CHIPS: Samsung Chases China Goodwill With Massive Chip Expansion

Bottom line: Samsung’s new $7 billion investment in a chip expansion in Xi’an should help to earn big government goodwill, which could help position its smartphone division for a rebound in China.

A major new China investment by chip maker Samsung (Seoul: 005930) is spotlighting just how important the market has become to the company, and South Korean companies in general, and how they are trying to play into Beijing’s agendas to maintain their place at the table. That’s become all the more important lately, as a disagreement between Beijing and Seoul has been costing South Korean companies business in China, as often happens when such political disputes spill out into the business sector.

This particular investment, totaling $7 billion, was obviously in the planning stages long before that dispute broke out earlier this year, involving Seoul’s decision to install a sophisticated anti-missile defense system supplied by the US to counter the North Korean threat. But Samsung’s decision to make its announcement now looks shrewd, as it should win it some goodwill from Beijing at a time when the company’s smartphones face similar struggles in China that they’re seeing in the rest of the world.

There are quite a few threads to this story, but at the center is South Korea’s largest corporate citizen and China, one of its largest customers. The company has just announced it will invest the $7 billion to expand a NAND memory chip plant in the interior city of Xi’an, including an initial $2.3 billion tranche that has already been approved by the company’s board. (English article)

This particular investment is actually a bit smaller than the initial $10 billion investment Samsung put into this chip plant, which manufactures memory that’s a central component of most electronic computing devices these days, including smartphones. So this latest figure means Samsung will be pouring $17 billion into this chip-making complex, in what must certainly be its largest offshore investment in a single facility.

Xi’an officials were also quick to point out at a signing ceremony that the huge investment has led to a large wave of secondary investment by companies related to Samsung’s memory chips, including its suppliers and perhaps a few downstream manufacturers as well. That plays nicely to a number of Chinese campaigns, which must have many in Beijing and Samsung’s headquarters smiling.

Go West Campaign

China has long been pushing western companies to invest in its interior regions, aiming to spread the nation’s wealth that is now skewed towards the coastal regions. Xi’an fits nicely into that agenda, as it’s squarely in one of China’s poorer interior areas, located at the end of the ancient silk road.

At the same time, China has also been earmarking hundreds of billions of dollars for development of the country’s high-tech chip sector. That campaign included an attempt by one company, Tsinghua Unigroup, to buy US memory chip giant Micron Technology (Nasdaq: MU), in a bid that ultimately failed a couple of years ago due to political sensitivities. That said, Samsung is one of the world’s leading memory chip makers, so having it set up such a large facility in China is a huge feather in Beijing’s cap.

All this comes as Samsung and Korean companies in general have been struggling in China over the last few months due to the political squabble, at least in terms of their consumer products. Samsung as recently as two years ago was the largest smartphone player in China, the world’s largest smartphone market. But lately it has dropped out of the top 5, meaning its share of the market has dropped below 7 percent.

The bottom line is that Samsung’s smartphones are in a period of retrenchment in China, and we should also point out that chips and smartphones are two very different animals. But that said, in China in particular, government relations are far more important than they are in most other countries and many things are interconnected. If Beijing thinks you’re a good corporate citizen, that impression inevitably spills over into the media and subsequently into the broader consumer consciousness, regardless of how the goodwill is generated.

This massive investment into Xi’an should work nicely to please both central leaders in Beijing and also local leaders in interior China, which may not bear immediate fruit but will ultimately generate lots of longer-term goodwill. That should not only help to bolster sales for the zillions of memory chips that will come from this new plant, but could also help to rectify Samsung’s tarnished perception among Chinese consumers for an eventual comeback by its smartphones.