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Samsung to build S$18.7b chip plant as phone sales slow

SEOUL — Samsung Electronics will spend 15.6 trillion won (S$18.7 billion) to build a chip plant in South Korea as it heads for the roughest quarterly result in years, amid competition from Apple and Xiaomi smartphones.

Samsung shifted the release date of its Galaxy Note 4
smartphone forward, so device sales will aid third-quarter results. Photo: Bloomberg

Samsung shifted the release date of its Galaxy Note 4
smartphone forward, so device sales will aid third-quarter results. Photo: Bloomberg

SEOUL — Samsung Electronics will spend 15.6 trillion won (S$18.7 billion) to build a chip plant in South Korea as it heads for the roughest quarterly result in years, amid competition from Apple and Xiaomi smartphones.

Construction in Gyeonggi province, south of Seoul, will begin in the first half of next year with semiconductor operations due to commence in 2017, said the South Korea-based mobile giant in a statement. Samsung is shifting towards more complicated and lucrative processors, which will serve as the brains for new products such as wearable devices and smart cars.

The biggest memory-chip maker is investing as its smartphone business struggles to stay dominant, with Apple introducing bigger-screen iPhones and Xiaomi selling low-cost devices in more overseas markets.

Third-quarter operating profit, due to be released today, is projected to plunge 47 per cent and sales may drop 15 per cent in the steepest declines since at least 2009, based on analyst estimates.

“Semiconductor has been Samsung’s long-time key business, while the firm can no longer expect strong growth from its mobile unit,” said I’M Investment & Securities analyst Lee Min-hee. “The company is making a huge investment for the future as its key mobile business isn’t likely to contribute to profits as much as it used to.”

The firm may raise spending on the new plant after its initial investment — which is triple the amount American firm Tesla Motors may spend on its planned battery “gigafactory”.

Profit at Samsung’s chip unit was 2.14 trillion won in the third quarter, a Bloomberg News survey of analysts showed. That increase from 2.06 trillion won a year earlier is partly due to the mobile giant supplying semiconductors to the new Apple phones.

Samsung shares rose 0.9 per cent to 1,151,000 won in Seoul, paring this year’s decline to 16 per cent. SK Hynix, South Korea’s second-largest chip maker, slumped 5.1 per cent.

Analysts have been cutting their profit estimates for Samsung almost daily, with at least 27 of 42 tracked by Bloomberg reducing their estimates in the past four weeks.

The firm moved the release date of its Galaxy Note 4 smartphone forward to the end of last month, meaning device sales will aid third-quarter results. “Samsung wanted to release the Note 4 in China ahead of Apple to give an earlier splash,” said HMC Investment Securities Co analyst Greg Roh.

Product release dates are determined based on a range of internal and external factors that affect business operations, Samsung said in a response to Bloomberg News.

“Samsung’s third-quarter earnings will be pretty ugly,” said Daishin Securities analyst Claire Kim. “The most important thing for Samsung now is to protect its fast-falling market share, especially in China.”

Samsung fell to fourth in Chinese market share in August with 10 per cent, behind Lenovo Group’s 17 per cent, Huawei Technologies’ 16 per cent and Xiaomi’s 14 per cent, said Hong Kong-based Counterpoint Technology Market Research.

While the introduction of smartphones aimed at low- to mid-range markets may help retain Samsung’s market share, it may take the release of the company’s next marquee device, such as a successor to the Galaxy S5, for earnings to recover.

“We can’t really expect good news from Samsung’s mobile business this year,” said HI Investment & Securities analyst Song Myung-sup. “To reverse the current tide, the firm should launch its Galaxy S6 with flexible screens.” BLOOMBERG

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