Samsung searching for ways to stay ahead

Rivals’ alliance, reported breakthrough keeping Korean tech giant on its toes

By Kim Yoo-chul

Samsung Electronics has overcome a lot of challenges to reach its leading position in chip making.

It is now facing an odd challenge ― client risk.

Simply put, it means that Samsung has done so good a job as to make competitors feel uneasy.

Another challenge of a lesser degree is Elpida Memory, Samsung’s Japanese rival, which claims that it has reached a milestone in chip-making technology of producing the first computer memory chip using ultra-fine technology.

``If anything, these challenges are being taken as a chance for us to keep searching for ways to stay ahead,’’ said a high-ranking Samsung executive.

Samsung controls over 40 percent of the global demand for memory chips used in almost all electronic devices from TVs and monitors to smartphones.

The semiconductor business is significant for Samsung since it is considered a buffer when its other businesses struggle.

More than 60 percent of revenue from Samsung comes from component-related business including LCDs.

Such ominous signs come after iPhone maker Apple opened talks with Intel over chip supply amid legal wrangling with Samsung Electronics.

Intel has just unveiled a three-dimensional chip with a vertical fin-like structure, allowing more computing power but using less battery power.

That means faster smartphones, lighter laptops and a new generation of supercomputers. Intel’s overnight milestone has been regarded as an instrumental development in jumping into the mobile application processor (AP) market amid explosive demand for tablets and smartphones.

``Intel may take this as an opportunity,’’ said another Samsung executive.

Samsung has been supplying key chips to Apple’s iPhones and iPads. Apple designs the chips, while Samsung is the sole manufacturer.

“Samsung has the technology for commoditizing memory chips, but Intel possesses the manufacturing technology in non-memory chips,’’ said a senior analyst at a top-tier Europe-based investment bank in Seoul.

A Samsung spokesman said Apple may be trying to lower its dependence on Samsung.

Apple is expected to increase the amount of its chip purchases from Samsung to 8 trillion won this year from the 5 trillion won over the past few years, according to Samsung and industry officials.

``Intel’s new technology has significant meaning. But we don’t see any problems to similarly develop three-dimensional chips as we acquired patents in 2002,’’ said the spokesman.

Steve Park, Apple’s representative, declined to comment, while Apple sources said that its shift to Intel may hit Samsung’s semiconductor business.

Alarmed by the signals, Samsung plans to reap 10 trillion won from its non-memory business alone in 2011 from 7 trillion won it achieved last year.

Samsung said it will invest more than 4 trillion won to ship more of its non-memory products such as mobile APs.

It is planning to operate a new chip line exclusively for such value-added chips from the company’s local plant in Giheung, located on the outskirts of Seoul, while ``line 9’’ is set to go on-line from the latter half of this year, according to Samsung officials.

Samsung is also building a $3.6 billion chip plant in Austin, Texas to meet soaring demand for such high-performance chips.

Memory chips just read and store data whereas APs are used to control the entire computing system, which makes the chips less volatile and cyclical.

Golden pricing strategy

Elpida Memory claims that it has developed the industry’s first DRAM using a 25-nanometer technology with the actual shipping date set for July.

In chips, thinner is better as those with thinner technology can cut costs in manufacturing by increasing the density.

Samsung is applying 30- and 40-nanometer technology to its main products. It doesn’t however appear to be concerned, with even experts doubting its rival's credibility.

``Elpida’s release has raised some concerns. But I can say let’s wait two more months,’’ said Kwon Oh-hyun, chief of Samsung’s semiconductor division in a meeting with reporters.

``Elpida’s memory chips using a 40-nanometer processing technology are nowhere close to commercialization. The Japanese company is still relying on 50-nanometer chips,’’ said Kwon.

``There are time gaps between sampling and actual shipments. Samsung has also finished the development of 20-nano computer chips in laboratory conditions.’’

Another Samsung spokesman said since 2007 it usually releases official announcements in chip developments when everything is set for mass-production and added it will monitor whether Elpida meets development and mass-production schedules.

But Elpida’s announcement doesn’t necessarily mean Samsung will lose its technological edge in chip-making.

``Ironically, the Elpida news actually means that Samsung can push its `golden pricing strategy’ in chips as it has been making a smoother transition towards thinner technology,’’ said Park Young-joo, an analyst at Woori Investment & Securities.

Samsung is maintaining greater flexibility in shipments according to market situations as most tech majors such as Dell, Hewlett-Packard (HP), Apple and leading Taiwanese firms are buying Samsung chips at competitive prices.

The golden pricing strategy means that Samsung’s chip business will secure its bottom line in the sector thanks to such a big market share.

``The industry may hope to see `another Qimonda’ but that will only materialize once chip prices are sustained at levels that Samsung wants,’’ added Park.

Qimoda had previously filed for bankruptcy and closed its factory amid an industry slump years ago as its less-competitive technology failed to create revenue.

Elpida’s development comes after it reported losses during the first quarter of this year, though Samsung and Hynix reported profits by pushing their 40-nanometer chips.

``My concerns are not whether Elpida is fully capable of handling the ultra-fine processing technology because it needs to focus more on 40-nanometer chips before leapfrogging to even thinner ones,’’ said the Samsung executive, adding the Japanese maker could be burdened financially if it fails to increase the production yields of chips with the latest technology.

``And that would be good news for Samsung and Hynix. It seems risky for the Japanese chipmaker to leapfrog its chip technology,’’ said the executive asking not to be named because he isn’t authorized to speak to the media in an official capacity.

But the executive ruled out the possibility that the chip industry could see another ``big bang’’ soon because Elpida is flexing its muscle to expand strategic alliances with money-losing Taiwanese chipmakers to better compete with the Koreans.

Samsung officials and local analysts said the Koreans could easily increase their investments in chips to further widen the gaps with rivals and to continue the current lead in the industry.

Samsung is set to invest $9.2 billion this year, a reduction of 16 percent from last year’s $11 billion. Hynix said this year’s investment for chips would be around 3.4 trillion won, little change from last year’s 3.3 trillion won.

``It would be impossible to announce chip breakthroughs without approval either from Intel and Microsoft. I don’t think Elpida is bluffing. But there is some way to go to get anywhere near Samsung and Hynix,’’ said Chung Deok-gyun, a professor and chip expert at Seoul National University.