TrendForce: New South Korea plant to help Samsung tighten grip on chip-making industry

Samsung Electronics plans to build a new semiconductor plant in South Korea at a cost of Won15.6tn ($14.7bn) to meet burgeoning demand for chips used in mobile devices. Construction of the chip-making plant, which will be the largest of its kind globally, will begin in the first half of 2015 and be completed in the second half of 2017, Samsung said. The plant will be located in Pyeongtaek, about 75 kilometers south of Seoul. 

“It makes sense for Samsung's new factory to focus on DRAM and NAND flash chips, since the application of processors made in-house has not increased significantly in Samsung smartphones,” said Avril Wu, assistant vice president of DRAMeXchange, a subsidiary of the Taiwan-based market intelligence firm TrendForce. Samsung's Line 17 factory was initially expected to boost production in the second half of 2015. But Samsung’s new plant may be operational as early as the second half of 2016, adding to its overall DRAM production capacity. DRAMeXchange estimates DRAM prices will drop as factories lower costs and gradually adjust production capacity. As a result, DRAM suppliers are expected to still be profitable in 2015. 

Yet the main reason Samsung is building the plant is not to satisfy surging demand for DRAM and NAND flash chips, but rather to placate the South Korean government, which is concerned about Samsung’s large investments overseas, Wu said. “The South Korean government has asked that Samsung retain a certain portion of its investments in South Korea,” she added. 

Since the DRAM industry is an oligopoly and barriers to entry are high, it is difficult for new firms to enter. With an aggressive strategy, which calls for boosting production at both the Line 17 and Line 18 factories, Samsung is the undisputed market leader, Wu said. “Samsung believes if it can pull out far enough ahead of its main competitors – SK Hynix and Micron – they will have no chance of catching up,” she said. As balance between supply and demand tends to be maintained in an oligopoly, it is unlikely SK Hynix or Micron will try to match Samsung’s expansion plans with those of their own, Wu added.