Samsung Inside?

Just a few years ago, Samsung Electronics had an inflexible rule regarding
Sony and Intel, the two competitors it saw as its chief role models and rivals:
Never compare the companies' performance to Samsung's in public. The
prohibition on mentioning Sony Corp. fell two years ago as Samsung grew into a
brand with street cred from Paris to Peoria, and its market capitalization
surged past that of the Japanese giant's. Execs bragged about their prowess in
consumer electronics and highlighted Sony's shortcomings.

Now, the Intel Corp. ban is starting to fall as well. On September 20, Hwang
Chang Gyu, president of Samsung Electronics Co.'s semiconductor business,
strode into the ballroom of Seoul's posh Shilla hotel and boasted about
Samsung's 80% revenue growth in semiconductors in the first half of 2004-making
a special point of noting that the figure was nearly four times Intel's
growth. "Samsung's gap with Intel is bound to narrow," Hwang told
the crowd of journalists, analysts, and industry bigwigs. His ultimate goal:
Become the world's biggest chipmaker.

Can Samsung really shove Intel from its perch at the top of the industry-a
perch built on Intel's near-total dominance of the market for PC
microprocessors? The consensus among analysts is not any time soon. But while
Samsung's semiconductor revenues today are just half that of Intel's, the
Korean company is making headway in some key areas: Flash memory, plus
processors for mobile gadgets such as cell phones, digital cameras, and MP3
players. And if the balance of power shifts away from the PC and toward portable
gizmos, then Intel's stranglehold on PC microprocessors will no longer be an
automatic ticket to the summit.

From fourth place in 2001, the Korean company has already stormed past
companies such as STMicroelectronics and Toshiba Corp. to become the No. 2
player in the global industry, thanks mainly to its surging business in memory
chips. In the first half of this year, Samsung sold $7.4 bn worth of chips,
giving it a market share of 7.3%. That's still well behind Intel's 14.7%,
but comfortably ahead of No. 3 TI's 5.8%, according to researcher IC Insights.
In flash memory-used to store data such as photos in cameras and songs on
mobile music players-Samsung overtook Intel last year, with 21% of the market,
vs. Intel's 15%.

Mobile Opportunities

That advantage, Hwang argues, will only grow as the voracious appetite for
higher-quality video and audio keeps boosting demand for memory. And Hwang
believes mobile products will fuel the industry's future growth.

Now, Samsung is looking to use its memory advantage to start taking share in
markets that cut closer to Intel's core PC business: the logic chips that make
digital devices hum. Although Samsung has no interest in PC microprocessors, the
two will butt heads as Intel tries to boost its share of mobile markets. Samsung
aims to gain more than 20% of the market for five key varieties of logic
semiconductors, including image sensors in cameras, display driver chips that
tell digital screens what to show, and processors that power all kinds of mobile
gadgets. Those markets will add at least $3 bn to Samsung's sales by 2007, its
execs say.

Samsung's experience in handsets will doubtless help it gain a foothold in
these markets. As the world's No. 3 cell-phone maker, one of the top two
makers of liquid-crystal displays, and a strong player in digital cameras and
music players, Samsung knows the demands of such gadgets as well as anyone in
the industry. Its own internal customers in Samsung's consumer-electronics
divisions aren't shy about pointing out flaws. Because Samsung already makes
logic chips for many of its own devices, its execs say it's relatively simple
to start churning them out for other companies. Already, Samsung is the top
maker of LCD driver chips. Last year, it sold $902 mn worth, giving it 19% of
the market. Its target now is to grab 27% of the market by 2007 for display
driver chips, not only for LCDs but also for other new TVs such as plasma
screens and projection displays. Among its customers: Sony, Nokia, and Motorola.

MOBILE MAVEN Samsung is No. 3 in cell phones

Good plan, some say, but Samsung's ambitions may be a bit grandiose. Sure,
Samsung is the biggest memory chip maker, but it "has yet to prove itself
in the nonmemory sphere and still has a long way to go," says Merrill Lynch
& Co analyst Simon Woo. Other industry watchers say Samsung's goal of 20%
of the market for the five logic chips within three years will be tough to meet
given the time needed to design new chips, write the required software, and
build devices around them. Furthermore, Intel isn't the only rival Samsung
will face. "In handsets, you know that TI is going to defend its position
to the hilt," says Jordan H. Selburn, an analyst at market researcher
iSuppli Corp.

As Intel sees it, one big potential flaw is Samsung's role as competitor
and supplier in mobile devices: "They end up competing with their customers
and that's a disaster because you lose trust and they get paranoid about
you," says one industry insider.

Fleeting Edge?

Another possible hurdle: despite Samsung's current strength in flash
memory, that may not give it a permanent edge against Intel. Samsung is best at
making so-called NAND flash chips, which are most suited for storing big music
and photo files. Intel, by contrast, excels at NOR flash chips, which are more
expensive to make but can be better integrated with logic chips. Next year the
NAND market is expected to grow 38%, to $9.9 bn-and Samsung says it will get
two-thirds of that. Intel, meanwhile, expects to have a big share of the $7.6 bn
NOR market, which iSuppli says will fall by about 6% next year. But some experts
say NOR prices will decline enough to make it competitive with NAND, and that
NOR will ultimately prevail. If that happens, it will take much of the wind out
of Samsung's sails. Not to worry, Samsung says. It's confident it can keep
making NAND cheaper, and it's continuing to expand the capacity of its chips.

CHIP BOSS HWANG He has plenty to boast about

Then there are concerns about whether Samsung is too optimistic in its
projections of growth in mobile gadgets. The company, for instance, expects
sales of feature-packed third-generation cell phones to double annually through
2007, which some analysts question. Also, forecasters worry that consumer demand
for various chip-laden devices will slow next year, putting pressure on chip
prices. Samsung is betting that its emphasis on customized chips and the most
advanced gadgets will insulate it from a downturn.

And if it's wrong? "If mobile phones don't turn out to be the main
handheld terminal for consumers, Samsung's scenario won't work,"
reckons Koo Bon Jun, an analyst at Salomon Smith Barney. Hwang, though, is
confident. "You don't wait for the future, you create it," says
Hwang. If he pulls it off, he'll have plenty to gloat about.

Moon Ihlwan in Seoul, with Cliff Edwards in San Mateo, Calif., and Otis Port
in New York in BusinessWeek. Copyright 2004 by The McGraw-Hill Companies, Inc