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Samsung to pour $30bn into booming chip business

Top memory maker seizes initiative in field growing amid pandemic

Samsung's ability to leverage its technological edge helps to maintain profit margins and generate cashflow for big investment plans. (Photo courtesy of the company)

SEOUL -- Samsung Electronics looks set to invest more than $30 billion in its semiconductor operations for the first time this year, spending aggressively amid the coronavirus to tap steady demand for memory and ramp up its foundry business.

Brisk demand for memory chips -- for which Samsung leads the global market, with a roughly 40% share -- was a major factor in strong 2020 earnings guidance released Friday, which showed operating profit jumping 29% to 35.95 trillion won ($32.8 billion) on a 3% rise in sales despite a sluggish global economy.

The rise in videoconferencing and online learning has spurred more investment in data centers to handle the ensuing surge in data usage. Increased demand for personal computers, tablets and video game systems has also boosted sales of chips used in those devices.

The South Korean company said in October that it expected to invest a total of 28.9 trillion won, or $26.5 billion, in the business in 2020 -- up 28% from 2019 and marking an all-time high. Chipmaking equipment manufacturers say the company has provided order plans for 2021 that point to a further 20% to 30% increase in spending.

This would likely mean total outlays in the neighborhood of 35 trillion won for the year, though Samsung has not issued an estimate.

Samsung's semiconductor business boasted a 27% operating profit margin for the first three quarters of 2020 -- well above the 12% for the information technology and mobile segment, which includes smartphones, and 8% for the consumer electronics segment -- and this pattern continued in the fourth quarter.

That level of profitability stands out in comparison with such other chipmakers as South Korea's SK Hynix and U.S.-based Micron Technology, with margins of 17% and 19%, respectively.

Strong cash flow enables Samsung's winning strategy of investing faster than the competition, enabling it to rake in cash while the market is booming. Getting orders in as quickly as possible gives the company more leeway when negotiating prices and delivery times with suppliers.

Samsung plans to invest heavily in its Pyeongtaek production site in South Korea. (Photo courtesy of the company)

The main destination for Samsung's beefed-up investment this year will be its Pyeongtaek main campus near Seoul, where the company plans to install state-of-the-art equipment for memory chips and foundry production to gradually scale up output.

Samsung will also continue increasing NAND flash memory capacity at fabrication facilities in the Chinese city of Xi'an, and update production lines at a U.S. plant in Austin that is set to expand.

On the demand side, prices are starting to show signs of recovery thanks to Chinese smartphone makers and global investment in data centers.

As smartphone production at Huawei Technologies has plummeted because of U.S. sanctions, compatriots Vivo, Oppo and Xiaomi have jumped at the chance to fill the gap. Huawei's share of global shipments slipped to 14.6% for the three months through September from 20.2% for the previous quarter, while Xiaomi's rose to 13.1% from 10.3% over the same period.

The Vivo-Oppo-Xiaomi trio gained further prominence as chip buyers in the last quarter of 2020, with the rollout of new handsets with fifth-generation wireless compatibility. They are gaining market share not only in China, but also in India and Southeast Asia. And Samsung, which had sold more memory to Oppo and Xiaomi than to Huawei even before the sanctions, is well positioned to reap the benefits.

Meanwhile, American tech giants are ramping up investment in data centers., Microsoft and Google parent Alphabet, the three big U.S. data center operators, together invested well over $50 billion in 2019, according to public financial information. The total is believed to have jumped roughly 30% in 2020 and is expected to keep growing this year.

These facilities require processors that can handle large volumes of data at high speeds, as well as advanced DRAM, giving Samsung an edge. Though memory chips are generally considered to be a commodity product, other chipmakers lack Samsung's ability to mass-produce cutting-edge DRAM.

The company can leverage its technological capabilities and supply capacity in negotiations with customers, fattening its profit margins and providing more cash for big investment plans.

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