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Samsung surges as competitors shrink, cut back

Apple, Inc. (AAPL) and Samsung Electronics Comp., Ltd. (KS:005930) have been fighting an intense war over sales of smartphones, the handheld computers that many people feel embody the future of personal computing and electronics.  The war has been waged in the court [1][2][3][4] [5][6][7][8] [9][10][11][12] [13].  It has been waged in the media.  It has been waged on the market.

I. Samsung Outspends Rivals on R&D, In-House Process Technology

But at the end of the day, two things are clears.  First, Apple has absolutely won in profitability.  Second, Samsung does not care because it is beating Apple in sales.

The two companies’ wildly different approaches are perhaps best embodied by their different philosophies in terms of spending on research and development.  Apple is notorious for being one of the stingiest spenders in terms of research paying in 2010 a reported mere $2.4B USD -- 2 percent of its annual income -- to research and development (R&D).

Samsung by contrast spent $6B USD in 2009 on R&D, according to Booz & Comp.

And this year it plans to broaden the gap in research and capital spending devoting 47.8T Won ($41.8B USD) to its efforts.  According to Reuters about 31T Won ($27.1B USD) will go to facilities, 13.6T Won ($11.9B USD) to R&D, and 3.2T Won ($2.8B USD) to capital investments.

Korean Won
Samsung is outspendings its rivals in capital and research.
[Image Source: 
SeongJoon Cho/Bloomberg]

By contrast, Intel Corp. (INTC) -- another key rival -- is expected to have spent on $9.8B USD on "capital expenditures" (mostly facilities) [source] and another $6B-$7B on R&D in 2011 [source].

The numbers are a bit misleading, though, as Samsung is fighting a war on many fronts.  The company makes chips galore -- from systems-on-a-chip (SOCs), which use licensed ARM Holdings plc (LON:ARM) IP-cores, to NAND flash chips.  Samsung holds the distinction of reportedly being the only DRAM manufacturer to remain profitable during the recent plunge in component prices.

Of the 31T Won for facilities, in 2012 Samsung is expected to spend 7.5T Won ($6.56B USD) on SOCs (e.g. its Exynos SOCs found in its smartphones) and sensors.  This is the first time that part of Samsung's component spending has surpassed DRAM and NAND investments, which are expected to total 6.5T Won ($5.69B USD).  

An R&D breakdown was not mentioned, but assuming that its similar to the capital expenditures on facilities, Samsung could be ponying up as much as 3.3T Won ($2.9B USD)

What this means is that Samsung is spending approximately half to two thirds third of what Intel is spending on CPU-making.  This puts Samsung in an elite league beyond other chip-heavy firms like Advanced Micro Devices, Inc. (AMD).

II. The Race to Tiny -- Samsung Remains Neck and Neck With Intel's Older Lines

The investment is starting to show signs of paying off.  Samsung was the only major ARM chipmaker to get 32 nm chips out in 2011, though it failed to yield devices (you can think of this as akin to Intel's production of Ivy Bridge in 2011, in that it's accumulating stock to storm the market next year).  It shipped its first production-line 32 nm stock last year.  By contrast, rivals like Qualcomm Inc. (QCOM) are just hitting the similar 28 nm node in 2012, courtesy of Taiwan Semiconductor Manufacturing Comp., ltd. (TPE:2330) (TSMC).

Fab worker
Samsung is a leader among ARM CPU makers in fab processes. [Image Source: IntoMobile]

Intel's mobile offering Atom will only hit 32 nm by H2 2012.  So it is behind Samsung on the mobile front as well.

Now this may seem a bit confusing as Intel's first 22 nm chips -- Ivy Bridge -- are expected to begin to retail in Q2 2012.  But the thing holding Intel back is that while it has smaller process fabs than either TSMC or Samsung, it only has a limited number, forcing it to devote them to its core PC business.  The reality of the situation is that unless Intel seriously ups its capital investment, mobile chips will likely keep getting the "hand me down" fabs, while the cream of the crop will be reserved for the PC.

This is good news for TSMC, but especially for Samsung -- the current leader in ARM process technology.  Now Samsung does still have to worry about some of the tricks Intel has up its sleeve -- including 3D FinFET transistors, which will hit its mobile lineup in 22 nm chips in 2013.

Predicting Samsung's arrival at 22 nm is a bit interesting given its rapidly increasing R&D/capital expenditures contrasting its historical struggles.  Samsung began 32-34 nm ("30 nm [range]" in Samsung-speak) DRAM mass production in 2011, around the same time it start to pump out its first 32 nm SOCs (albeit in lower quantities).  Samsung's 30 nm range node was first sampled in 2009, but problems with NAND controllers delayed commercialization to the present.  Samsung sampled 20 nm range (like 22 nm) NAND in Apr. 2010.  So if the 20 nm node follows the trend of the 30 nm node, you can expect to see Samsung with 22 nm SOCs in 2013, alongside Intel.

Intel's roadmaps at IDF slung mud at this idea, but given Samsung's massive investments on the chip making front, it might be premature to think that Samsung can't deliver 22 nm in 2013.

