Subscribe
E-Paper
This is the fifth in a series of contributions from experts to highlight various issues President Yoon Suk-yeol and his administration should address during his presidency. ― ED.
Samsung, SK advised to cut reliance on commodity chips, focus on differentiated products
By Jim Handy
 |
| Jim Handy, general director at Objective Analysis |
It seems presumptuous of me to try to give insight and advice to an important nation's leader, but I feel that I may be qualified to provide some input in my area of expertise.
I am a semiconductor industry analyst who entered the business as a design engineer in the 1970s, to become one of its leading analysts, particularly in the field of memory chip technologies. I pride myself on my understanding of two markets that are incredibly important to Korea's semiconductor industry: DRAM and NAND flash.
These two markets are both dominated by Korean companies: Samsung Electronics and SK Hynix, whose combined memory revenues total $99 billion, or 18 percent of the total world semiconductor market. Korea has numerous other important chip makers as well, but these two account for most of my focus as a memory chip analyst.
The Republic of Korea, and the nation's people, should be congratulated for their achievements in a relatively short time. Both my father and my wife's father were sent as U.S. military to Korea in the early 1950s to help the country fight for independence. Korea had none of the industrial strength in those days that it has today.
Samsung and SK hynix have also grown very rapidly. These companies first entered the semiconductor memory business in the early 1980s, and have come to lead in that field. In fact, Samsung has occasionally held the top position in all semiconductors over the past couple of years, outstripping Intel, a company that was one of the earliest and most aggressive of Silicon Valley's chip makers.
The path that these companies followed was straightforward. They manufactured commodity memory products. Success can be won or lost in commodities faster than it can in other markets, and Korea's memory leaders have used that fact to their advantage and the disadvantage of memory makers in all other parts of the world: Japan, the U.S. and Europe. That approach is the same one that China hopes to employ to gain prominence in tomorrow's semiconductor market.
China's government dislikes the country's heavy dependence on chips from foreign countries. In 2015, less than 20 percent of the chips consumed in China were manufactured domestically. To correct that situation they have created initiatives to supply 70 percent of their own chip consumption by 2025. The path they have chosen to follow is the same one that Samsung and SK Hynix successfully followed ― they will manufacture commodity memory chips and try to displace their established competitors.
Fortunately, both Samsung and SK hynix have good relationships with China's government. SK Hynix built one of China's first large-scale semiconductor wafer fabrication plants (commonly called a "Fab" in the industry) in Wuxi, Jiangsu Province, in 2005. Samsung also built a significant fab in Xi'an, Shaanxi Province, in 2014.
The trick for these companies will be to find a way to maintain both their good relationships with China and their leadership in the DRAM and NAND flash businesses when China's interest is to take that business from them. This effort is certain to require delicate diplomacy and significant support from your government.
Another tactic is to reduce these companies' reliance on commodity chips and focus on differentiated products, whose markets are slower to establish but are easier to defend against competition. Samsung has already made good progress in this direction with its pursuit of the foundry business, where the company manufactures semiconductors for other companies. SK and Samsung are both developing important artificial intelligence (AI) chips which will also be a help.
Here the Korean government could offer encouragement to motivate these companies to focus a larger share of their effort on developing these defensible markets with the understanding that they may eventually lose their dominance of the commodity memory business. This is the approach that many older companies like Intel, AMD, Infineon, STMicroelectronics and Renesas have used to remain prominent despite their exit from the commodity memory business.
The Republic of Korea is the world's tenth-largest economy, and with good vision and encouragement, this leadership can be maintained or grown despite changes in competition and the world economy. I wish you every success in guiding your country to continued prosperity and strength.
Jim Handy is general director at Silicon Valley-based semiconductor market research company Objective Analysis.
