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Intel, Samsung to Boost Spending to Outpace Rivals (Update1)
By Yoshifumi Takemoto
Seoul, Jan. 7 (Bloomberg) -- Samsung Electronics Co., Intel Corp. and Texas Instruments Inc. will probably widen their lead over chipmaking rivals this year because they're investing the billions of dollars needed to compete in the $141 billion industry, investors and analysts say.
Intel is opening factories that produce more chips from each silicon wafer and cut production costs by as much as 30 percent to stay ahead of Advanced Micro Devices Inc., its closest competitor in the computer microprocessor market. Similar spending will help Samsung, the world's No. 1 memory-chip maker, beat out rivals Micron Technology Inc. and Hynix Semiconductor Inc.
``The chip industry is a high-stakes gamble that requires a lot of investment,'' said Takehiko Takachio, a senior portfolio manager at Kokusai Asset Management Co., which manages about 470 billion yen ($3.95 billion) in Japanese equities, including shares of chipmaker Toshiba Corp. ``Those that invest for the future will be the winners.''
Falling business spending and slowing global growth have cut sales of the personal computers and phone equipment that use 70 percent of the world's chips. Companies that invest now will be set to outsell their competitors as corporate spending and demand for advanced mobile phones revive chip sales later this year, analysts say.
Take Texas Instruments. The company, whose chips power half the world's mobile phones, invested $800 million in 2002, mostly to upgrade wafer equipment. That dwarfed the $180.5 million spent by National Semiconductor Corp., which also focuses on chips for wireless devices. In 2001, the industry's worst year ever, Texas Instruments invested $1.8 billion.
`Big Bet'
``We think we're further ahead in products and performance than we were during the height of the last upturn,'' Texas Instruments Chief Financial Officer Bill Aylesworth said in an interview. ``With our strong financial position, we knew we weren't jeopardizing the health of the company.''
The company had $2.59 billion in cash and marketable securities as of September, according to a filing with the Securities and Exchange Commission. By the same measure, National Semiconductor had $686 million in November.
``If you're ever going to make a big bet, this is the time to make it,'' said Cody Acree, an analyst at Legg Mason Wood Walker Inc. who rates Texas Instruments shares ``buy'' and said he doesn't own them. ``It's not really a huge risk to shareholders.''
Global chip sales will probably rise 12 percent this year to about $174 billion after gaining just 1.4 percent in 2002, according to market researcher Dataquest Inc. That still trails gains in 2000, when worldwide chip sales climbed 37 percent to a record $204 billion.
Chips for Phones
In 2000, capital spending on semiconductors surged 87 percent before falling for two straight years. Spending this year will probably rise 5 percent, according to IC Insights Inc.
``For 2003 as a whole I'm not very optimistic,'' said Egbert Jan Nijmeijer, who helps manage about 30 billion euros ($31.4 billion) at Robeco Groep in Rotterdam, including Samsung shares. ``There is still big price pressure as there is still overcapacity.''
Most of this year's growth will go to chipmakers that are building more cost-efficient factories and relying less on personal-computer demand by making chips for camera-equipped mobile phones, digital cameras and other consumer electronics, investors said.
Intel, the world's biggest chipmaker, opened a $2 billion extension to a New Mexico plant in October that makes silicon wafers with smaller circuitry and 12-inch (300-millimeter) diameters, larger than the current standard. That means more chips can be made from each wafer.
Bigger Wafers
The Santa Clara, California-based maker of the Pentium chip used in about 80 percent of the world's PCs plans to open two more plants making chips from 12-inch wafers in the next two years.
``They've made the technology transitions, and they're already experiencing the benefits to some extent,'' said Sunil Reddy, who helps manage $32 billion at Fifth Third Bancorp, including 9.4 million shares of Intel.
Intel Chief Executive Officer Craig Barrett said last year his company would win market share from rival Advanced Micro by outspending it. Intel said in November it would invest $4.7 billion in 2002, making it the industry's biggest spender. Advanced Micro planned to spend $750 million for the year.
