The simultaneous alignment of these three variables is no coincidence; it's structural.

Samsung's 10.5% Becomes Everyone Else's Starting Point

The ink on the agreement was barely dry when unions across the country began treating it as a floor, not a ceiling.

Unions from five companies under Kakao jointly demanded 13-15% of operating profit, significantly higher than Samsung, threatening a collective strike otherwise; a labor-management committee is currently mediating. LG Uplus and HD Hyundai Heavy Industries were even more direct, demanding 30%, nearly three times the Samsung agreement. Employees at Samsung's own biopharmaceutical division have already been on strike for five full days, demanding 20%. Management has not budged an inch, while employees refuse overtime and holiday shifts, settling in for a protracted battle.

None of these unions following suit are from chip companies, nor do they have the profit margins of Samsung's DS division. But their logic is: if Samsung gave it, why can't we get it?

The chaebol's psychological defense crumbled the moment Samsung signed.

An even more critical change is happening on the legal front. The Yellow Envelope Law, effective March of this year, has largely closed off the channels for companies to sue striking unions for damages. In the past, the chaebol's best tactic was "if you strike, I'll sue you and bankrupt you"—some unions have been ordered to pay billions of Korean won in damages. That card no longer works. The cost of management's continued强硬 stance has shifted from "the union pays the price" to "both sides will bear the cost," fundamentally changing the balance of leverage.

Within two days of the law's enactment, 100,000 subcontractor union members nationwide submitted collective bargaining requests to their parent companies. Workers have been waiting for this door to open for a long time; once it did, it couldn't be held back.

Of course, this isn't a story of the chaebol collapsing at the first touch. The opposing side has substantive arguments: Samsung and SK Hynix's concessions are built on the exceptional backdrop of the AI profit boom. The profit foundations of Kakao, LG Uplus, and Hyundai Heavy Industries aren't as deep; the feasibility of their 30% demands at the negotiating table is questionable. Samsung Biologics management held firm even after five days of strikes, proving that not all chaebol will follow Samsung's path.

Even if non-chip companies ultimately settle at 10% or 15%, rather than 30%, it would be an outcome unprecedented in the decades-long history of the South Korean chaebol system. Unions demanding 30% and getting 15% is a world away from getting nothing at all.

The outcome of the Kakao negotiations will serve as the first litmus test for how far this story can go. If it concludes with any form of profit-sharing agreement, the chaebol's "collective breach" will be established. If negotiations break down and the strike is suppressed, Samsung will remain an isolated case, and this fire won't spread—for now.

Samsung's Stock Rose, But the Market Missed the Most Important Thing

On the day the agreement was finalized, Samsung Electronics' stock price rose 8.5%, hitting an all-time high.

The market priced in the "removal of strike risk"—the threat of an 18-day production halt vanished, production continuity was restored. Coupled with optimistic AI chip demand fueled by Nvidia's strong earnings report, Samsung had reason to rise.

But the long-term cost pressure of that 10.5% has not yet been fully priced in.

With Samsung's DS division reporting a Q1 2026 operating profit of 53.7 trillion Korean won, if this pace continues for the full year, the bonus pool would approach 20 trillion Korean won (approximately $14 billion). Part of this is paid out in treasury shares, easing immediate cash pressure, but the dilutive effect of treasury shares is real, and the long-term erosion of earnings per share and return on equity is unavoidable.

The watershed moment will be the second-half profit guidance. If Samsung DS maintains high H2 profits, the market will gradually absorb the cost pressure and re-price based on progress in the HBM catch-up race. If profit growth slows alongside the bonus cost, medium-term pressure will become more visibly reflected in valuations.

SK Hynix faces the same cost equation, but its HBM technological advantage provides stronger pricing power, allowing higher costs to be covered by even greater profits—for now, it remains the more resilient player in South Korea's chip sector.

Three things to watch next: the outcome of the Kakao negotiations, which is the first verification of whether the domino effect will hold; Samsung DS's second-half profit guidance, which determines the actual weight of the 10.5% cost; and the direction of the Samsung Biologics strike, which signals the speed of internal erosion within the chaebol system.

Samsung fired the first shot, and the bullet is in the air. Whether the South Korean chaebol can hold onto their respective purses will be clear in the coming weeks.