Samsung Inside?

Look out, Intel. The Korean giant wants to become the No. 1 chipmaker

Just a few years ago, Samsung Electronics had an inflexible rule regarding Sony and Intel (INTC ), the two competitors it saw as its chief role models and rivals: Never compare the companies' performance to Samsung's in public. The prohibition on mentioning Sony Corp. (SNE ) fell two years ago as Samsung grew into a brand with street cred from Paris to Peoria, and its market capitalization surged past that of the Japanese giant's. Execs bragged about their prowess in consumer electronics and highlighted Sony's shortcomings.

Now, the Intel Corp. ban is starting to fall as well. On Sept. 20, Hwang Chang Gyu, president of Samsung Electronics Co.'s semiconductor business, strode into the ballroom of Seoul's posh Shilla hotel and boasted about Samsung's 80% revenue growth in semiconductors in the first half of 2004 -- making a special point of noting that the figure was nearly four times Intel's growth. "Samsung's gap with Intel is bound to narrow," Hwang told the crowd of journalists, analysts, and industry bigwigs. His ultimate goal: Become the world's biggest chipmaker.

Can Samsung really shove Intel from its perch at the top of the industry -- a perch built on Intel's near-total dominance of the market for PC microprocessors? The consensus among analysts is not any time soon. But while Samsung's semiconductor revenues today are just half that of Intel's, the Korean company is making headway in some key areas: Flash memory, plus processors for mobile gadgets such as cell phones, digital cameras, and MP3 players. And if the balance of power shifts away from the PC and toward portable gizmos, then Intel's stranglehold on PC microprocessors will no longer be an automatic ticket to the summit.

From fourth place in 2001, the Korean company has already stormed past companies such as STMicroelectronics and Toshiba Corp. (TOSBF ) to become the No. 2 player in the global industry, thanks mainly to its surging business in memory chips. In the first half of this year, Samsung sold $7.4 billion worth of chips, giving it a market share of 7.3%. That's still well behind Intel's 14.7%, but comfortably ahead of No. 3 TI's 5.8%, according to researcher IC Insights Inc. In flash memory -- used to store data such as photos in cameras and songs on mobile music players -- Samsung overtook Intel last year, with 21% of the market, vs. Intel's 15%.

MOBILE OPPORTUNITIES

That advantage, Hwang argues, will only grow as the voracious appetite for higher-quality video and audio keeps boosting demand for memory. And Hwang believes mobile products will fuel the industry's future growth. "The new mobile revolution spells a fresh opportunity for us," says Andy Cho, Samsung's strategist for nonmemory chips, adding that demand for handhelds will also fuel the need for other chips.

Now, Samsung is looking to use its memory advantage to start taking share in markets that cut closer to Intel's core PC business: the logic chips that make digital devices hum. Although Samsung has no interest in PC microprocessors, the two will butt heads as Intel tries to boost its share of mobile markets. Samsung aims to gain more than 20% of the market for five key varieties of logic semiconductors, including image sensors in cameras, display driver chips that tell digital screens what to show, and processors that power all kinds of mobile gadgets. Those markets will add at least $3 billion to Samsung's sales by 2007, its execs say.

Samsung's experience in handsets will doubtless help it gain a foothold in these markets. As the world's No. 3 cell-phone maker, one of the top two makers of liquid-crystal displays, and a strong player in digital cameras and music players, Samsung knows the demands of such gadgets as well as anyone in the industry. Its own internal customers in Samsung's consumer-electronics divisions aren't shy about pointing out flaws. Because Samsung already makes logic chips for many of its own devices, its execs say it's relatively simple to start churning them out for other companies. Already, Samsung is the top maker of LCD driver chips. Last year, it sold $902 million worth, giving it 19% of the market. Its target now is to grab 27% of the market by 2007 for display driver chips, not only for LCDs but also for other new TVs such as plasma screens and projection displays. Among its customers: Sony, Nokia (NOK ), and Motorola (MOT ).

Good plan, some say, but Samsung's ambitions may be a bit grandiose. Sure, Samsung is the biggest memory chip maker, but it "has yet to prove itself in the nonmemory sphere and still has a long way to go," says Merrill Lynch & Co. (MER ) analyst Simon Woo. Other industry watchers say Samsung's goal of 20% of the market for the five logic chips within three years will be tough to meet given the time needed to design new chips, write the required software, and build devices around them. Furthermore, Intel isn't the only rival Samsung will face. "In handsets, you know that TI is going to defend its position to the hilt," says Jordan H. Selburn, an analyst at market researcher iSuppli Corp.

For its part, Intel is not commenting. But sources close to the company say it is taking Samsung very seriously. As Intel sees it, one big potential flaw is Samsung's role as competitor and supplier in mobile devices: "They end up competing with their customers and that's a disaster because you lose trust and they get paranoid about you," says one industry insider.

FLEETING EDGE?

Another possible hurdle: Despite Samsung's current strength in flash memory, that may not give it a permanent edge against Intel. Samsung is best at making so-called NAND flash chips, which are most suited for storing big music and photo files. Intel, by contrast, excels at NOR flash chips, which are more expensive to make but can be better integrated with logic chips. Next year the NAND market is expected to grow 38%, to $9.9 billion -- and Samsung says it will get two-thirds of that. Intel, meanwhile, expects to have a big share of the $7.6 billion NOR market, which iSuppli says will fall by about 6% next year. But some experts say NOR prices will decline enough to make it competitive with NAND, and that NOR will ultimately prevail. If that happens, it will take much of the wind out of Samsung's sails. Not to worry, Samsung says. It's confident it can keep making NAND cheaper, and it's continuing to expand the capacity of its chips.

Then there are concerns about whether Samsung is too optimistic in its projections of growth in mobile gadgets. The company, for instance, expects sales of feature-packed third-generation cell phones to double annually through 2007, which some analysts question. Also, forecasters worry that consumer demand for various chip-laden devices will slow next year, putting pressure on chip prices. Samsung is betting that its emphasis on customized chips and the most advanced gadgets will insulate it from a downturn.

And if it's wrong? "If mobile phones don't turn out to be the main handheld terminal for consumers, Samsung's scenario won't work," reckons Koo Bon Jun, an analyst at Salomon Smith Barney. Hwang, though, is confident. "You don't wait for the future, you create it," says Hwang. If he pulls it off, he'll have plenty to gloat about.

Moon Ihlwan in Seoul, with Cliff Edwards in San Mateo, Calif., and Otis Port in New York

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