This year, Intel's net income will rise 29 percent to 63 cents a share from an expected 49 cents in 2002, according to the average estimates of analysts surveyed by Thomson First Call. Advanced Micro will post a loss of 66 cents a share, analysts predict. Intel's shares fell about 50 percent in 2002, and Advanced Micro's declined 59 percent.
Trimming Costs
While machines used to make chips from 12-inch wafers cost more than 8-inch equipment, the current standard, investors say the savings may shield Intel from chip-price fluctuations.
``Once business improves and demand improves, it's not pricing that's going to get you to the margins you want, it's going to be the economics of your fixed costs,'' said Rose Papp, who owns Intel shares among the $1 billion managed by L. Roy Papp & Associates in Phoenix.
New investments may help South Korea's Samsung extend its gains this year. The South Korean company's chip sales rose 30 percent last year to $8.17 billion, according to market researcher Dataquest Inc.
``Samsung has been an extraordinary exception in the chip industry when you look at profit levels and increasing market share,'' said Robeco's Nijmeijer. ``Nothing is stopping Samsung from further building on its already strong position.''
Samsung invested 4.88 trillion Korean won ($4.1 billion) in new plants and equipment in 2002, more than four times its nearest memory-chip-making rival, Micron of the U.S. Samsung says it has 6 trillion won in cash and plans to start mass production at a 12- inch wafer plant by the third quarter.
Hynix Lags
South Korea's Hynix, the world's No. 4 memory-chip maker according iSuppli Corp., spent only about a 10th of what Samsung did last year. Saddled with debt of more than 12 trillion won, Hynix will probably post a 1.1 trillion won loss in 2003, its sixth in a row, according to Merrill Lynch & Co.
By contrast, Samsung's 2003 profit will probably rise to at least 8.1 trillion won from an estimated 7.1 trillion won last year, according to nine analysts surveyed by IBES. Samsung's shares rose 12 percent last year, while Hynix's slid 88 percent and Micron's shares dropped 68 percent.
Europe's biggest chipmakers are spending less than their U.S. and Asian counterparts on new plants and equipment.
STMicroelectronics NV, the region's No. 1 chipmaker, plans to invest about $1 billion this year, the same as in 2002. To share costs, it's linked up with Royal Philips Electronics NV and Motorola Inc. to develop semiconductors that are smaller, cheaper to produce and more efficient. The three partners plan to spend a combined $1.4 billion by 2005.
Infineon, Philips
Germany's Infineon AG, the world's third-largest memory-chip maker, said it will invest 980 million euros in the year ending in September and reach full production capacity at a new 12-inch wafer plant by mid-2003.
Others have less cash for expansion. Philips, Europe's No. 3 chipmaker, cut planned capital spending for 2002 to 425 million euros in October from an earlier forecast of 450 million euros.
Rising global consumer demand for digital cameras, camera- equipped cell phones and video-game consoles will sustain chip- sales growth in 2003 as PC demand stalls, analysts said.
The market for chips used in consumer electronics will grow 20 percent to $23.1 billion this year, according to IC Insights. That more than twice the 8 percent increase in PC sales expected by market researcher International Data Corp.
`Higher Performance'
Sales of flash-memory chips used in cell phones, digital cameras and MP3 music players are set to climb 39 percent in 2003, the Semiconductor Industry Association forecasts.
Japan's Toshiba, Sony Corp. and Matsushita Electric Industrial Co. will be among the chipmakers that benefit most from growing demand for those gadgets as they increase production of the chips that power them, analysts said.
Toshiba, the world's No. 5 chipmaker, said last month it plans to invest 350 billion yen to build two new plants that make chips from 12-inch wafers, and it's increasing production of large- capacity flash memory chips.
``We expect chip demand to surge perhaps in the second quarter of 2003, mostly because mobile phones require semiconductors with higher performance,'' Toshiba Senior Vice President Takeshi Nakagawa told reporters last month. ``That's why we need to invest in the latest chip technology.'' |
