Samsung Tops Intel As Biggest Chip Firm -- WSJ

By Timothy W. Martin in Seoul and Ted Greenwald in San Francisco Features Dow Jones Newswires

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 31, 2017).

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Samsung Electronics Co., the South Korean technology company best known for its smartphones and televisions, has taken the title of world's largest chip maker by revenue, knocking Intel Corp. from a perch it held for nearly a quarter-century.

Samsung's semiconductor unit, whose fortunes come largely from selling memory chips used in mobile devices, delivered second-quarter sales of $15.7 billion and operating profit of $7.1 billion. Intel, which dominates the calculating engines known as microprocessors, reported quarterly revenue of $14.8 billion and operating profit of $3.8 billion.

It marks the first quarter in which Samsung, for years a distant No. 2 to Intel in the roughly $365 billion semiconductor industry, has topped the Santa Clara, Calif.-based chip pioneer in semiconductor sales, according to IC Insights Inc., a semiconductor-market researcher. It is an advantage industry analysts expect Samsung to maintain at least through the end of this year as a shortage of memory chips persists.

Samsung, which started making chips for wristwatches in the 1970s, has more recently become a dominant player in two major types of memory chips: one for data storage, known as NAND, and another, known as DRAM, which gives devices their multitasking speed by holding data needed in the short term.

A surge in demand for memory has caused prices to soar over the past year, benefiting Samsung. NAND prices rose 50% and DRAM prices jumped 115% on the spot market over the past year, according to DRAMeXchange, which tracks sales and prices. But some predict supply will become replenished by next year, dragging on Samsung's revenue.

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Samsung has ascended during a turbulent year for the South Korean giant, whose de facto leader, Lee Jae-yong, was arrested in February and is on trial on corruption allegations that he denies. Samsung's rise reflects the trend toward putting digital horsepower in a widening range of items, from smartphones to automobiles, and the ambitions of tech companies to use those products to accumulate data on customer behavior to sell more products and related services.

"This isn't just a one-shot deal for Samsung," said Tobey Gonnerman, executive vice president at Fusion Worldwide, an electronic-components distributor. "Technology won't take a leap backwards or become less mobile, so this won't be an anomaly for them."

Samsung's leap ahead of Intel in semiconductor sales also reflects a fundamental difference in the two companies. Samsung's chip unit focuses on memory chips, traditionally a lower-margin commodity product with volatile price swings. But Samsung has invested tens of billions of dollars to place itself at the forefront of new advances that cram more memory, either storage or multitasking ability, onto small-size chips. Analysts agree it is several years ahead of rivals, particularly in terms of its large-scale production ability as an explosion in internet-connected devices brings unprecedented levels of demand.

Intel, on the other hand, concentrates on highly differentiated processing chips for computers -- and dominates its key markets of PCs and the servers that drive corporate operations, cloud computing, and communications networks. Those products have brought high margins, but revenue growth has been increasingly hard to come by. Demand for PCs has slowed in recent years as consumers move from PCs to smartphones, and data-center customers have found ways to make fewer chips do more work, even as large cloud providers are spending tens of billions annually to expand their facilities.

"Samsung surpassing Intel as No. 1 has more to do with Samsung gaining market share than Intel losing," said Bill McClean, president of IC Insights, underscoring the industry's overall strength.

A year ago, Intel's full-year semiconductor sales were nearly 25% higher than Samsung's. Samsung Electronics shares have risen about 55% over the past year, while Intel's stock price has remained flat.

The world's largest smartphone maker, Samsung is also in position to top Apple Inc. in quarterly profits during what is traditionally a weaker three-month period for the iPhone maker. Apple reports earnings on Tuesday.

A Samsung spokesman declined to comment. An Intel spokeswoman emphasized the company's strong second-quarter performance and expressed confidence in its product road map, saying, "We feel very good about our strategy and our results."

Intel is making moves to push outside its core strengths and into higher-growth areas, including NAND memory, where it is investing heavily to compete with Samsung and others. It has high hopes for a proprietary technology called 3-D XPoint that it touts as a new memory category combining attributes of NAND and DRAM at a price midway between them.

The two companies also compete in mobile chips, where Intel missed the smartphone boom but last year scored a place in roughly 50% of Apple iPhone 7 units. To capture growth as cars evolve into rolling data centers, Intel is in the process of buying computer-aided driving pioneer Mobileye NV for $15.3 billion.

A 16 gigabyte NAND chip that typically would go into a smartphone costs about $4, according to Jim Handy, a memory-chip analyst with Objective Analysis. Common half-gigabyte DRAM chips cost around $2.75, he said.

In contrast, Intel's latest PC chips range in price from roughly $250 to $2,000, while its new line of server chips tops out at $10,000. Intel has kept revenue growing in declining markets partly by nudging customers toward ever more capable -- and higher-priced -- models, but profit margins have been squeezed by the high cost of manufacturing ever more advanced processor chips.

Samsung's advantage may be fleeting as other memory-chip manufacturers jump in, bringing an oversupply that causes prices to fall.

"I wouldn't be surprised if, when the next turn happens, Samsung's revenue plummets below Intel's, possibly for a very long time," said Mr. Handy, who predicts oversupply by the middle of next year.

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

(END) Dow Jones Newswires

July 31, 2017 02:47 ET (06:47 GMT)