Photograph by Chung Sung-Jun—Getty Images

Korean giant bets heavily on semiconductors as U.S., Chinese competition erodes its position as the world's biggest smartphone maker.

By Reuters
October 6, 2014

South Korean IT giant Samsung Electronics AAPL in the premium segment and undercut by Chinese rivals like Lenovo Group Ltd in mid-to-low end. April-June operating profit for Samsung’s mobile division fell in annual terms for the second straight quarter, the longest streak since at least 2011.

But with the higher demand for mobile devices comes increased orders for mobile chips, and Samsung Electronics’ semiconductor division will be key to propping up the company’s bottom-line, analysts say.

The plant in Pyeongtaek will make either logic or memory chips, Samsung Electronics said, adding that a final decision had not been made yet.

“Right now, the only part of the company that is bringing in steady profits is the semiconductor division, so it looks like the company will keep investing in the business,” said IM Investment analyst Lee Min-hee.

The chip business is likely to be a lone bright spot in what is otherwise expected to be a poor third quarter for the South Korean giant. Samsung will issue its earnings guidance for the period on Tuesday and analysts polled by Reuters expect operating profit to come in at 5.6 trillion won ($5.24 billion), its weakest performance since the fourth quarter of 2011.

Some analysts forecast that the semiconductor division will report stronger operating profit than the handset division in the third quarter for the first time in more than three years.

The chip business recorded a 1.9 trillion won profit in the second quarter, compared with 4.4 trillion won for the mobile business.

Samsung said the new plant is due to be completed by the second half of 2017.

Any capacity increase can be ominous for competitors in a deeply cyclical industry. Shares in domestic rival SK Hynix Inc fell more than 8% at one point on Monday after Samsung’s announcement.

Market conditions for memory chips have remained favourable this year partly due to stronger-than-anticipated demand from personal computers and servers. The industry has so far been careful about capacity expansion, keeping supply conditions on a tight leash.

Besides SK Hynix Inc, competitors in the memory industry also include Micron Technology Inc MU .

Analysts said there could be practical benefits to having the new plant in relatively close proximity to other domestic chip plants as opposed to building one overseas. Some said building a new plant near Seoul makes it easier for the company to recruit local engineering talent as well.

“To some extent this is also a response to the current government’s call for big corporations to invest domestically,” said Korea Investment Trust Management fund manager Baik Jae-yer.

The government has proposed a tax on excess profits at big corporations in an effort to prod them to spend more on investment, wages and dividends.

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