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MoneyInside Samsung’s $116bn plan to overtake chip rivals

17:05  22 july  2019
17:05  22 july  2019 Source:   msn.com

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Samsung and Apple stand firmly at the stop of the smartphone heap, and players like HTC and LG continue ride their way up the market share rankings. But what of Sony? You know, the Japanese stalwart that occupies a significantly strong (if not dominant)

Inside Samsung’s $116bn plan to overtake chip rivals © Provided by Financial Times Limited K787P7 Samsung SID2001A CPU on hard disk drive control board

When Samsung told engineers in its flagship memory chip team that they were being moved to a division making processor chips, they often asked what they had done wrong, according to industry insiders.

Processors are the “brain” of any computer, making decisions and storing and retrieving data, and Samsung fabricates its own processors for all its devices, from smartphones to tablets to laptops.

But inside Samsung’s huge chip division, which had sales of Won86tn (£58.71bn) last year, the processor unit has played second fiddle to the team making memory chips, the circuits that store data, which accounted for 84 per cent of those sales.

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Samsung ' s plan to take on new memory chip rivals involves a massive spending surge, making it impossible for them to compete at the same level. As smaller rivals position themselves to take on Samsung , the company wants to effectively crush them with a massive surge in spending.

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Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals
Inside Samsung’s $116bn plan to overtake chip rivals

For three years, demand for memory chips has been sky-high, partly fed by the boom in smartphones, and partly by the need to build more and more data centres to house the vast amount of data being produced by individuals and businesses.

But in the first quarter of this year, Samsung saw its operating profit slump 60 per cent, as a global surfeit of memory chips drove prices down.

Now the South Korean company wants to boost its processor unit and has said it will invest Won133tn over the next decade to be the world’s biggest and most advanced producer of processor chips by 2030, according to one executive at the company’s Giheung campus, south of Seoul.

Inside Samsung’s $116bn plan to overtake chip rivals © Catalyst Images SAN FRANCISCO, CALIFORNIA - FEBRUARY 20: DJ Koh, President and CEO of IT & Mobile Communications Division of Samsung Electronics, announces the new Samsung Galaxy Fold smartphone during the Samsung Unpacked event on February 20, 2019 in San Francisco, California. Samsung announced a new foldable smart phone. (Photo by Justin Sullivan/Getty Images)

Whoever dominates the industry will be critical in underpinning new technologies like artificial intelligence, 5G and autonomous vehicles. They will also enjoy the spoils of the foundry market — making chips under contract for other companies — which is forecast by TrendForce to near £56bn in annual production this year, and by IC Insights to see revenue growth soon outpace that of other chip segments.

Samsung’s success or failure will also have ramifications across the tech sector: affecting China’s dreams of semiconductor self-sufficiency, potentially loosening Taiwan’s long held supremacy on making processor chips and expanding South Korea’s position in the electronics supply chain.

But the jury is out among sector analysts over what will happen next.

Inside Samsung’s $116bn plan to overtake chip rivals © Catalyst Images Drew Blackard, product marketing manager for Samsung, speaks on stage during the Samsung Unpacked product launch event in San Francisco, California on February 20, 2019. (Photo by Josh Edelson / AFP) (Photo credit should read JOSH EDELSON/AFP/Getty Images)

Samsung lags behind TSMC

Samsung only has 8 per cent of the foundry market for processor chips and will need to raise its share significantly to dethrone Taiwan Semiconductor Manufacturing Co, which has for years controlled more than half the market. Along the way, Samsung may also need to fend off Chinese challengers backed by Beijing.

While Samsung and TSMC are neck and neck when it comes to the size and power of their chips, TSMC has dominated the market since its founder Morris Chang hatched the independent foundry model in the late 1980s. The Hsinchu-based group is a darling among tech analysts, boasting strong relationships with chip designers as well as many of the world’s biggest device makers, including Apple and Huawei.

For Samsung, questions swirl around two key areas: money and trust.

To consistently break new ground making the world’s leading edge chips, TSMC is pouring about 8 per cent of its annual revenues back into research and development — $2.9bn in 2018.

Samsung’s announcement in April signalled its readiness to at least stay in the race of producing leading edge chips. Out of the $115.7bn, roughly $63.5bn will be allocated for R & D and the remainder for manufacturing facilities.

Nevertheless, analysts pointed out that Samsung’s annual capex spend for its chip-making unit over the next decade shakes out to about $5bn-$6bn, against TSMC’s stated range of $10bn-$12bn over the next few years.

“It would still say Samsung is going to be spending at a level to be the ‘number two’ foundry business,” said Randy Abrams, a Taipei-based analyst for Credit Suisse.

Inside Samsung’s $116bn plan to overtake chip rivals © Catalyst Images BROOKLYN, NY - AUGUST 09: Samsung Vice President of AI Strategy Ji Soo Yi speaks onstage during Samsung Unpacked New York City at Barclays Center on August 9, 2018 in Brooklyn City. (Photo by Mike Coppola/Getty Images for Samsung)

Conflict of interest

As Samsung sees it, the cash promised to 2030 ensures sustainable growth, and executives have not ruled out a further ramp-up in spending. TSMC won dominance by sharply jacking up spending on chip technology and production capacity just ahead of the smartphone boom, after winning Apple as core customer.

