Bloomberg News

Samsung Poised to Gain Share on $42 Billion Investment: Tech

January 27, 2012

(Updates with earnings forecast in fifth paragraph.)

Jan. 26 (Bloomberg) -- Samsung Electronics Co.’s capital expenditure dwarfs that of competitors and has helped make it the world’s biggest maker of TVs, memory chips and flat-screen panels. Record spending this year may further pressure rivals.

Samsung and its affiliates plan to spend 47.8 trillion won ($42 billion) this year on new product research and upgrading plants, the group said this month. The Suwon, South Korea-based company, which reports full-year earnings tomorrow, spent more than Sony Corp., Intel Corp. and Cisco Systems Inc. combined in 2010, according to data compiled by Bloomberg.

The spending spree will enable the chips and display supplier to Apple Inc. and Sony to build on record sales last year and boost profit that doubled in the five years to 2010. That may leave competing makers, already mired in losses from a glut of commodity chips, even farther behind in their quest to diversify into the higher-margin specialty semiconductors for phones and tablets that have made Samsung so successful.

“We have a Goliath in the technology industry,” said Kim Hyung Sik, a Seoul-based analyst at Taurus Investment Securities Co. “The gap between Samsung and the laggards will keep widening, particularly in memory chips.”

Earnings Forecast

Sales by Samsung Electronics, the biggest unit of South Korea’s largest industrial group, were equal to 16 percent of the nation’s gross domestic product, based on figures from the company and the Bank of Korea. The company’s fourth-quarter profit probably rose to 3.99 trillion won from 3.42 trillion won a year ago, according to the average of 28 analyst estimates compiled by Bloomberg.

Samsung Electronics will spend as much as 40 trillion won of the group’s total budget, said four analysts, including Young Park, a Hong Kong-based analyst at Woori Investment & Securities Co. The semiconductor and display businesses will get the most, they said.

The spending amid burgeoning sales and profit contrast with Asian rivals including Japanese chipmaker Elpida Memory Inc., which was unprofitable for four straight quarters to September and faces a deadline to repay debts. Makers of dynamic random- access memory, the most common chip in computers, lost a combined $14 billion in the past three years, according to Bloomberg calculations.

‘Deep Pocket’

Sony hasn’t made a profit selling TVs in the past seven years. The Tokyo-based electronics maker is forecasting a fourth consecutive companywide loss this year amid slumping TV demand that’s prompted a restructuring of the business. Last month, Sony agreed to quit a panel-making joint venture with Samsung.

“Samsung’s strategy is to take advantage of its deep pocket and keep widening their lead over rivals,” said Im Jeong Jae, a Seoul-based fund manager at Shinhan BNP Paribas Asset Management Co., which oversees about $28 billion.

LG Group, which includes LG Electronics Inc. and LG Display Co., said Jan. 13 its companies would reduce expenditures by 15 percent this year, citing slowing consumer spending in the U.S. and Europe as a potential risk. Taiwan Semiconductor Manufacturing Co., which competes with Samsung in contract manufacturing of chips, said Jan. 18 it will decrease its equipment budget to $6 billion this year from $7.3 billion.

Samsung v. Apple

In 2010, Samsung had $18.7 billion in capital expenditures, according to data compiled by Bloomberg. In comparison, Santa Clara, California-based Intel spent $5.2 billion.

Apple spent $2 billion in the year ended in September 2010. The Cupertino, California-based company, which more than doubled first-quarter profit and had cash and investments of more than $97 billion, contracts most of its manufacturing to other companies, reducing the need for high capital expenditure.

Samsung shares gained 11 percent last year, compared with a 26 percent jump for Apple and a 53 percent slump for Sony.

Samsung, expected to detail its capital expenditure plan tomorrow, should continue expanding investment and hiring to maintain industry leadership even as the global economic growth slows, Chairman Lee Kun Hee said this month.

Spending in the past has helped the company extend its dominance.

Samsung’s share in the global handset market increased to 22.6 percent from 20.9 percent in the third quarter, while market leader Nokia OYJ’s share slipped to 27.3 percent from 32.3 percent, according to Strategy Analytics. The Korean company probably will pass Nokia in total mobile phone sales by the end of this year, Taurus’s Kim said.

‘Thrown in the Towel’

With the DRAM chip industry reeling from a glut and falling prices, Samsung is investing more in the semiconductor business to diversify. Apple is Samsung’s biggest customer as well as the biggest competitor in smartphones and tablet computers.

“The Japanese and Taiwanese memory-chip companies have almost thrown in the towel,” Shinhan BNP Paribas’s Im said. “In phones, Samsung and Apple’s dominance will continue.”

Samsung may almost double spending on its logic-chip business, which oversees manufacturing of Apple-designed A4 and A5 processors under an exclusive contract, to a record 8 trillion won this year, according to Hanwha Securities Co. and Korea Investment & Securities Co.

The Korean company has profitably diversified into specialty chips for smartphones, tablet devices and servers. Samsung sells twice as many specialty DRAM chips, where margins are higher, as commoditized chips used in PCs, Shinhan Investment Corp. said in a report in October.

In other businesses, Samsung may spend as much as 7 trillion won to expand production of OLED, or organic light- emitting diode, displays, Tong Yang’s Park said. Demand for screens using the technology is increasing, driven by use in smartphones including the Galaxy devices.

“The most important thing in this industry is to invest early so you can gain dominance and build an entry barrier against competitors,” Park said. “Samsung can do that because they have the financial firepower.”

--Editors: Anand Krishnamoorthy, Terje Langeland, Rick Schine

To contact the reporter on this story: Jun Yang in Seoul at jyang180@bloomberg.net

To contact the editor responsible for this story: Michael Tighe at mtighe4@bloomberg.net


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