In­tel and Sam­sung gear up for a clash of the chip­mak­ing ti­tans

▶ The lead­ing chip­mak­ers push into each other’s busi­nesses ▶ “It’s been com­ing to a head for the past cou­ple of years”

Bloomberg Businessweek (Asia) - - CONTENTS - −Ian King and Jun­gah Lee

Dur­ing this year’s Su­per Bowl, the ad mak­ing the big­gest state­ment was well be­yond the walls of Levi’s Sta­dium. Through­out the big game, at­ten­dees and some ea­gle-eyed TV view­ers could see pitches for Sam­sung’s mem­ory

chips and pro­ces­sors—not within the sta­dium, but on a gi­ant dis­play al­most 2 miles away. Sam­sung turned the top two floors of its new Santa Clara chip­mak­ing head­quar­ters into a makeshift dig­i­tal bill­board mea­sur­ing 30 feet by 300 feet. Along with the Den­ver Bron­cos and Carolina Pan­thers, one other im­por­tant group could see its ads: any­body an ad­di­tional mile be­yond the Su­per Bowl, at the head­quar­ters of In­tel.

For 40 years, Sam­sung’s semi­con­duc­tor op­er­a­tion has been look­ing up at In­tel’s. Th­ese days, though, it’s more of a side­long glance. In­tel re­mains the world’s No. 1 chip­maker, and in some ways is stronger than ever, sup­ply­ing pro­ces­sors for 99 per­cent of the world’s servers and 95 per­cent of lap­tops. But Sam­sung has solidly es­tab­lished it­self as No. 2 in the past few years by tak­ing con­trol of the faster-grow­ing mem­ory chip busi­ness. (In­tel more or less aban­doned that line in 1985.) For the first time, the two com­pa­nies are be­gin­ning to se­ri­ously eye each other’s cus­tomers.

Late last year, In­tel said it would spend as much as $5.5 bil­lion to jump back into pro­duc­tion of mod­ern mem­ory chips at a plant in the Chi­nese city of Dalian. “This is prob­a­bly one of the first mem­ory in­vest­ments we’ve made in our In­tel fac­to­ries in quite a few years,” Chief Ex­ec­u­tive Of­fi­cer Brian Krzanich said on a Novem­ber call with in­vestors. In an in­ter­view, Kelvin Low, Sam­sung’s se­nior di­rec­tor of foundry mar­ket­ing, says his com­pany is gear­ing up to pro­duce two big sets of server chips us­ing “the most ad­vanced tech­niques”—mean­ing they’re in­tended to com­pete with In­tel’s. “We are proac­tively en­ter­ing that space,” he says. “The rea­sons are ob­vi­ous.” Sam­sung de­clined to com­ment specif­i­cally on com­pe­ti­tion with In­tel, which de­clined to com­ment for this story.

The chip­mak­ers’ strengths com­ple­mented one an­other when the PC was the pri­mary means of com­put­ing and get­ting on the In­ter­net and there was plenty of growth to go around. In the mo­bile era, up­front man­u­fac­tur­ing ex­penses have grown so large that any ef­fort to set up a prod­uct line has be­come a se­ri­ous risk. “It’s been com­ing to a head for the past cou­ple of years, and it’s go­ing to ac­cel­er­ate,” says Shane Rau, an an­a­lyst for mar­ket re­searcher IDC.

A new chip plant with the lat­est pro­duc­tion equip­ment costs as much as $10 bil­lion, re­searcher IHS es­ti­mates. Most of that money goes to­ward the ma­chin­ery, which be­comes ob­so­lete within five years and must be re­placed if com­pa­nies want to re­main com­pet­i­tive. Adding pres­sure, de­vice mak­ers want fewer sup­pli­ers to pro­vide them with more pieces of the fi­nal prod­uct, ideally fused to­gether.

Sam­sung has turned some of th­ese prob­lems to its ad­van­tage by strik­ing deals to pro­duce chips de­signed by Ap­ple (for the iPhone) and

Qual­comm (for most ev­ery phone). Low says the com­pany has al­ready signed con­tracts to make server chips, but he wouldn’t name any cus­tomers. In­tel has had a tougher time break­ing into mo­bile—its chip rev­enue de­clined 2 per­cent last year, while Sam­sung’s grew 20 per­cent. “His­tor­i­cally, In­tel has had a huge R&D bud­get that couldn’t be chal­lenged by any­body,” says IHS an­a­lyst Len Je­linek. Sam­sung’s bud­get, he says, rep­re­sents the first real “com­pet­i­tive ef­fort.”

That doesn’t mean it’ll be easy to take on In­tel, which has only gained ground in servers and PCs. In­tel’s Krzanich said in Novem­ber that his com­pany’s sup­ply of hard drives made of mem­ory chips, part of a ven­ture with chip­maker Mi­cron, has helped boost prof­its. The com­pany is also promis­ing a new type of mem­ory that’s faster than to­day’s flash chips.

Down the road, the big ques­tion is whether one com­pany can bet­ter pre­pare for the wave of We­b­con­nected ap­pli­ances and ve­hi­cles known as the In­ter­net of Things, says Lee Se­ung Woo, an an­a­lyst at IBK Se­cu­ri­ties. “All chip­mak­ers are try­ing to make ev­ery­thing for when IoT even­tu­ally kicks off,” Lee says. “I don’t think they can start from scratch and out­run each other in their re­spec­tive dom­i­nant ter­ri­to­ries.”

For now, In­tel and Sam­sung are each spend­ing $12 bil­lion a year on re­search and de­vel­op­ment as they try to set the pace in de­vis­ing faster, smaller, more ef­fi­cient chips. (An undis­closed por­tion of Sam­sung’s R&D bud­get also funds work on its screens.) In­tel is work­ing to in­tro­duce its lat­est mo­bile chips and modems with­out the kinds of de­lays com­mon in the last decade, ac­cord­ing to Krzanich. Sam­sung’s goal is to over­take In­tel in chip sales. “It’s dif­fi­cult to say when we’ll achieve our goal,” says Kim Ki Nam, Sam­sung’s head of logic chips. “We still have a big gap. They’re a good com­pany.” But make no mis­take: That is the plan.

The bot­tom line In­tel and Sam­sung are po­si­tion­ing them­selves for bites at each other’s pri­mary chip mar­kets.

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