Samsung Invests Billions in Future Chips

Already at the top of the DRAM market and others, the chip maker is expanding production, following the old adage that you have to spend money to make money.

Samsung Electronics, already a chip giant, appears to be gearing up to take an even bigger piece of the semiconductor market.

Best known for being the top maker of dynamic RAM for personal computers and for supplying flash memory for Apple Computer Inc.s iPod music players, Samsung Electronics Co. Ltd. plans to spend $33 billion to expand its production capacity over the next seven years.

The move, analysts say, will provide it a greater reach in the memory field, along with boosting its processor production capabilities.

Plunking down billions to add manufacturing capacity is a normal state of affairs for large chip makers. Right now, it costs about $3 billion to build a new chip manufacturing plant from the ground up—most of that goes to buying actual manufacturing equipment—and numerous chip makers have been adding capacity of late in an effort to keep up with demand.

Thus, in some respects, Samsungs announcement shows it is simply putting plans in place for the future. It competes with other giants, including DRAM makers such as Micron Technologies Inc. and Toshiba Corp. in flash ROM.

"By successfully executing on leading-edge R&D and manufacturing technologies, we are driving the adoption of innovative semiconductor technology solutions in the marketplace," Chang-Gyu Hwang, the CEO of Samsung Electronics Semiconductor Business, said in a statement.

However, one analyst detected something else in the move. Although Samsung is likely to bump DRAM and processor manufacturing, it could be spending its way into even greater prominence in NAND flash memory chips, which are used to store data in devices such as music players and USB storage drives, and which could soon impact personal computers.

Samsung has already announced plans to offer flash memory-based drives for notebooks, for example.

Samsung is "throwing a lot of capacity at flash," said Risto Puhakka, president of VLSI Research Inc., a Santa Clara, Calif., firm that tracks the world chip manufacturing industry. It "clearly sees the flash demand growing very rapidly and is responding" with the plans to increase its production capacity, Puhakka said.

Indeed, the company could use additional flash memory capacity, as Apple is believed to be soaking up a major portion of its NAND flash production. iSuppli, of El Segundo, Calif., has estimated that Apple will buy as much as 40 percent of Samsungs flash output in the second half of 2005, leaving other customers in the lurch.

/zimages/1/28571.gifClick here to read about Samsungs flash-based hard drive.

iSuppli, in a recent teardown analysis of the iPod Nano, found Apple had chosen Samsung to supply the players memory. Earlier this year, an iPod Shuffle teardown by International Data Corp. revealed that player also uses Samsung memory.

But by simultaneously boosting its ability to manufacture logic chips—semiconductors break down into two basic types of chips, memory for storing data and logic chips that process data—Samsung could also be bolstering its ability to act as a contract manufacturer or chip foundry as well, analysts said.

Thus, overall, the $33 billion plan will help Samsung keep up with both the IBMs and the TSMCs of the world.

The planned expenditures, which average out to nearly $5 billion per year, will make Samsung one of the top three chip capital spenders, annually, alongside Intel Corp. and Taiwan Semiconductor Manufacturing Co., the chip worlds largest contract manufacturer, which also average about $5 billion per year, Puhakka said.

Samsung has "basically put the plans in place to be a big player," Puhakka said. "In this business you cant add the capacity on two months notice, so you basically want to put the plans in place so that you know well in advance how youre going to [add capacity] and when youre going to do it."

For its part, Intel projected earlier this year that it would put $5.2 billion into capital expenditures.

However, the chip maker, which has been busy bringing its 65-nanometer chip production technology online and expanding its production capacity for chip sets at existing factories, is likely to end up spending closer to $5.8 billion this year, VLSI Research said.

Samsungs expansion, which will take place at Giheung-Hwaseong, its main semiconductor production site in South Korea, will add a research and development facility, along with eight production lines, which could be made to produce memory or logic chips.

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When the project is complete, Samsung expects Giheung-Hwaseong to be the largest semiconductor production facility in the world, the company said in a statement.

Among the first to open will be the research and development facility, scheduled to begin operations in May 2006, and a production line. That line, which is already under construction, is slated to begin production in the first half of 2006.

Samsung did not spell out its exact plans for each of the eight lines to be built by 2012. Time may ultimately decide exactly how the company uses them, as the company said it plans to review its plans periodically.

Thus, what it does with the capacity "really depends on the market conditions," Puhakka said. "Basically what [Samsung] is saying is it has the financing and everything else in place to spend $33 billion [to up capacity] in the next seven years."

Samsung did not immediately return a request to comment for this story.

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