Samsung Electronics Co. will use its own microprocessors in the next version of the Galaxy S smartphone, dropping its use of a Qualcomm Inc. (QCOM) chip that overheated during the Korean company’s testing, people with direct knowledge of the matter said.

Samsung, the world’s largest smartphone maker, tested a new version of Qualcomm’s Snapdragon chip, known as the 810, and decided not to use it, the people said, asking not to be identified because the issue hasn’t been discussed publicly. Qualcomm shares fell.

The decision is a blow to Qualcomm, the world’s largest maker of semiconductors used in phones, which has been supplying Samsung with chips that run the company’s best-selling handsets. The South Korean company, the world’s second-largest chipmaker, is trying to become more self-reliant and boost its own processor-making division as it spends $15 billion on a new factory outside Seoul.

The new Galaxy S will be equipped with Samsung’s most advanced chips, one of the people said. A spokesman for Qualcomm declined to comment. Samsung declined to comment in an e-mail.

“Samsung may release the next Galaxy S as early as March, and it can’t dare to take the risk to use any of the chips in question for its most important model,” said Song Myung Sup, a Seoul-based analyst at HI Investment & Securities Co.

Qualcomm shares traded in Europe fell 1.2 percent as of 9:03 a.m. in Frankfurt. Samsung shares rose 1.7 percent to 1,395,000 won in Seoul.

Dominant Chip

Application processors are the main semiconductor component in smartphones, running everything from the operating system to games and the camera. Qualcomm is also the biggest provider of modems that convert the cellular signal into voice and data.

Qualcomm’s Snapdragon processors, combined with its cellular baseband chips, have dominated the market for smartphones and made the San Diego-based company one of the biggest beneficiaries of the explosion of mobile Internet use.

In its last fiscal year, sales at its chip division were $18.7 billion, a gain of 12 percent from the year earlier. Samsung is Qualcomm’s second-largest customer, providing about 12 percent of its sales, according to Bloomberg supply chain analysis.

“This is huge news,” Amir Anvarzadeh, a manager of Japanese equity sales at BGC Partners Inc. in Singapore, said in an e-mail.

Xiaomi, LG

Qualcomm said in April its latest 808 and 810 processors will start appearing in phones at the beginning of this year and will feature more advanced computing, graphics and radio capabilities. Xiaomi Corp. and LG (066570) Electronics Inc. are among the manufacturers preparing to release models with the Snapdragon 810.

Beijing-based Xiaomi said Jan. 15 the chip would be used in the Mi Note Pro, its largest, most expensive phone. Joy Han, a spokeswoman, declined to comment on whether the company is aware of any overheating issues or whether it plans to switch to another chip.

LG said the G Flex2 it’s releasing at the end of this month also uses the Snapdragon 810.

“There will be no problem with the G Flex2 phones,” the company said in an e-mailed statement. “We are taking every measure to ensure there will be no overheating problem.”

Samsung Reinvention

Samsung is relying more on its 40-year-old memory-chip unit for earnings growth as sales of its Galaxy smartphones are eclipsed by Apple Inc. (AAPL) and Xiaomi. Buoyant demand for semiconductors, including from competitors in the phone business, and a falling won helped Samsung post fourth-quarter operating profit earlier this month that beat analyst estimates.

The South Korean company is developing more advanced sensors and chips while reinventing itself as a purveyor of Internet-connected appliances and wearable devices. That market may be worth $7.1 trillion by 2020, according to researcher International Data Corp.

Vice Chairman Lee Jae Yong is overseeing the strategy shift as Samsung’s smartphone business, which sells every one of four phones globally, struggles to stay dominant against Apple’s new iPhones and Xiaomi’s lower-cost devices in China and India.

Samsung’s fourth-quarter operating profit probably slumped about 37 percent from a year earlier, the company said in a regulatory filing on Jan. 8.

(Source: Bloomberg)