By Timothy W. Martin in Seoul and Ted Greenwald in San Francisco
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.
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 30, 2017 12:14 ET (16:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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