By Min-Jeong Lee in Seoul and Jonathan Cheng in Barcelona
Samsung Electronics Co.'s new flagship Galaxy S6 smartphone is
garnering attention for its curved screens and its metal-and-glass
frame.
But for the South Korean technology giant's attempts to rebound
from one of its worst years of profit declines, the most important
feature may be the one inside the phone that most consumers won't
even notice: the internally developed Samsung microprocessors that
will power the new high-end device.
The Galaxy S6's microprocessor, dubbed the Exynos 7, is the
product of a carefully laid-out, multi-billion-dollar investment
bet that stretches back years. By using its own microprocessors
rather than those from Qualcomm Inc., Samsung hopes to gain a
technological edge against rival devices and, in the process, boost
the profits that the company makes from each smartphone that it
sells.
The Exynos chips will power the majority of the company's Galaxy
S6 devices including those for the U.S. market, say people familiar
with the matter. They are being pumped out at Samsung's most
advanced chip plant, which produces microprocessors using advanced
technology that allows it to boost output while lowering
manufacturing costs. Only Samsung is able to pump out mobile chips
at volume using 14-nanometer process technology, Roh Tae-moon,
Samsung's head of mobile product strategy, said in a recent
interview.
Until the Galaxy S6, Samsung--like most other makers of high-end
smartphones--had little choice but to rely on Qualcomm, whose
Snapdragon microprocessors have long been considered the gold
standard, giving the San Diego-based semiconductor company a
virtual monopoly on the chips in high-end smartphones.
While Samsung was able to use Exynos chips to power some of its
previous Galaxy smartphones, their wider use this time underscores
the technological edge that Samsung has gained.
Samsung is the world's biggest maker of memory chips but has
long been a minor player in chip design. The company began making
microprocessors for Apple Inc.'s iPhones in 2007 but only started
to develop similar chips for its own smartphones in 2010.
Since 2010, Samsung has been spending no less than $10 billion
each year to upgrade and expand its chip facilities, including
memory chips. Even during cyclical downturns when rivals cut back
on spending, Samsung continued to spend billions of dollars to stay
ahead in the semiconductor industry.
In June 2012, Samsung announced a 2.25 trillion won ($2.05
billion) investment plan for a new production line for chips using
transistors as tiny as 14 nanometers, or billionths of a meter,
which is more advanced than the 20-nanometer circuitry that
Qualcomm uses to make its Snapdragon chips. The high-tech
manufacturing capability gave Samsung a cost advantage to produce
microprocessors with better power efficiency and faster data
transmission speeds.
The process was far from smooth. In 2013, Samsung's Exynos chips
had briefly been subject to overheating issues making it a less
preferable option even for Samsung's own premium smartphones,
analysts say. The rate of adoption by Samsung phones of Exynos
chips bottomed in 2014, with analysts estimating the proportion to
have dipped to roughly 20% among Samsung's own high-end models, as
Qualcomm's offerings became the favored choice for Samsung phones
based on advanced fourth-generation communications technology known
as LTE, or long-term evolution.
But longer term, Samsung is betting that having its own mobile
processors will help boost profits from its semiconductor division.
In the fourth quarter of 2014, Samsung's semiconductor business
accounted for 51% of the company's operating profit of $4.8
billion.
Sundeep Bajikar, a San Francisco-based analyst for Jefferies,
says that Samsung's new capabilities mean that Exynos processors
could even be seen by customers as a potential alternative to
Qualcomm and Taiwan's MediaTek Inc.
Qualcomm declined to comment, while a representative at MediaTek
couldn't immediately be reached for comment.
The anticipated increase in internal demand for Exynos chips
coupled with expected chip demand from Apple will help Samsung's
logic chip division, called System LSI, to swing back to
profitability as early as the third quarter of the year, analysts
say. Last year, the division was mired in hefty losses. Samsung
doesn't disclose exact figures.
Company executives have already sounded a rare upbeat note.
"All of the capital expenditure related with System LSI that's
planned for the second half of this year is already backed up by
customers," Robert Yi, Samsung's head of investor relations said in
late January, as the company released its fourth-quarter
results.
When it came time to unveil the Galaxy S6 on the sidelines of
Mobile World Congress this week, however, Exynos didn't get even a
mention from the stage. The reason: Samsung's reluctance to sour
its relationship with Qualcomm, which it still relies on for
state-of-the-art modem chips and a potential customer for Samsung's
foundry business, which manufactures chips according to others'
designs.
In February, Qualcomm cited its failure to win a spot for its
Snapdragon 810 chip in one high-profile smartphone as among several
factors leading to a reduced revenue forecast for 2015.
Samsung declined to clarify whether it will still use Qualcomm
modem chips in the Galaxy S6.
Write to Min-Jeong Lee at min-jeong.lee@wsj.com and Jonathan
Cheng at jonathan.cheng@wsj.com
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