Samsung to cut chip investment

http://www.koreatimes.co.kr/www/news/tech/2013/10/133_144910.html

By Kim Yoo-chul

Samsung Electronics, the world’s top supplier of memory chips, plans to cut its investment in components by as much as 30 percent next year.

The company doesn’t plan to build any more plants to make memory chips because the industry is undergoing rapid structural change.

Industry officials at Samsung's local primary parts suppliers say that aggressive investment does not guarantee high returns anymore due to industry consolidation as well as rising uncertainty surrounding technology and sluggish demand.

“Investment in chips will be cut by 30 percent next year, at least, because we believe Samsung doesn’t have plans to build new fabrication facilities. Total investment in components will remain under 10 trillion won throughout 2014,” said a senior executive at one of the company’s suppliers by telephone.

“It is unlikely that the industry will see cash-burning business projects in chips next year as complexity is increasing because the market is approaching scaling limits.”

Samsung planned to invest 13 trillion won this year. So far it has spent 4 trillion won to transition its Texas plant toward processors, 3 trillion won to build the first line of its NAND flash chip plant in Xian, China, and 2.3 trillion won to build its 17th processor assembly line in Hwaseong.

The remainder will be used for maintenance, technology migration and equipment, said industry sources.

“Samsung’s primary target for its semiconductor business is to churn out advanced flash memory chips including V-NANDs in a strategy to actively meet the industry’s demand for NAND-intensive digital devices such as smartphones, tablets and solid state drives. It may invest more in flash chips. However, the factory expansion, if it materializes, will cost less than 1 trillion won from next year’s tentative investment budget,” said an official from another partner of Samsung.

“Next year’s key issues are how to operate new factories and expanded lines, effectively.”

Strategy change

Samsung’s “golden pricing strategy” encouraged heavy investment in chips in an attempt to gain a larger market share, regardless of the market’s volatility.

“As a new order prevails, you don’t have to invest heavily in chips. Samsung is sourcing conventional DRAM chips from its strategic partners such as SK hynix and Micron Technologies. Rather than building new factories, Samsung can secure enough chips via cross-licensing deals with them,” said a fund manager at a U.S.-based investment bank in Seoul.

Its earlier investments in the 17th processor assembly line and the U.S. plant were aimed at supplying processors to major clients such as Apple.

“Samsung’s factory in Xian will be tasked to sell NAND chips to be used in corporate servers and to leading technology solution majors such as IBM and Apple,” said a Samsung source asking not to be identified.

The company’s in-house solid-state drives with flash chips are used in Apple’s MacBook Air, said the suppliers.

“Samsung will continue to improve semiconductor earnings as it gains more share in non-memory areas including foundries and processors. The company will enhance earnings from NAND as the market continues to grow rapidly, powered by smartphones and solid state drives. In addition, the company plans to improve DRAM margins and share as the DRAM industry moves towards a profitable oligopoly,” said Sanford C. Bernstein in a recent note to clients.