Samsung Electronics is expected to end Intel’s quarter-century reign as the world’s biggest chipmaker by sales and outstrip smartphone rival Apple in quarterly profits in the coming days, thanks to booming demand for one of its simplest products: the humble memory chip. Increased uses, from smartphones to cars and the “Internet of Things”, have led to capacity shortages for flash memory chips, driving up prices, with Samsung the main beneficiary. At the same time, the traditional PC processor market, Intel’s mainstay, continues to shrink. The initial rise of the IBM PC carried Intel to the top of the semiconductor market in 1992, when it overtook then-leader NEC. That era is set to end on Thursday when Intel and Samsung report their latest results. The Korean group’s anticipated semiconductor revenues of up to $15bn are expected to exceed its US rival’s sales forecast of $14.4bn for the second quarter. “Samsung is doing phenomenally well in memory, which is a critical part of a huge diversity of products, and demand is far outstripping supply,” said Geoff Blaber, a Silicon Valley-based analyst at CCS Insight. Analysts at Gartner, the IT researcher, predict worldwide semiconductor revenues will exceed $400bn this year for the first time, thanks largely to a 52 per cent increase in the memory market, where Samsung has a dominant share. “This gives Samsung its best shot at capturing the number one position from Intel for the first time” over the year as a whole, said Gartner chips analyst Andrew Norwood.
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However, analysts are divided over whether a generational shift is taking place or if the memory industry is merely at the top of yet anotherboom-bust cycle. “Whatever revenue gains put Samsung atop Intel today will probably be shortlived,” said Tim Bajarin, analyst at Creative Strategies. The global memory chip industry is riding high on an unprecedented supercycle amid soaring demand for data storage, which has delivered bumper earnings for top-tier companies such as Samsung and SK Hynix, as they struggle to fulfil roaring demand from internet-connected devices and data servers. As a result of the imbalance in supply and demand, memory chip prices have doubled over the past year. Share prices of memory players have risen 155 per cent on average from their most recent cyclical bottom in 2016. SK Hynix said on Tuesday its net profit surged 763 per cent to Won2.5tn ($2.2bn) in the second quarter, compared to a year earlier. The memory boom is driving Samsung to post record quarterly earnings that are likely to make it the world’s most profitable non-financial company. Its $12.1bn in operating profit for the June quarter is likely to surpass the $10.5bn that analysts expect Apple to report next Tuesday, although the last quarter is typically the iPhone maker’s slowest. The seeds of Samsung’s dominance in memory chips were sown almost a decade ago, when the industry cycle had swung towards a glut. In 2008, capacity overexpansion coupled with the global financial downturn forced many suppliers to turn away from flash memory, Mr Bajarin says. But while others pulled back, Samsung expanded its commitment. “They took a very strategic focus on memory,” Mr Bajarin said. “To their credit, they saw this as a big opportunity.”
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Today, Samsung’s operating profit margins from Dram memory — commonly used in PCs and data centre servers — and NAND flash memory chips are estimated at more than 60 per cent and 45 per cent respectively. The company is spending heavily in a range of semiconductors, with an estimated capital spending of $12.5bn this year, but the bulk of the recent investment has been made in NAND chips, the staple memory for smartphones, solid-state drives and camera memory cards. “There is a ballooning number of devices and endpoints that are going to require memory and keep demand high,” says Mr Blaber. “Samsung has a substantial scale advantage so their cost base is vastly more competitive.” As Samsung ploughed resources into flash memory over the past decade, Intel’s investments in mobile over the same period have yielded few significant results. It took until last year’s iPhone 7 for a leading smartphone to have “Intel inside”, in the form of a modem. Despite missing the smartphone boom, Intel has successfully defended its share of the PC market from rivals such as AMD, even as the industry’s unit sales declined from 400m at their peak to around 270m computers today. Intel has also seen growth in data centres, giving it a key foothold in the next era of cloud computing and allowing it to sustain its position at the top of the industry — at least, until now. As Intel and rivals such as Qualcomm and Nvidia wait for the next wave of growth beyond the smartphone, today’s income from hyped sectors such as the Internet of Things and Artificial Intelligence remain small in relative terms. Last year, Intel generated $2.6bn in revenues from its Internet of Things group, up 8 per cent on 2015, but only 4 per cent of its $59.4bn total sales for 2016.
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“We haven’t got to that tipping point where [IoT] becomes a meaningful revenue source,” said Mr Blaber. “Until we get to that transition, you would expect this dynamic of Samsung overtaking Intel to hold true.” However, Mr Bajarin disagrees, pointing to Intel’s investment in a new form of high-speed memory, 3D XPoint. “Within two to three years you might see that swing again when Intel takes the leadership position in pure revenue terms,” he said. Either way, the good times for the flash memory industry cannot last for ever, especially when Chinese companies are eager to catch up in the highly competitive industry. It is expected to take several years for it to become a big producer, but the country has spent $150bn since 2014 on developing the sector. “Overinvestment, particularly from China, remains the primary risk,” said Mike Howard, senior director at IHS Markit on the chances of a bust. “Overinvestment and thereby too much supply growth is the biggest threat for Dram and NAND, and it’s likely a question of when and not if.” Read More Samsung poised to dethrone Intel as chip king : http://ift.tt/2tGEbNC
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