Samsung’s China bet

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Samsung’s China bet

At the center of the vast Guanzhong Plain is Xi’an, one of the oldest cities in China and home to some of the most important dynasties in Chinese history. The thousand-year-old city has a newcomer, a state-of-the-art NAND flash memory factory from the world’s biggest memory chipmaker, Samsung Electronics. Samsung turned a wheat field into a global manufacturing epicenter for its ultra-fast memory chips for smartphones and tablets by investing more than $9 billion.

Over 60 Chinese supervisors oversaw the construction an managed to build the 300-mm (11.8 inch) wafer fabrication facility in just 15 months. As soon as a business permit was issued, over 2,600 farmhouses were bulldozed. The Chinese government handled the moving of ancient graves and other tricky issues to make sure the construction went smoothly. The factory is in charge of rolling out 5 percent of Samsung Electronics’ memory output.

There is no political motive behind Samsung’s choice of Xi’an as its new semiconductor manufacturing base although it is the capital of Shaanxi, the home province of Chinese President Xi Jinping. The city is rich in water and electricity resources, which are essential for semiconductor production. The Wei River flows along the city and power is cheap because the province is home to China’s biggest coal mines. About 90 percent of computers and 85 percent of mobile phones sold around the world are produced in China. Semiconductor imports are the country’s largest, reaching $231.3 billion in 2013. Building a factory in the country was guaranteed to please the government of the world’s biggest manufacturer.

China is keen on semiconductor technology. Last year, it created a 21 trillion won ($19.1 billion) semiconductor fund and the powerful State Council announced “Guidelines to Promote National IC Industry Development” to concentrate government support. Over the next 10 years, the Chinese government will spend as much as $161.2 billion to develop local IC manufacturing, design, packaging and related industries.

Money-pumping and concentrated promotion has worked with liquid crystal displays. In just seven years, the Chinese achieved 55 percent self-sufficiency in LCD supplies. LG and Samsung Display were quick to establish manufacturing bases in China before the Chinese localization campaign began. Other display makers like Sharp of Japan were soon outsized by Chinese latecomers.

Will China be as successful in chipmaking?

Samsung has already sketched out the big picture in China. Stretches of land are empty around its Xi’an factory. They are reserved for future factories. It can triple its output from China. At the same time, another factory is being constructed in Pyeongtaek in Gyeonggi Province. With an investment of 80 trillion won, the lot could host five additional wafer fab lines. Samsung Electronics is known these days for its Galaxy smartphones. But its mainstay business is memory chips. Depending on how it makes use of the Pyeongtaek factory site, Samsung Electronics’ future could be altered.

The global semiconductor industry faces a major challenge. Personal computers have reached a saturated point. Microprocessor giant Intel is trembling. The future of the dynamic random-access memory (DRAM) chip, a Samsung specialty, is also murky. The DRAM market is divided amongst Samsung, Hynix and Micron. China hopes to squeeze into the DRAM market, but the cost of catching-up is high and risky. It has already been defeated in a game of chicken with Micron over acquiring Japan’s Elpida.

The future of semiconductors revolves around NAND flash memory - nonvolatile storage technology that does not require power to retain data - and mobile application processors designed to support applications running on mobile operating systems and the system-on-chip (SoC).

The semiconductor industry is and always has been a war zone. Intel is studying entry into the mobile processor segment and Samsung is eager about the SoC business. If Samsung fills the new Pyeongtaek lot with DRAM lines, Hynix and Micron could be hurt. If it instead puts in assembly lines for SoC processors, Samsung will be directly taking on Intel. NAND flash and mobile processors also could find new roosts in the new facility.

As the industry leader, Samsung cannot but feel the heat from China and changes in the industry. It must make its bets sooner rather than later. It has to solve one hurdle before it breaks grounds on the Pyeongtaek site. The city promised full support, but residents in neighboring Ansung are opposed to the construction of new electricity transmission towers. The Xi’an factory was put up in just 15 months. Timing is everything in chip-making. We cannot afford to lose more jobs and factories overseas due to political and social conflict.

JoongAng Ilbo, May 26, Page 30

*The author is senior editorial writer of the JoongAng Ilbo.

by Lee Chul-ho

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