Galaxy’s secret sauce: Samsung components; “Samsung’s strength is this ability to in-source to itself”

May 8, 2013, 7:15 p.m. ET

Galaxy’s secret sauce: Samsung components

By ARIK HESSELDAHL

Samsung Electronics Co 005930.SE +1.01% .’s latest smartphone, the Galaxy S 4, takes advantage of the South Korean electronics company’s chip- and display-manufacturing prowess to get its material costs closer to Apple Inc AAPL +1.13% .’s costs for the iPhone 5. An analysis conducted by market-research firm IHS Inc. IHS +1.66% estimates Samsung’s cost of materials and manufacturing to produce the U.S. version of the S 4 is slightly above $237 a unit, according to a report expected to be released on Thursday. That is higher than Apple’s $217 production cost for a 32-gigabyte iPhone 5, which has a smaller and less-costly display screen. Without a two-year contract, the 16-gigabyte version of the Samsung phone sells for $639 at AT&T Inc., T +0.83%and the iPhone 5 with 32 gigabytes costs $749 at an Apple store.

MK-CD089A_GALAX_G_20130508185108Pricing for an unlocked 32-gigabte S 4 hasn’t been released.

Most phone manufacturers buy components from many different suppliers. But Samsung, which builds everything from chips to displays, has used its production capabilities to produce many of the key components inside its S 4 phones.

“Samsung’s strength is this ability to in-source to itself,” IHS analyst Vincent Leung said in an interview. “They just keep adding to the list of components that they can supply to themselves.”

One key component that Samsung didn’t produce for its phone sold in the U.S., was the applications processor. U.S. versions of the phone contain a Snapdragon processor from Qualcomm Inc. QCOM +0.23% that contributes $20 to the overall cost, IHS says.

Versions of the phone sold in Korea and other markets around the world use a Samsung-made chip called Exynos 5 Octa that costs $28 in place of the Qualcomm chip.Samsung manufactures at least four different variations of the phone around the world, including two being sold in the U.S., one to AT&T, and another to Verizon Wireless, said Andrew Rassweiler, another IHS analyst.

“Samsung is demonstrating its ability to suit the tastes of carriers in different regions of the world,” Mr. Rassweiler said. “It comes down to what the market is willing to spend on the features offered.”

The fact that Samsung used the Qualcomm-made chip is a testament to the U.S. chipmaker’s prowess. “Even with all the vertical integration it is doing, it isn’t like Samsung has given up on Qualcomm,” Mr. Rassweiler said.

One interesting difference between the U.S. and Korean versions of the Galaxy S 4 is the imaging processor.

U.S. versions of the phone contain an image-processing chip made by Japan’s FujitsuLtd. 6702.TO +1.79% that added $1.50 to the total cost. IHS’s Mr. Leung says in the Korean versions, some of the image processing is handed off to Samsung’s Exynos chip.

Samsung also supplied the flash memory used to store data on the device.

IHS estimates that the phone’s 16 gigabytes of memory added $28 to the material cost of the device.

The Korean company supplied its own display and touch-screen parts, which added $75 to the cost of components.

The combined display package also includes Gorilla Glass, a strong glass material made by U.S.-based Corning Inc. GLW +0.07%

The S 4’s display is nearly an inch larger than Apple’s iPhone 5, raising the Galaxy’s material costs.

Samsung is also thought to have supplied itself with several unlabeled components, including the camera module and some wireless baseband chips.

A few non-Samsung suppliers include Broadcom Corp., BRCM +0.33% which provided Bluetooth and Wi-Fi chips, Maxim Integrated Products Inc MXIM +0.57% ., which provided a power management chip, and Triquint Semiconductor Inc.,TQNT +0.34% which provided some wireless chips.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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