III.  Mo' Money, Mo' Selling Features

Samsung is clearly serious about its chip making investments.  It is issuing ~$1B USD in new bonds, its first new debt in over a decade.  The money will go towards chip making capacity expansion, presumably in part towards expanding Samsung's only overseas fab, located just minutes away from a major Apple customer service call center in Austin, Texas.

It's hard to say how much of a difference these investments will make to Samsung's core smartphone sales.  But pushing smaller process and higher yields via deeper investment certainly can't hurt Samsung's profit margins and industry-leading smartphone market share.

"Galaxy S II
Led by the Galaxy S II, Samsung's smartphone lineup proved much more popular in terms of sales than its rival Apple's lone product. [Source: Samsung]

Furthermore, they offer a nice trickle-down effect to Samsung's feature phones, which are currently second only to Nokia Oyj. (HEL:NOK1V) in sales.  Samsung has announced its hopes to pass Nokia in total combined smartphone and feature phone sales in 2012.

Samsung plans to funnel 10T Won ($8.75B USD) into its LCDs, rechargeable batteries and LED businesses, investments which should also give a nice boost to its smartphone and feature phone lineup.

IV. Samsung Beefs up Investment in Other Divisions, Too

Outside the core chip making and smartphone businesses Samsung is prospering as well.  The company plans to pour 7T Won ($6.13B USD) into commercializing OLED.  Samsung recently took Sony Corp.'s (TYO:6758) struggling LCD business (mostly TV manufacturing) off its hands

While LCD TVs are the core of Samsung's current TV sales, OLEDs represent the future of the market.  South Korean rival LG Display (sister company to LG Electronics Inc. (KS:066570) -- also a smartphone rival of Samsung) revealed a large OLED TV at CES 2012.

Market research firm DisplaySearch says that OLEDs currently only amount to 4 percent of the display market, but will rise to a substantial 16 percent by 2018.

Samsung OLED sets, circa-2010 [Image Source:]

But while LG is serious about OLED, the LG Group (the parent of LG Electronics and LG Display) is cutting investment by $3B USD in 2012.  The OLED division will be relatively untouched, getting 4T Won ($3.5T USD), but that's only about half of what Samsung is investing.  

And overall LG is going in the reverse direction to Samsung who increased its investments from 2011 42.8T Won ($37.45B USD), a net swing of +11.7%.  LG is not alone in its cutbacks.  Sony, Toshiba Corp. (TYO:6502), Hitachi Ltd. (TYO:6501), and Sharp Corp. (TYO:6753) -- the top vendors in Japan -- all made similar cuts.  Combined these firms are only spending 1.3T ¥ ($16.9B USD) on investments -- roughly on two fifths of what Samsung is spending.

These rivals are also cutting employees, while Samsung is adding an estimated 26,000 employees in 2012 to its global workforce of 350,000.

Samsung, a massive South Korean conglomerate composed of 80 sub-units which span everything from dishwashers to automobiles is currently Asia's most valuable tech company.  The gap between Samsung and its Asian rivals is only expected to grow as the investment gap grows.

Despite its heavy investment Samsung is still turning profits.  It is expected to haul in 5.2T Won in calendar Q4 2011 ($4.73B USD).  That isn't Apple-esque profits, by any stretch, but it's not bad considering Samsung's industry leading investments in its technology future.

Source: Reuters

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More Mick trolling
By mfenn on 1/17/2012 9:00:43 PM , Rating: -1
Mick, Apple isn't "stingy" wrt to R&D funding, they just don't have 1,000's of different products like Samsung has. I'll bet more R&D funding goes into the iPad than went into the entire Samsung Galaxy line (smartphones and tablets).

RE: More Mick trolling
By Reclaimer77 on 1/17/2012 9:08:13 PM , Rating: 4
You're an idiot. Apple doesn't make ANYTHING! They subcontract everything out to tech firms like Samsung, for example.

That means they don't have to invest R&D anywhere NEAR the level of Samsung.

I'll bet more R&D funding goes into the iPad than went into the entire Samsung Galaxy line (smartphones and tablets).

That's so absurd I don't even know where to begin. The most crucial components of the iPad where researched and developed BY SAMSUNG! The "A" series chips alone represent billions in R&D. Your ignorance is astounding. You believe coming up with ideas for others to actually make costs MORE in R&D???

If anyone is trolling here it's you.

RE: More Mick trolling
By TakinYourPoints on 1/17/12, Rating: 0
RE: More Mick trolling
By Reclaimer77 on 1/17/2012 11:43:40 PM , Rating: 2
Did you even research the cold hard numbers before posting all that? Samsung is in the top 10 in the world in total R&D spending. Apple isn't even in the top 20.

