Samsung is still slipping behind TSMC in the race to manufacture chips

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

Samsung said on June 30 that it had started mass-producing 3nm chips, the first company to achieve the feat. It appeared that the conglomerate had taken a head start in the race for advanced chips.

But the ad stopped short of telling the full story.

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

The answer to this question could turn out to be crucial. While the 3nm milestone is a big technical step, Samsung has yet to reveal who will buy its next-generation chips. The company’s press release only states that they will initially be adopted for “high performance computing applications.”

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

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According to vendors and other sources, the first recipients of the computer chips will be Chinese cryptocurrency miners. But given the recent drop in crypto values, clients may not be reliable in the long run.

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

Samsung has been unable to provide stable supplies of smartphone chips to Qualcomm, its biggest customer. Ultimately, Qualcomm increased its outsourcing volume to TSMC last fall, which led to Samsung losing orders.

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

Because the iPhone is the top-selling line of smartphones by volume, they require processors to be produced and shipped on short cycles. At this stage, it is extremely difficult for an operator other than TSMC to commission the necessary production equipment and technology in this regard.

Due to the disparate results for 5nm chips, TSMC has significantly widened its lead. In the first quarter, TSMC captured 53.6% of the foundry market, according to Taiwanese analytics firm TrendForce. Samsung is far behind with 16.3%.

Global share of chip foundries

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

TSMC specializes in contract manufacturing of chips, so it derives its strength from the fact that it can focus its investment in cutting-edge technology. Capital spending this year is expected to rise 46% to $44 billion. Between 70 and 80% of these funds will be directed to advanced products.

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

From the perspective of Apple and other customers, 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 range of out-of-the-box design data that supports a customer’s semiconductor designs.

Desperate to stage a comeback, Samsung shook up the management team. Kyung Kye-hyun, a former chief executive of Samsung Electro-Mechanics, was named in December to head Samsung’s Device Solutions chipmaking business, where he began his career.

Last month, Samsung replaced a dozen senior executives, including the head of the foundry’s manufacturing technology center – a surprising move as the group typically finalizes personnel changes in December.

This off-season shakeup doesn’t just suggest the urgency to overhaul manufacturing technology; it points to a company looking to revamp an executive roster made up largely of people with experience in standard memory chips. Meanwhile, Samsung is hiring people from Qualcomm and other places to provide tailored services to customers.

Intel, which has taken a step back from the race for cutting-edge chips, is also planning a comeback. Managing Director Pat Gelsinger announced massive investments in the United States and Europe.

“Today there is a strong bias towards Asia,” Gelsinger said in an interview, adding that “the world needs US and European sourcing in a more balanced way.”

Samsung Vice President Lee Jae-yong, fourth from left, visits Dutch chip-making equipment maker ASML in June

Samsung Vice President Lee Jae-yong, fourth from left, visits Dutch chip-making equipment maker ASML in June © Samsung Electronics

The rivalry between the big three chipmakers of TSMC, Samsung, and Intel will persist for at least the short term.

Samsung’s memory business continues to underpin earnings gains. The company said revenue jumped 21% on the year in the second quarter and operating profit climbed 11%.

At the same time, the outlook is far from rosy. Weaker global economic conditions have undermined demand for smartphones and displays. Sales of televisions and other consumer electronics have declined since the peak of pandemic-induced at-home demand.

These conditions will eventually trickle down to the memory sector. Samsung is facing the growing possibility that its four main divisions are losing ground. To maintain stable growth, Samsung should capitalize on the foundry business, where the market continues to expand.

The global chip shortage has underscored the risks of seeing TSMC accounting for much of the contract chip manufacturing business. Samsung is faced with the task of demonstrating that it is a suitable alternative for the mass production of 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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