Samsung's Chip Business: What Happened?

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On the other, oversupply means that, although seasonal demand for the chips will kick in for the summer as computer and electronics makers begin building inventory ahead of the yearend sales surge, supply will still outpace demand. "I don't see a significant recovery in the third quarter," says Song Myung Sup, a chip analyst at CJ Investment & Securities in Seoul. "A real improvement will have to wait until the second half of next year when overcapacity problems will have been curbed."

Looking to Notebooks

At least the outlook for NAND flash memory chips, the next largest segment of Samsung's semiconductor business, is brighter. The chips, which are widely used in handheld products such as music players, digital cameras, and portable media players, provide an alternative profit driver when DRAM prices are heading south.

"The South Korean DRAM suppliers will shift capacity away from DRAM toward NAND, which is expected to be more profitable over time," Derek Lidow, chief executive of market research firm iSuppli, said last month. Korea's Hynix Semiconductor (HXSCF) is the world's second-largest memory chip maker after Samsung.

Samsung executives hope that one eventual driver of demand will be notebook PCs, which will be equipped with NAND-based drives, called solid-state drives or SSDs. Although more costly than conventional hard drives, flash drives are faster, more reliable, and consume less power (see BusinessWeek.com, 6/11/07, "How Flash Will Change PCs").

But even in flash memory production, competition is heating up, and margins are being squeezed. On June 12, Japan's Toshiba (TOSBF), the second largest NAND chipmaker after Samsung, announced it is boosting capacity by 70% by June, 2008. Toshiba's U.S. partner, SanDisk (SNDK), major U.S. memory chipmaker Micron Technology (MU), and Korea's Hynix also have plans to expand flash memory (see BusinessWeek.com, 4/12/07, "Toshiba's Flash New Look at Chips").

An Air of Confidence

And just as with DRAM chips, that could lead to Samsung's competitive lead being whittled away. "Samsung used to skim the cream as an early mover, but with rivals having caught up, future benefits will be shared and limited," says Shinyoung's Lee. He reckons Samsung's earnings from NAND will be halved to $640 million this year from $1.4 billion last year.

Still, Samsung can't complain too loudly about rivals increasing their NAND supply. On June 14 it opened a $3.5 billion state-of-the-art NAND plant in Austin, Tex., where it already has a memory chip factory.

That could also be because the company remains confident about its chip business. That's certainly the impression given by company executives. "It's true the gap between ourselves and our rivals has narrowed, but there's no other company that could provide as comprehensive solutions as we do," says one Samsung senior manager. Just don't expect to hear Hwang gloating again anytime soon.

Moon is BusinessWeek's Seoul bureau chief.