South Korea's Samsung Electronics said on Wednesday oversupply of memory chips used in personal computers was expected to ease in 2008 as growing demand for portable gadgets prompts a shift in production to flash chips.
The world's biggest maker of memory chips, which trails Finland's Nokia in mobile phones and jumped ahead of U.S. rival Motorola this year, gave ambitious guidance on the business, forecasting it would sell 25 percent more phones next year compared with this year.
In October, Samsung posted a flat third-quarter net profit as sluggish computer memory chip prices offset strong flat screens, and had warned that the whole memory sector could see losses in this quarter.
Although the market for dynamic random access memory (DRAM) chips was still tough, rising demand for NAND-type flash chips used in portable gadgets, such as Apple Inc's iPhone, means manufacturers will switch more production from DRAM to NAND, easing DRAM supply, said Chu Woo-sik, executive vice president in charge of investor relations.
The market is very difficult for DRAM, he said at a technology forum organized by Samsung.
Moreover, many memory chip makers will have to stop some older production lines using 8-inch wafers because they are not cost effective. Converting to more profitable lines that produce more chips from bigger wafers takes time and money.
(In the) next few months, they will have to make the critical decision to retire those facilities, Chu said.
The DRAM sector, which also includes smaller home rival Hynix Semiconductor and Germany's Qimonda, has been plagued with oversupply since the beginning of the year.
After a strong period of growth chip makers kept churning out DRAM chips despite lack of great demand, causing steep price drops over the course of the whole year.
Some DRAM chips are nursing price drops of more than 80 percent since the beginning of the year.
Samsung's forecast is more bullish than that of market research firm iSuppli, which two weeks ago cut its rating on suppliers of DRAM and flash memory chips to negative from neutral, citing a supply glut and a fall in prices.
ISuppli said market conditions should slowly improve during the next few quarters, with DRAM picking up more quickly than NAND. The researcher said earlier this month that the DRAM sector generated $7.96 billion in the third quarter, an 8 percent rise on the previous quarter.
Samsung Electronics shares closed 0.93 percent higher at 544,000 won, outperforming a 1.4 percent fall in the wider market.
Chu said the company did not intend to raise its capital expenditures in 2008, saying it was not intending to flood the market.
Samsung not increasing capex is good news for the DRAM market, said Yoo Chang-eyun, an analyst at BNP Paribas, adding that the current oversupply had prompted many DRAM makers to accelerate the retirement of their 8-inch lines. We don't need more capex right now in DRAM, he said.
STRONG MOBILE PHONES, LCD
Samsung's Chu said the company expects to sell close to 50 million handsets in the fourth quarter, from a record 42.6 million in the third quarter.
Samsung, which said it was targeting both the higher end of the market and the lower-cost segment, said the global mobile phone industry would grow by 12 percent in 2008, reaching 1.28 billion units.
But Chu said higher marketing costs related to selling mobile phones could push fourth-quarter telecoms operating profit margin down by 2 to 3 percentage points from the third quarter's 12 percent margin.
Samsung's Chu said the company expected very strong growth in LCDs as customers buy more TVs to watch the 2008 Beijing Olympics.
The profit margin in the LCD business would break above the 20 percent range in 2008, he said. The division posted a 17 percent operating profit margin in the third quarter.
Bert Park, senior vice president of LCD marketing, said the supply situation should be even tighter in 2008 than in 2007.
Samsung said it expected the market for TV panels to rise 32 percent in unit terms, driven by 68 percent year-on-year growth in panels sizes 40 inches and higher.
Overall, Samsung hopes to reach an operating profit of about $20 billion on a consolidated basis by 2012, with sales expected to reach $150 billion, Chu said.
Samsung had previously predicted that it would post on a consolidated basis sales of $100 billion in 2007.
He said Samsung was betting on non-memory semiconductors and on the printer market as its next growth engines.
(Additional reporting by Jessica Kim; Editing by Sei Chong & Louise Heavens)