Samsung Electronics, the world's No.1 memory chip maker, said it started mass production at a new $10 billion chip line, as it seeks to raise its share in the booming flash memory chip market fueled by robust demand growth in mobile products.

Samsung's new production line, its first in about five years, will help the company sharply lower production costs of the chips and could exacerbate oversupply in the market, stifling smaller rivals.

Apple Inc, the maker of popular iPhones and iPads, and Sony, which joined the crowded tablet market last month with two new devices, buy flash memory chips from Samsung.

The cost-competitive facility will make it difficult for its major customers to shift away to other suppliers.

Apple, Samsung's biggest customer locked in a series of patent legal battles with the South Korean firm, is trying to reduce sourcing from the emerging competitor.

The new line won't have any immediate impact on the supply side, as it will take some nine months to fully raise capacity run rates, but it shows Samsung's attempt to take more share in the flash chip market, said Song Myung-sup, an analyst at HI Investment & Securities.

Samsung, the world's biggest technology firm by revenue, on Thursday said the new line was the industry's largest and most advanced memory fabrication facility, producing chips with 20-nanometre class processing technology.

Lower line-widths processing technology allows more circuits on a chip, making them smaller, cheaper, more powerful and more energy efficient.

By 0355 GMT, shares in Samsung dropped 3.4 percent, versus a 3.3 percent drop in the broader market.

FLASH MEMORY BENEFIT

The line mainly makes NAND-type flash memory, widely used in mobile gadgets such as smartphones, digital music players and tablets.

Flash memory chips, also used in portable storage devices such as USB memory devices, are increasingly replacing hard drives in notebooks, as it has much faster boot times.

Samsung competes with Toshiba Corp in flash memory and local rival Hynix Semiconductor Inc, Japan's Elpida Memory Inc and Taiwan's Powerchip in dynamic random access memory (DRAM) chips.

Samsung expanded its global NAND market share by three percentage points to 41.6 percent in the second quarter, while Toshiba's share fell to 29 percent from 35 percent following the Japan earthquake in March.

Global NAND market is seen growing 21 percent this year to $23 billion, according to Citi analysts, as a strong 76 percent growth in shipment will more than offset an estimated price decline of 31 percent.

The global semiconductor industry is in a period of fierce cyclical volatility, so the opening of this new memory fab and the start of mass production of the world's first 20nm class DRAM are important milestones to reinforce Samsung's industry leadership, Samsung Chairman Lee Kun-hee said in a statement.

The production ceremony was attended by executives from Samsung's key clients including Sony.

Samsung said it has already started producing chips earlier this month from the line with a monthly output of some 10,000 twelve-inch wafers and plans to raise production rates further.

At full capacity, the new line can produce 200,000 wafers per month.

COMPUTER CHIPS

The new line and production of DRAM chips using 20-nanometre technology comes as computer memory prices have fallen more than 30 percent over the past three months to below production costs due to faltering demand from computer makers.

Global shipments of computers are projected to grow only a low-to-mid single digit percent this year as consumers switch to more popular tablets and smartphones.

Smaller rivals are struggling with worsening profitability and bracing for a tough outlook as weak demand and falling prices force them to delay capital-intensive facility upgrades.

Elpida said last week it was considering shifting some production to Taiwan to cope with a currency near record highs and to survive in a dwindling market.

Samsung earmarked 12 trillion won ($10.4 billion) of investment for the new line in Hwaseong, south of Seoul, and plans to operate the line, whose size amounts to some 28 soccer fields combined, at full capacity at the end of 2012.

(Additional reporting by Jungyoun Park; Editing by Jonathan Hopfner and Vinu Pilakkott)

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