Samsung's Flash of Inspiration

With flash memory finding its way into more devices, the company's bets are paying off. But a possible Micron/Intel venture could be a challenge

In the late 1990s, much of the semiconductor industry had all but written off the memory business. Long trapped by boom-and-bust cycles, memory was suffering from a worldwide capacity glut that sent prices and margins into a tailspin. By 1999, big name players such as Texas Instruments, NEC (NIPNY), and Hitachi (HIT) had pulled the plug on their memory operations.

Yet Korea's Samsung Electronics bet big on chips, investing billions annually in new facilities and technologies. Good bet. Now, Samsung is firmly rooted as the world's No. 2 player in semiconductors behind only Intel (INTC), having raced past TI, STMicroelectronics (STM), and Toshiba (TOSBF).

Not all the news has been good. Samsung, the world's largest maker of computer memory chips known as dynamic random access memory, this week ended a long-running legal dispute stemming from a DRAM price-fixing case. On Mar. 22, three Samsung executives agreed to plead guilty and serve jail time in the U.S. for their roles in fixing prices for the chip. This brings to an end a U.S. probe into industry price-fixing practices that affected other chipmakers such as South Korea's Hynix, Elpida of Japan, and Infineon Technologies, based in Germany.


  The negative publicity from the case hasn't really slowed Samsung down, however. Already controlling about one-third of the global DRAM market, Samsung has been making a big push in so-called NAND flash memory -- chips that store data even when the power is switched off. Flash is a key component in new digital devices such as MP3 players, cell phones, and cameras.

With such devices flying off of store shelves worldwide, global sales of NAND chips are expected to hit $14 billion this year, six times their 2002 level, according to researcher IDC. "The explosive growth will accelerate in years to come" as more and more devices start using flash, says IDC analyst Kim Soo Kyoum.

Samsung is in a position to capture a lot of that growth. Last year, Samsung was the No.1 player in NAND, with about half the market. Apple Computer (AAPL), for instance, put flash memory -- instead of a hard drive-- in its iPod nano after Samsung guaranteed it could deliver enough of the chips (Apple has since started buying NAND chips from Toshiba, Hynix, and Micron (MU) as well). Nokia (NOK), Motorola (MOT), Sony-Ericsson, Panasonic, and NEC all make cell phones using special Samsung chips that combine vast amounts of storage with super-fast access to essential data.


  Samsung is offering a new, fingernail-sized flash chip with 8 GB of memory -- enough to hold thousands of songs or several full-length movies, not to mention untold numbers of photos and e-mails. "Intel was the pacesetter in the PC world, but in the mobile and digital consumer era, we'll lead the way," says Hwang Chang Gyu, president of Samsung's semiconductor unit.

That's not to say that Samsung is abandoning the PC market. Instead, the company has been busy developing new PC technologies that require lots of what they can provide. One big initiative is using flash as a replacement for hard drives in mobile PCs. On Mar. 21 in Taipei, Samsung introduced a 32-GB flash drive that cuts in half the time it takes to boot up a computer.

The drive also uses far less power than a hard disk, since it has no moving parts -- an advantage that also makes flash drives less noisy and fragile than hard disks. Tech consultancy Web-Feet Research is predicting sales of 582,000 of the drives this year as Samsung, Sony, and a handful of other computer makers roll out notebook PCs with them.


  Some are more skeptical about the prospects for such drives. Today, flash drives cost at least six times what hard disks do for similar storage capacity, which means they won't reach mass-market PCs for several years, at least. "I don't see [flash drives] displacing hard disks anytime soon," says Joe Unsworth, an analyst at researcher Gartner Group. "In the next three years, [such drives] will be relegated to ultra high-end or ultra low-end PCs" such as models with less than 10 GB of storage.

Samsung counters that there will be plenty of demand as flash prices continue to tumble by as much as 50% annually. Analysts figure a 32-GB flash drive will fall to about $200 by 2008 -- low enough for PC vendors to sell 2 million machines using only flash for data storage. By 2010, Web-Feet expects the global flash drive market to hit $4.5 billion, or about 2.7 million computers.

Other, more modest amounts of flash may go into larger numbers of PCs much sooner. For the past two years, Samsung has worked with Microsoft (MSFT) to develop drives that use both flash and a disk, a new technology that will be compatible with the software maker's latest operating system, Windows Vista, due out in January (see BW Online, 3/23/06, "Microsoft's Slo-Mo Scramble"). Such drives don't have all the advantages of pure flash, but by storing key programs in flash, and less frequently used information on the disk, they will be far faster and use less power than today's drives.


  Of course, Samsung isn't the only company to offer flash. Toshiba, the inventor of flash technology, has always been a significant player and is boosting its flash output. Hynix and Micron also have ambitious plans to ramp up NAND production.

Perhaps more important, Intel in November announced a $2.4 billion joint venture with Micron to make NAND chips. If Intel is serious about moving into the memory business and pours billions into research and cutting-edge production facilities, it could well challenge Samsung's leadership there. Already, the U.S. giant is working on a technology similar to Samsung's hybrid flash/hard disk drive. Though Intel has said it doesn't plan to focus on NAND, if it changes its mind, it would undoubtedly change the landscape of the business.

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