Samsung Electronics Co. spent about $24 billion in the past two years beefing up the world's biggest maker of memory chips to meet demand. It wasn't enough.
Surging sales of smartphones, including its own Galaxy range, has Samsung turning to its biggest rival to buy mobile dynamic random access memory chips. For the first time, the company that makes more than half the world's mobile DRAM chips may buy them from SK Hynix Inc., said Shin Jong Kyun, head of Suwon, South Korea-based Samsung's mobile business.
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The supply squeeze doesn't just pose a problem for Samsung, which releases its new flagship Galaxy S4 phone in South Korea tomorrow. The chips, along with NAND memory, are needed in handsets and tablet computers made by Apple Inc., Nokia Oyj and HTC Corp. for functions from playing video and multitasking to storing books and photographs.
"Not only DRAM chips, but all memory chips for mobile devices show signs of shortages," said Kim Sung In, an analyst at Kiwoom Securities Co. in Seoul, who recommends buying both Samsung and Hynix shares. "Samsung's biggest chip customer is itself and things will only get out of hand with the approach of the third quarter, typically the strongest time of year."
The second half of the year is when Samsung expects to release a new smartphone using its own Tizen operating system and an updated version of the Galaxy Note device. It's also when Apple usually releases details of a new handset.
The S4 is in limited supply and Samsung is struggling to keep up with demand, the company said. Two top U.S. carriers have pushed back their release dates citing shipment delays.
"Pre-order demand is much stronger than expected, so it's difficult to rapidly boost supply in the short term," Lee Don Joo, president of the strategic marketing office at Samsung's mobile business, said today in Seoul. The handset will be released in South Korea tomorrow and on Saturday in other markets around the world, Lee said.
The rising demand for mobile chips follows a glut in production of the type of DRAM used in personal computers that saw prices slump, driving some producers to the wall.
SK Hynix, Micron, Nanya Technology Corp., Powerchip Technology Corp. and other Samsung rivals lost a combined $21 billion from 2008 to 2012, according to analyst estimates and company data compiled by Bloomberg. Some Taiwanese makers quit the business, while Tokyo-based Elpida Memory Inc. was forced to seek protection from creditors before Boise, Idaho-based Micron Technology Inc. agreed to buy it last year.
Chip prices have since recovered as suppliers including Micron kept DRAM output steady. Last year, Toshiba Corp., the world's second-biggest maker of NAND flash memory, said it will reduce production by 30 percent.
Benchmark 2Gb, 1333Mhz DRAM chips have more than doubled to $1.69 since the end of November, according to TrendForce Corp.'s DRAMeXchange, Asia's largest market for the components.
"Mobile DRAM supply started to slow from the third quarter of last year as players had cut investment a lot," said Byun Han Joon, an analyst at KB Investment & Securities Co. in Seoul. "There's a possibility that demand for mobile chips may increase faster than had been anticipated so Samsung is trying to brace for it."
SK Hynix, the world's second-largest supplier, counts Apple among its biggest customers, with the maker of iPhones providing 9.3 percent of sales, according to data compiled by Bloomberg. The Cupertino, California-based company ranks behind only Hon Hai Precision Industry Co., which assembles the iPad, the data show.
SK Hynix, which has been unprofitable in four of the past five years, this week posted first-quarter earnings that beat analyst estimates as chip prices rebound.
Shares of the Icheon, South Korea-based company have risen 15 percent this year compared with a 2.3 percent drop in the benchmark Kospi index and a 1.8 percent decline for Samsung.
Global smartphone sales rose 34 percent last year to $294 billion, according to data compiled by Bloomberg Industries.
Among the flagship devices announced in the past 12 months are HTC's One, Nokia's Lumia 920, the BlackBerry Z10 and Apple's iPhone 5.
"Chip demand for smartphones remains strong while the market will be flooded out with new devices," said Lee Sei Cheol, a Seoul-based analyst at Meritz Securities Co.
Samsung's capital spending on chips was 13.85 trillion won ($12.3 billion) last year after the company spent 13 trillion won on the business the year before.
As of the fourth quarter of last year, Samsung had 51 percent of the global mobile DRAM market, followed by SK Hynix's 25 percent and 20 percent for Elpida, according to market researcher IHS iSuppli.
Any supply squeeze is likely to help second-tier players such as Taoyuan, Taiwan-based Nanya Technology Corp., which is ramping up production of mobile chips and expects the business will climb to 10 percent of revenue by the end of the year from 1 percent in the first quarter. Inotera Memories Inc., a Taiwan- based venture between Nanya and Micron, expects mobile DRAM will rise to 20 percent of sales by the fourth quarter from 5 percent at the end of 2012, Chairman Charles Kau said.
Toshiba is closely monitoring the market for signs of shortages that may be based on "excessive expectations," spokesman Atsushi Ido said by phone, declining to elaborate. Samsung, Hynix and Elpida declined to comment on output plans.
Part of Samsung's dilemma with mobile DRAM is its own success in making mobiles, which is the biggest profit driver at the company. Telecommunications contributed 67 percent of operating income in 2012, compared with 14 percent for chips and 11 percent for liquid crystal displays, according to data compiled by Bloomberg.
While Apple has focused on high-end devices and limited its handset releases to one a year since the first iPhone, Samsung offers smartphones across a wider range of prices, all requiring mobile DRAM chips.
"Demand for Samsung's mobile phones is way too strong" for the company's semiconductor business to keep up, said Kiwoom Securities' Kim.