Why Samsung says it isn't leaving town anytime soon

By Cho Mu-hyun | November 20, 2014 -- 06:03 GMT (22:03 PST)

All attention was focused on how and what Samsung plans to do about its ailing, albeit still stronger than most, mobile business during its investors forum in New York. Apple's spectacular iPhone 6 sales and Xiaomi's rise seem to have the South Korean tech giant cornered. But while other one-trick ponies would have faltered under all that weight, Samsung, in essence an integrated electronics maker, says it has more up its sleeve than your regular tech company.

Contract chip boom for 2015? Thank you, Apple

Having been largely eclipsed by its consumer-oriented mobile counterpart, Samsung's chip business — more specifically, its contract chip business — is expecting to see the light again, starting next year.

Samsung is the world's largest memory chip vendor by revenue, second in semiconductor only to Intel, and its third-quarter financials show this clearly, with operating profits of 2.26 trillion won ($2 billion). However, its System LSI division, Samsung's contract chip business, by the company's own admission in its filings to South Korean financial regulators, was a deterrent to growth during both the quarter and the whole year, due to low popularity of its Exynos system on a chip (SoC) and lowered contract production volume.

However, the System LSI division says that is all going to change, and it is partly due to Samsung attempting to stay ahead of the curve by investing in next process technology. Samsung became the world's first chip maker to begin production using a 14-nanometre FinFet process. This will have it make smaller chips than contract chip giant TSMC, which is focusing on a 16-nanometre process, and any other competitor.

According to sources familiar with the matter, Samsung already has a contract in place with Apple to produce the latter's next-generation application processors that will succeed the A8 and A8X. TSMC was the main supplier for the latest iterations, and took the lion's share of contracts away from Samsung for its iPhone 6, but the new SoC expected next year will be mostly made by the South Korean tech giant again, they said.

Samsung, which has a production sharing agreement with GlobalFoundaries for 14-nanometre contract making, will likely attempt to lure potential customers such as Qualcomm and Nvidia away from TSMC by touting its finer-tuned technologies, the sources added.

"It's not just the development cost, but more and more, you need integrated processes or the higher the cost rises to meet the capacity volume," said Ben Suh, senior vice president of strategic planning, System LSI, Samsung, during the investors forum. "The number of competitors that can apply advanced technology [like Samsung] is low.

"[The need for] research and development of sophisticated and state-of-the-art technology [right now in the semiconductor industry] is, for us, a great opportunity. We will build a strong, technological foundation," he added, vowing to expand its client portfolio going forward.

According to IBS, in semiconductors, it takes $1 billion to develop a 20-nanometre production process. However, the cost to develop is tripled to $3 billion for the 10-nanometre processes, meaning companies need to pour in a potentially life-threatening amount of cash to stay ahead.

Samsung has an estimated cash pile of over $60 billion, and has always been unafraid to spend it, especially in semiconductors. It announced earlier that it will invest $14.7 billion on a new chip plant in Pyeongtaek, south of Seoul, until 2017. For this year alone, Samsung plans a comprehensive investment of 24 trillion won ($21.7 billion), the majority of which will be going into semiconductors.

Investing in logic chips, or processors, will also help Samsung secure growth from the emerging Internet of Things (IoT) market by providing memory chips and SoCs to all potential "things" that will be network connected, though this will be in some distant future.

Siphoning Silicon Valley's startup culture

One of the biggest challenges for Samsung in recent years has been an attempt to change its manufacturing-oriented mindset into a new, yet-to-be-formed culture that fosters creativity, thereby leading to creating its own content and software. To achieve this, Samsung has been one of the most active among South Korean conglomerates in investing, acquiring, and cooperating with startups, to siphon their technology and workplace cultures.

"In Samsung, the old mindset was 'if you used to hire 10 software engineers and failed to develop creative software, hire 100 more as a solution', which didn't work," said an ex-Samsung engineer, who declined to be named. "I think Samsung recognised that for some time, but change is happening slowly. Outsourcing and later imbuing them into the organisation is, I think, a very good strategy for a conglomerate like Samsung

Samsung set up its Open Innovation Center (OIC) at Silicon Valley last year to foster startups with strong potential there.

David Eun, executive vice president and leader of OIC, said during the investor forum that it was not easy combining two cultures: One of a manufacturer making products without fault, and another of a fast-moving, energetic software developer. Samsung's goal is to meet as many consumers as possible by balancing the two cultures, he said.

The OIC has led 24 investments as of August this year — including home automation company SmartThings and TV solution firm Boxee, which Samsung acquired — that work in IoT, healthcare, and security so far. Its accelerator arm fostered three startups that successfully graduated, with 16 more on the way. Healthcare features preinstalled on the latest Galaxy devices were a direct result of the activities of the OIC.

By imbuing Silicon Valley's DNA into Samsung, the company wants to figure out what is best in the world, and mulling over how to create a "hybrid" from knowledge learned there, said Eun.

Separately, via its venture capital arm Samsung Venture, the South Korean tech giant has been investing in flash storage companies such as Pure Storage, SolidFire, and NetApp, and commencing co-research to cement its technological superiority over rivals. Sources familiar with the matter said that SK Hynix and Toshiba approached these companies as well to play catch-up, but the technological gap between the two and Samsung is at least 10 years.

Samsung — Samsung Electronics and its affiliates, that is — has been on an acquisition spree in recent years: CSR, Proximal Data, PrinterOn, NVELO, Quietside, SELBY, MOVL, NeuroLogica, Wacom, and Nexus Dx, among others.

R&D behemoth

According to Fortune's 10 biggest research and development spenders worldwide list for 2013, published this year, Samsung clinched second place, behind Volkswagen and one step ahead of chip rival Intel. It spent a total of $13.4 billion in R&D, which accounted for 6.4 percent of its revenue.

"Its many R&D centres range from Silicon Valley to Bangalore to Beijing," wrote Fortune. "The company says it is developing a smart TV monitor and a smart TV service as part of its research program."

Neglected in the report is that Samsung almost always has manufacturing facilities adjacent to those R&D centres worldwide, and that they are all connected via its intricate yet streamlined supply chain management network. For smart TVs, almost all components will be self-made, possibly even the operating system, since Samsung is pushing Tizen (issues of its current quality aside) for the platform.

In enterprise, its B2B Group — the division that cooperates with its mobile, semiconductor, and consumer electronics divisions — is hard at work developing new business-oriented services and platforms. Samsung is investing an undisclosed amount in its enterprise business; one source told ZDNet Korea that it is probably the largest ever in the area in its corporate history, with over 1,000 employees working at the B2B Group, with also the largest allocation of human resources in the sector.

"Our fundamental principle has not changed. Invest during a crisis to prepare for the coming peak season," said a senior Samsung executive at the investors forum. "Investments look at not the world of today, or next year, but five to 10 years later."

Lee Chang-hoon, vice president of business strategic team, Samsung Display, told investors that the company is preparing a transparent AMOLED to commercialise sometime later on.

"[Transparent AMOLED] will change the lifestyle in construction to fashion. We are looking for a partner in the market to introduce transparent AMOLED," he said.

Samsung is planning to develop the technology further to have AMOLED wrap around corners of buildings, much like signage, but obviously more dynamic, or place them on clothing.

"Our vision is to have next-generation products not end as a dream, but to become products of the new world to come," said Lee.

Source: ZDNet.co.kr