Samsung slips further behind TSMC in chipmaking race

When Samsung Electronics declared that it would become the world’s top chipmaking foundry, it did so with the confidence that one might expect from South Korea’s largest company. However, three years later, top rival Taiwan Semiconductor Manufacturing Co has captured a larger market share, prompting Samsung to replace several executives.

Samsung said on June 30 that it had started to mass produce 3-nm chips, the first company to achieve the feat. It appeared the conglomerate had moved a step ahead in the advanced chip race.

But the announcement stopped short of telling the full story.

“Who are the clients?” asked a source in Yeouido, Seoul’s financial district.

The answer to that question could prove crucial. While the 3-nm milestone is a big technical breakthrough, Samsung has yet to reveal who will buy its new generation chips. The company’s news release says only that they will initially be adopted for “high-performance computing applications”.

Mass production will not take place at Samsung’s Pyeongtaek fabrication facility, where the latest in production equipment is being installed. The chips will be made at the Hwaseong campus, which is also a site for developing manufacturing technology. This has prompted observers to suspect that the production will be small in scale.

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According to suppliers and other sources, the first recipients of the computing chips will include Chinese cryptocurrency miners. But given the recent slide in crypto values, the clients may not be reliable in the long term.

Samsung’s foundry business has been cited for problems since the beginning of 2021. The company started mass producing 5-nm chips in the second half of 2020, but was unable to raise the yield rate.

Samsung was not able to provide stable supplies of smartphone chips to Qualcomm, its largest client. Ultimately, Qualcomm expanded its outsourcing volume from TSMC last autumn, resulting in Samsung losing orders.

Meanwhile, TSMC had started mass producing 5-nm chips at approximately the same time as Samsung. TSMC also became the sole contract manufacturer for Apple’s central processing units.

Because the iPhone is the bestselling line of smartphones by volume, they require CPUs to be produced and shipped over short cycles. At this stage, it is extremely difficult for an operator other than TSMC to field the production equipment and technology to deliver on that front.

Due to the disparate outcomes concerning 5-nm chips, TSMC has greatly expanded its lead. In the first quarter, TSMC captured 53.6 per cent of the foundry market, according to Taiwanese analytics firm TrendForce. Samsung is a distant second at 16.3 per cent.

“We will be the world’s number one player in the non-memory sector” by 2030, vice-chair Lee Jae-yong, Samsung’s de facto chief, said in 2019. Since then, TSMC has added about eight points to its lead.

TSMC specialises in contract chip manufacturing, so it derives strength from the fact that it can concentrate investment in cutting-edge technology. This year’s capital expenditures are expected to rise 46 per cent to $44bn. Between 70 per cent and 80 per cent of those funds will be directed towards advanced products.

TSMC is preparing to mass produce 3-nm chips by the end of the year. To that end, the company is setting up one production site each in the Taiwanese cities of Hsinchu and Tainan.

From the perspective of Apple and other clients, TSMC has significant advantages. Unlike Samsung, TSMC is not a direct competitor in the smartphone space. Apple can more easily entrust TSMC with sensitive chip design data. TSMC is also unique in the line-up of off-the-shelf design data that support a client’s semiconductor designs.

Desperate to stage a comeback, Samsung has shaken up the executive team. Kyung Kye-hyun, formerly the chief executive of Samsung Electro-Mechanics, was installed in December as head of Samsung’s chipmaking Device Solutions business, where he first started his career.

Last month, Samsung replaced about a dozen senior managers, including the chief of the foundry manufacturing technology centre — a surprising move as the group usually finalises personnel changes in December.

This off-season reshuffle not only suggests an urgency to overhaul manufacturing technology; it points to a company looking to reorganise the slate of executives largely made up of people with backgrounds in off-the-shelf memory chips. Meanwhile, Samsung is hiring people from Qualcomm and other places to provide bespoke services for clients.

Intel, which has taken a brief step back from the state of the art chip race, is planning a comeback as well. Chief executive Pat Gelsinger announced massive investments in the US and Europe.

“Today there’s a heavy bias to Asia,” Gelsinger said in an interview, adding that “the world needs US and European supply in a more balanced way”.

The rivalry between the Big Three chip manufacturers of TSMC, Samsung and Intel will persist at least for the short term.

Samsung’s memory business continues to buttress profit gains. The company said revenues jumped 21 per cent on the year during the second quarter, and operating profit climbed 11 per cent.

At the same time, prospects are far from rosy. Weaker global economic conditions have undermined demand for smartphones and displays. Sales of televisions and other consumer electronics have waned from the heyday of pandemic-induced, stay-at-home demand.

These conditions will eventually spill over to the memory business. Samsung faces the growing possibility that all four of its principal divisions will lose their footing. To maintain stable growth, Samsung will be expected to capitalise on the foundry business, where the market continues to expand.

The global chip shortage has underscored the risks of having TSMC account for a large bulk of the contract chipmaking business. Samsung faces the task of demonstrating that it is a suitable alternative for mass producing advanced chips.

A version of this article was first published by Nikkei Asia on July 10. ©2022 Nikkei Inc. All rights reserved.

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