CHIP COMBAT: Samsung Building New Plant, Intel and ARM Take Notice!

Samsung Electronics is investing about $2 billion to set up a new plant for manufacturing logic chips, the real “brains” that run modern mobile devices such as smartphones and tablets. It is also retooling some of its memory chip production lines to make logic chips instead.

Samsung’s moves make sense in the light of research from Nomura that projects demand for logic chips growing 40 percent a year to 2014, while PC processors a.k.a CPUs, are likely to only rise in the single digits through the same period.

That’s not good news for Intel (NASDAQ:INTC), which is yet to make any significant headway in the market for mobile chips. Entrenched application processor (NYSE:AP) makers such as Samsung itself, Qualcomm (NASDAQ:QCOM), Texas Instruments (NASDAQ:TXN) and ARM Holdings (NASDAQ:ARMH) would, of course, be happy with the projections.

But Samsung’s plans to ramp up its AP capacity could significantly affect both Intel and Qualcomm. Intel has so far maintained its lead in the chip market, aided in no small measure by its famous Wintel partnership with Microsoft (NASDAQ:MSFT). As Microsoft tries to break into the tablet market, with Apple (NASDAQ:AAPL) in its crosshairs, it has tied up with Intel’s rival ARM for mobile chips.

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“Samsung is betting that mobile processor market growth will further accelerate when Windows 8 is released, which will use ARM-based application processors, and that’s partly behind its aggressive capacity expansion,” said NH Investment & Securities analyst Lee Sun-tae.

Intel’s new Medfield processors are still finding their feet in this market, with their first known application found on a little known smartphone called the Xolo 900 made out of India. But Intel is not giving up – it is ramping up capital spending by about 17 percent and building a $5 billion plant to manufacture high tech 15 nanometer chips. Though Intel surely has the technological advantage, it is still hard put to match mobile chips designed by ARM, which are cheaper to produce and consume much less power.

Samsung’s moves to cut Intel’s lead in the chip market – Intel had $48.7 billion chip revenues last year compared to Samsung’s approximately $29 billion – may take it into different mobile devices, such as low cost phones, and a wider range of customers, beyond itself and Apple.

Samsung may be having its sights clear, except there’s one problem: in some areas such as mobile phones, its chip clients may be its own competitors. Sensitive technology concerns could result in these customers holding back from buying chips from Samsung.

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