Samsung is now searching for a similar opportunity, hoping that new applications around 5G, AI, or the Internet of things may give it an opening. “If the timing was right, we could do something similar [to TSMC],” the executive said.

But Samsung is also a significant player in smartphones and devices, meaning some potential customers are wary that it has a conflict of interest.

Many of the companies Samsung wants to make chips for are direct competitors — and the concerns have lingered even after the company carved out its chipmaking unit from the rest of the division in 2017.

“Apple and Huawei both command a sizeable share of silicon, and growing over time, it is two big parts of the market that Samsung just doesn’t have much have access to,” Mr Abrams said.

Inside Samsung’s $116bn plan to overtake chip rivals © Catalyst Images SHENZHEN, CHINA - APRIL 12: A Huawei thermal engineer performs a heat test in the research and development area of the Bantian campus on April 12, 2019 in Shenzhen, China. Huawei is Chinas most valuable technology brand, and sells more telecommunications equipment than any other company in the world, with annual revenue topping $100 billion U.S. Headquartered in the southern city of Shenzhen, considered Chinas Silicon Valley, Huawei has more than 180,000 employees worldwide, with nearly half of them engaged in research and development. In 2018, the company overtook Apple Inc. as the second largest manufacturer of smartphones in the world behind Samsung Electronics, a milestone that has made Huawei a source of national pride in China. While commercially successful and a dominant player in 5G, or fifth-generation networking technology, Huawei has faced political headwinds and allegations that its equipment includes so-called backdoors that the U.S. government perceives as a national security. U.S. authorities are also seeking the extradition of Huaweis Chief Financial Officer, Meng Wanzhou, to stand trial in the U.S. on fraud charges. Meng is currently under house arrest in Canada, though Huawei maintains the U.S. case against her is purely political. Despite the U.S. campaign against the company, Huawei is determined to lead the global charge toward adopting 5G wireless networks. It has hired experts from foreign rivals, and invested heavily in R&D to patent key technologies to boost Chinese influence. (Photo by Kevin Frayer/Getty Images)

Will companies trust Samsung?

Samsung executives, underscoring attempts to address this, point to further efforts in the past two years including new legal compliance protections and firewalls to protect clients’ intellectual property.

Industry watchers question whether Samsung has allayed concerns. “Trust takes years to build. It is more than a piece of paper,” said Mark Li, an analyst with Bernstein in Hong Kong.

And for some of Samsung’s chief rivals, TSMC’s position as a purely independent chipmaker has appeal, analysts said.

Elizabeth Sun, TSMC’s director of corporate communications, said the company is “very well aware of the competition coming from Samsung”. But the Taiwan group is bullish, saying the Korean company would never be a foundry chipmaker like TSMC.

“We would never compete with our customers,” Ms Sun said. “What we do [is] we collaborate with customers . . . Samsung competes with everyone. That doesn’t mean they will never get any foundry customers . . . But will they rely on Samsung the way they rely on TSMC?”

Inside Samsung’s $116bn plan to overtake chip rivals © Catalyst Images SEOUL, SOUTH KOREA - AUGUST 25: A Samsung flag flies outside the Samsung office on August 25, 2017 in Seoul, South Korea. Prosecutors are seeking a 12-year jail sentence. Lee, de facto chief of South Korean conglomerate, faces five charges connecting the bribery scandal involving ousted former President Park Geun-hye and her confidant Choi Soon-sil. The verdict affects the business of Samsung, which has launched new Galaxy Note 8 smartphone to wipe out the misery of exploding Note 7 last year. (Photo by Chung Sung-Jun/Getty Images)

Samsung has reinvented itself many times

Further complicating the near-term outlook, Japan’s new export controls on materials used in semiconductor production could disrupt Samsung’s use of extreme ultraviolet machines, critical for making its most advanced chips.

But some analysts pointed to Samsung’s history of several cycles of successful reinvention.

In 1983 the South Korean company sampled its first dynamic random access memory chip; 10 years later it blew past Japan’s Toshiba as the world’s biggest memory chip producer, industry watcher Don Dingee writes in his history of the chip sector.

Inside Samsung’s $116bn plan to overtake chip rivals © Catalyst Images A man checks a new Samsung Galaxy S9 mobilephone during the Samsung Galaxy S9 Unpacked event on February 25, 2018 in Barcelona, on the eve of the inauguration of the Mobile World Congress (MWC). The Mobile World Congress, the world's biggest mobile fair, is held in Barcelona from February 26 to March 1. / AFP PHOTO / LLUIS GENE (Photo credit should read LLUIS GENE/AFP/Getty Images)

Then in 1994 the company shipped its first NAND flash parts, and by late 2002 it supplied more than half that market. Mobile phones took longer: from “reverse engineering a Toshiba car phone” in the early 1980s to shipping more smartphones than Apple in 2011.

“If you ask me whether Samsung can overtake TSMC in five years? My answer is simply ‘no’,” said Daniel Kim, a chip sector analyst at Macquarie in Seoul. “But over 20 to 30 years Samsung has transformed itself several times, very successfully. Microsoft did it once, Nokia did it once. But what other [technology] companies have done it three or four times?”

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