Samsung Electronics, Hynix to invest $12 billion

Firms to maintain competitive price advantage over rivals

By Kim Yoo-chul

Korean chipmakers are investing more to maintain their pricing initiatives to keep Japanese and Taiwanese firms at bay.

This year’s combined investment by Samsung Electronics and Hynix Semiconductor is projected to reach 13.7 trillion won ($12 billion) ― 10.3 trillion won for Samsung and 3.4 trillion for Hynix.

Samsung plans to invest 5.8 trillion won in advancing memory chips including DRAMs and NANDs, while the rest will be going towards less-volatile system memories.

``Samsung has cut its spending on memory chips by 35 percent year-on-year but its 5.8 trillion won in planned investment is aggressive, considering its heavy spending on new lines last year,’’ said an Samsung executive, asking not to be identified.

Park Hyun of Hynix said more cash will be used to speed up its efforts to switch to more profitable and advanced thinner chip-making technologies.

Hynix’s targeted investment is in contrast to No. 3 DRAM maker Elpida of Japan, which just released a tepid investment plan, which sees a year-to-year reduction of 65 percent.

Elpida representatives in Korea were unavailable for comment.

Taiwanese companies, forming a chip axis with Korea and Japan are also reducing their investments. Inotera and Nanya decided to cut spending by 69 percent and 50 percent respectively, according to media reports.

``Cash is the determining factor,’’ said the Samsung executive.

For the fourth quarter of last year, Samsung’s chip division posted 1.8 trillion won in operating profit, while Hynix recorded 418 billion won, the companies said in a regulatory filing to the Korea Exchange (KRX).

Elpida and Nanya were in the red during the last three months of 2010, according to reports.

``Korean chipmakers’ advantage in pricing competiveness will widen,’’ said the executive.

A Samsung spokesman Song Chul-kyu said his firm will continue investing more in memory capabilities.

The popularity of devices such as smartphones and tablet computers is helping Korean makers.

Samsung provides its DRAMs and NAND flashes to Sony and Apple, while Hynix sells its chips to LG Electronics. Although recently Hynix is becoming friendlier with Apple, market analysts say.

DRAMeXchange, a market research firm, said it’s good for the industry in general and for Korean chipmakers in particular.

The research firm expects smartphone penetration to surpass 30 percent this year along with an increased appetite for tablets.

In chip-making technology, thinner means more profit. A 40-nanometer chip cuts production costs by 40 percent and enhances profitability compared to 50-nanometer level processing technology.

Samsung and Hynix are the only firms that can fully manage the finer 40-nanometer class technology. Foreign firms are still at the level of 50 nanometers.

DRAM chips are widely used in traditional PCs, while NAND flash memories go into high-end digital gadgets.

Samsung controls over 40 percent of the global demand in both DRAMs and NANDs, while Hynix accounts for about 20 percent of global DRAM demand, data from another market research firm iSuppli said.

Samsung shifts to non-memories

Samsung is moving to system memories, which are non-volatile and more profitable in an effort to hedge against its heavy dependence on the volatile and cyclical memory chip business that is subjected to more sensitive ups and downs.

DRAMs and NANDs can read and write data, while system memory chips are used to control an entire computing system.

``Samsung is to lay solid ground for non-memories,’’ said another Samsung executive.

Meanwhile, Samsung is building a non-memory only chip line in the U.S. in Austin, Texas with the goal of going operational in the second half.

Samsung is receiving orders from companies such as Texas Instruments (TI) to produce chips with the original design from clients in the so-called ``foundry business.’’

``That means a gradual shift to the non-memory chip business for Samsung. It wants to shy away from its dependence on memory chips,’’ added the executive.

Song of Samsung said it’s true that its non-memory chips were getting more attention and bigger budgets, though the spokesman declined to elaborate further.

It’s been difficult for South Korean chipmakers to actively jump into the non-memory sector because of technological limits as non-memories need a very fine process, while memory chips just follow standard formats.

Samsung, which sees only a few hundred million dollars of sales in the non-memory business, is initially injecting more into foundries.

Samsung executives say it has decided to expand its foundry production as a ``future growth engine with the long-term goal of becoming as big as the world’s number one TSMC.’’

It entered the foundry business in 2006 with sales of about $75 million. In 2007, Samsung marked sales of $385 million, according to IC Insights, a research firm, although this was somewhat behind other bigger players such as TI and IBM.