How Samsung Got Into the Chip Business

By Timothy W. Martin Features Dow Jones Newswires

Semiconductors are raking in profits for Samsung Electronics Co., but the company's foray into chips more than 40 years ago didn't come easily.

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Lee Kun-hee, now the South Korean conglomerate's incapacitated chairman, faced skepticism from Samsung's leadership about a push into semiconductors. Among the initial doubters was his father, the company founder, according to a person familiar with the matter. At that time, Samsung was known more as a food, textiles and logistics empire that had just started producing black-and-white televisions domestically.

But in 1974, Mr. Lee was so bullish on the potential of chips that he invested his personal money to buy a 50% stake in the financially troubled Korea Semiconductor. Mr. Lee's father eventually was persuaded, too.

"They made a very important decision based on their belief that the future would be in the information-technology world," said E.S. Jung, a Samsung Electronics executive vice president, who oversees its semiconductor research and development center.

In 1980, Samsung's semiconductor unit -- which had started off making chips for wristwatches -- was absorbed into Samsung Electronics.

Mr. Lee's gamble paid off. In 1992, Samsung became the first company to develop a 64-megabit DRAM chip, a key PC component, surging ahead of Japanese competitors.

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Samsung now has around 50% global market share in DRAM chips and 37% in storage chips. Samsung is a newer entrant in outsourced manufacturing of high-end semiconductors, a business dominated by Taiwan Semiconductor Manufacturing Co. Despite its small scale, the South Korean company has major clients such as Apple Inc. and Qualcomm Inc.

Samsung also was a pioneer in developing ways to scale up production by using larger pieces of silicon wafer, the foundational material for semiconductors -- and the "silicon" in Silicon Valley. Rivals, lacking Samsung's technology, had to use smaller, disk-shaped wafers, meaning production was less efficient or cost more to make the same number of chips. Samsung was among the first to produce chips on 8-inch and 12-inch wafers.

Industry experts cite the company's aggressive investment in research and development as its main recipe for becoming No. 1 in memory chips.

"We always stay ahead of the curve, so even when the market has a downturn, we've already had production on the lines," said Mr. Jung, who started at Samsung in 1985. "We can sustain above a break-even point even when other competitors are recording losses."

Write to Timothy W. Martin at timothy.martin@wsj.com

(END) Dow Jones Newswires

April 26, 2017 10:57 ET (14:57 GMT)