RE: More Mick trolling
By ptmmac on 1/18/2012 12:16:17 AM , Rating: 2
I think you are missing what he is saying. Apple does not spend as much on R&D, but they do find the right places to spend money. They are intimately involved in all the tech that goes into their devices, controlling specs, platforms, hardware and even purchasing expensive machinery to allow production of innovative products that other tech companies won't even touch. The machining of the macbook pro cases is one example. The original iPhone 4 touch screen is another. Apple leaves broad growth of new tech to other companies and focuses on IP problems that they believe are more profitable. Microsoft has spent billions on pure research for their windows franchise and have very little to show for all the expense and time involved. Intel has focused on keeping the keys to their kingdom and keeping x86 alive long after the efficiency of other types of cpu's has been established. Apple has transitioned to new hardware at least 3 times and grown in breadth and scope of the business they are able to attract. It is also important to remember that one of the reasons Apple has avoided this type of investment is that it has let them be more nimble than companies many time smaller than they are. You don't have to be an Apple fanboi to appreciate laser like focus that produces outsize profits do you?

RE: More Mick trolling
By TakinYourPoints on 1/18/2012 1:42:15 AM , Rating: 2
+1 reading comprehension for you. :)

The point of the root post was on product focus and ROI from R&D, not the total amount spent on R&D.

RE: More Mick trolling
By Reclaimer77 on 1/18/2012 8:51:29 AM , Rating: 3
I think you are missing what he is saying. Apple does not spend as much on R&D

But the argument was who spends more on R&D. That was the point of the entire discussion. If Takin want's to move the goalposts and frame the argument in a different context, one that favors Apple, fine. But I'm under no obligation to do the same.

I "get" what he's saying and what he's trying to do. I'm just not playing that silly game. Samsung spends far more on R&D and makes a far bigger impact on technology than Apple. ANYONE can come up with ideas. Making ideas real and tangible, however, takes know-how and lots of money.

As to your other points...

Microsoft has spent billions on pure research for their windows franchise and have very little to show for all the expense and time involved.

Microsoft was the first real software company, and has ALWAYS been the biggest and most profitable. Saying they have "very little to show" for their investment makes you look like a fool. What are you playing at here?

Intel has focused on keeping the keys to their kingdom and keeping x86 alive long after the efficiency of other types of cpu's has been established.

What? There's NEVER been a better desktop CPU that wasn't X86 based. You can make the argument for mobile CPU's, sure. But you're so wrong on this it's amazing. Intel HAS developed and released non-X86 chips anyway. Your whole point is moot and biased.

Like Takin you seem to have to rewrite history or just say wonky inaccurate crap, whatever you have to do, to change the context so Apple appears to be awe-inspiring and unique and better than everything out there.

You don't have to be an Apple fanboi to appreciate laser like focus that produces outsize profits do you?

See? Get over the hype! Apple was an OEM computer supplier who failed to gain market-share after decades of trying and was treading water. They switched their focus to disposable consumer devices like iPod's and iPhones because there was nowhere else to go for them. Plain and simple. What you see as divine inspiration is really just desperation.

RE: More Mick trolling
By TakinYourPoints on 1/18/2012 8:34:31 PM , Rating: 2
No, the discussion in the root argument was always about ROI, not on who spent the most. You're the one who changed the subject.

RE: More Mick trolling
By TakinYourPoints on 1/18/2012 9:56:55 PM , Rating: 1
ANYONE can come up with ideas. Making ideas real and tangible, however, takes know-how and lots of money.

Like Apple, Microsoft doesn't "make" anything, they just subcontract physical production to other companies. By your original argument, they are just as silly as Apple. After all, ANYONE can come up with ideas, that's cheap and easy! The core building blocks are all that matter!


Saying they have "very little to show" for their investment makes you look like a fool. What are you playing at here?

Again, the argument in the root post you responded to was all about ROI. Microsoft's ROI is very low relative to Apple's. Their R&D kind of boggles my mind given that what they end up putting out to market are copies of what Apple, Google, and Sony already proved beyond a shadow of a doubt can work.

That said, it may be an unfair comparison given that nearly everyone's ROI is low compared to Apple's. Again, this is about their focus on developing and marketing very few products as opposed to a ton of others, and they do that very well.

This is a well known and widely accepted point, and it is hilarious that it gets you SO MAD. Why are you always so angry?

RE: More Mick trolling
By Just Tom on 1/19/2012 12:01:23 PM , Rating: 2
Samsung is also over twice as large, in revenue, as Apple. Some of the differences in R&D is simply a function of size.

RE: More Mick trolling
By ssnova703 on 1/18/2012 12:00:05 AM , Rating: 2
Don't forget the LCD screen in the Ipad as well... "eye-retina", also developed by Samsung...

RE: More Mick trolling
By MADAOO7 on 1/17/2012 9:11:20 PM , Rating: 2
Agreed. They have two different business strategies. Apple goes for a few home runs, whereas Samsung's success is from a lot of doubles and triples.

RE: More Mick trolling
By MGSsancho on 1/17/2012 9:41:05 PM , Rating: 2
While Samsung plays different sports

RE: More Mick trolling
By TakinYourPoints on 1/17/2012 10:01:32 PM , Rating: 2
Very good analogy

RE: More Mick trolling
By Ramtech on 1/18/2012 2:20:04 AM , Rating: 2
Why Mick always gets trolled for criticizing Apple by Apple fanatisc and Tiffany and Shane do not?

"It's okay. The scenarios aren't that clear. But it's good looking. [Steve Jobs] does good design, and [the iPad] is absolutely a good example of that." -- Bill Gates on the Apple iPad

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