Trends That Will Drive Samsung's Semiconductor Business In 2015

Samsung Electronics‘ bread-and-butter smartphone business has been facing significant headwinds of late. The company’s weak product differentiation, coupled with increasing competition from Xiaomi and Apple at the low and high ends of the smartphone market have caused the handset division’s profits to plummet by about 40% over the past year. Although the company is looking to stabilize the handset business with a series of new launches, we believe that it will increasingly refocus its growth strategy towards semiconductors, where it has competitive advantages owing to its technology and massive scale. During the second half of 2014, profits from Samsung’s semiconductor arm surpassed those of its IT and mobile communications division, and we believe that the trend is only likely to continue given that Samsung has been ramping up its semiconductor capital expenditures (which stood at roughly 60% of the company’s total $21.5 billion capital budget for 2014). In this note, we take a look at some of the key developments and trends that will drive Samsung’s 2 key semiconductor divisions – memory and logic chips.

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Memory Business: DRAM Supply, Product Mix, Process Improvements

Samsung’s memory business, which primarily produces NAND and DRAM chips, accounts for about 75% of the company’s semiconductor revenues. During 2014, the memory business saw revenues grow by around 24% to about $28 billion, largely driven by strong demand and ASPs for DRAM. The DRAM market is largely cyclical, and the industry spent much of 2014 transitioning out of a phase of undersupply caused by years of cautious investment. The undersupply, coupled with strong demand growth from mobile devices and servers, has resulted in higher pricing for DRAM. The DXI index, which indicates general pricing trends of DRAM prices, has risen by over 120% over the past two years. Samsung’s NAND operations have also been doing reasonably well, on the back of demand for Solid State Drives and mobile devices and the company’s migration to its 10nm-class process technology. The profitability of the semiconductor business has also been on the uptrend, driven by better production efficiency, favorable pricing and sales of more high value products such as DDR4 RAM and memory solutions such as eMCP. eMCP is a multi-chip package that combines DRAM and NAND flash memory into a single module and is commonly used in smartphones. For 2015, the company expects its DRAM shipment growth (in terms of bit volumes) to outpace the broader market, which it estimates will grow by mid-20%. For NAND, the company expects the growth rate to surpass the projected upper-30% market growth rate. However, we believe that DRAM prices are likely to decline this year, on the back of increasing supply and the consequent growth in competition between DRAM manufacturers.

Logic Chips: 14-nm Process Technology Will Give Samsung An Edge

Samsung’s logic chip business is divided into two parts. A bulk of the company’s chip business comes from its foundry operations, which acts as a contract manufacturer for semiconductor companies. A smaller portion of revenue comes from the chips such as the Exynos, which are developed and manufactured by the company. During 2014, Samsung saw its non-memory chip business decline by roughly 24% year-over-year to around $10 billion, potentially due to a lower foundry business from Apple (which is believed to have sourced fewer of its mobile processors from Samsung) and weak demand for Exynos chips. However, 2015 appears to be a more promising year, given that the company will be ramping up production of its highly anticipated 14 nanometer (nm) FinFET process technology. The nanometer measurement, which is a key metric in the semiconductor fabrication business, is an indicator of the space between transistors on a chip. Reducing the distance typically leads to a better performance, lower power consumption and miniaturization of chips.

While rivals such as TSMC are currently migrating from 20nm to 16nm this year, Samsung’s 14nm process puts it well ahead of the competition. Samsung’s 14 nm chips are touted to consume 35% less electricity, while having 20% more processing power and taking up 15% less space compared to 20-nm chips, making them ideal for mobile and wearable applications. Samsung notes that these chips could account for about a third of its non-memory chip output by the year end. This technology is expected to help the company win business from Apple (for the next iteration of its iPhone) as well as other semiconductor companies such as Nvidia and Qualcomm. The first chip that will utilize the 14nm technology will be the company’s own Exynos 7, which is likely to debut on the company’s latest high-end smartphone, which will presumably be called the Galaxy S6.