Samsung’s plans to catch TSMC in semiconductor manufacturing

Samsung’s model is in all places. From Galaxy telephones and good TVs to washing machines and fridges, the corporate says its merchandise may be present in practically three-quarters of U.S. households. 

However Samsung is way more than devices and home equipment, and there is another excuse why it is one of many world’s most respected firms. It is the second-biggest maker of chips which might be powering so many in style units.

For greater than three a long time, Samsung has been a pacesetter in reminiscence chips, that are used for digital knowledge storage. However that is been a market in turmoil. During the last yr, costs for reminiscence chips have taken a dive, and so they’re anticipated to fall as much as 23% extra within the present quarter. In April, Samsung reported dismal earnings for the primary quarter, with revenue plunging to its lowest degree since 2009.

Samsung responded by reducing manufacturing of reminiscence chips. Elsewhere within the {industry}, smaller rival Micron stated lately that it expects to slash 15% of its workforce.

Amid the wreckage, the enormous firm has discovered progress in one other nook of the semiconductor market, doubling down on its foundry enterprise, the facet that makes customized chips for enormous prospects like Qualcomm, Tesla, Intel and Sony, in addition to 1000’s of smaller gamers.

Samsung is constructing a $17 billion chip fabrication plant, or fab, in Taylor, Texas, the place it is promised to begin the primary U.S. manufacturing of superior chips subsequent yr. In February, functions opened for firms like Samsung to get their minimize of the $52.7 billion CHIPS and Science Act, handed by lawmakers final yr with the goal of bringing chip manufacturing to the U.S. after 30 years of market share losses to Asia.

Samsung can be including capability in its house nation of South Korea, spending $228 billion on a mega cluster of 5 new fabs which might be scheduled to return on-line by 2042.

“They’re spending and spending and spending,” stated Dylan Patel of analysis and consulting agency SemiAnalysis. “And why is that? To allow them to compensate for expertise, to allow them to proceed to keep up their management place.”

Samsung is one among solely three firms that manufacture the world’s most superior chips, rating second behind Taiwan Semiconductor Manufacturing Firm and forward of Intel.

Now Samsung is setting its sights on catching TSMC.

“We don’t settle to be No. 2,” stated Jon Taylor, Samsung’s company vp of fab engineering, in an interview. “Samsung is rarely glad with No. 2 as a enterprise, as an organization. We’re very aggressive.”

The corporate introduced an bold new highway map in October, pursuing a aim to triple capability of modern manufacturing, and to make industry-leading 2-nanometer chips by 2025 and get them all the way down to 1.4-nanometer by 2027.

“If Samsung hits their targets, they’re going to leapfrog forward of TSMC, however that is a giant if,” Patel stated. “TSMC is the one one which the {industry} trusts to hit their highway map.”

CNBC lately went inside Samsung’s Austin chip fab, for the primary in-depth tour given on digital camera to a U.S. journalist. Whereas there, we acquired a uncommon interview with the pinnacle of Samsung’s U.S. chip enterprise, Jinman Han.

A 34-year veteran of the corporate, Han’s U.S. oversight contains the foundry operations and the reminiscence chips enterprise.

“We actually need to be a bedrock for U.S. {industry},” Han instructed CNBC.

Samsung acquired its begin 85 years in the past, when founder Lee Byung-chull created it as a buying and selling firm for exporting fruit, greens and fish in Korea. 

“His imaginative and prescient was for our firm to be everlasting, sturdy and highly effective,” Han stated. “So, he selected the title Samsung, which accurately means three stars.”

To outlive two main wars, the corporate diversified into industries like textiles and retail. Samsung Electronics was established in 1969, the primary Samsung TV got here out in 1972, and two years after that Samsung purchased Hankook Semiconductor in a daring effort to ascertain the vertically built-in shopper electronics large the corporate is immediately.

Samsung opened its first U.S. places of work in New Jersey in 1978. By 1983, it was making 64KB dynamic random-access reminiscence (DRAM) chips, which had been generally utilized in computer systems, and the corporate had a brand new U.S. workplace in Silicon Valley.

Lee Kun-hee took over after his father’s loss of life in 1987, and Samsung’s first cell phone got here a yr later. And now Samsung is the world’s greatest smartphone supplier, going head-to-head with Apple.

Only a decade after making its first reminiscence chip, Samsung was coming to market with a model that had 1,000 instances the capability. It gained worldwide acclaim in 1992 with the world’s first 64MB DRAM chip, inserting the corporate squarely in first place in reminiscence, the place it stays immediately.

“Its presence is so ubiquitous in South Korea that they name their nation the Republic of Samsung,” stated Geoffrey Cain, creator of the e-book “Samsung Rising,” revealed in 2020.

Samsung began making chips within the U.S. with its fab in Austin, Texas, which broke floor in 1996. It opened a second fab within the Texas capital metropolis in 2007. At present, Samsung’s Austin operation is completely dedicated to foundry.

Samsung’s enlargement has introduced with it some authorized battle.

In 2018, the corporate lastly ended a seven-year authorized battle with Apple over whether or not Samsung copied the iPhone. Phrases weren’t disclosed.

“Apple acquired a cost from Samsung, so Apple technically gained,” Cain stated. “However whenever you add up all of the authorized prices, all of the combating, all these years, it was only a impartial zero on zero for each side.”

Challenges have not been restricted to the courtroom.

In South Korea, protests have erupted round Jay Y. Lee, the third technology of Samsung’s founding household to take the helm. He served time in jail for bribery earlier than being pardoned in August and changing into govt chairman in October.

And throughout the pandemic, Samsung was harm by the worldwide chip scarcity as demand peaked and the provision chain was disrupted.    

“It was actually painful,” Han stated. “Whenever you have a look at your prospects asking for extra chips, however there isn’t any means you possibly can present that, it was so painful.”

That dynamic is altering. As shoppers rein of their spending within the face of rising inflation, demand for reminiscence chips has weakened sharply. Han stated Samsung’s inner knowledge evaluation reveals “the market will rebound probably by finish of this yr.”

Buyers have already been coming again. The inventory dropped virtually 30% final yr, alongside a broader decline within the international tech {industry}. The shares are up 28% this yr and hit a 52-week excessive on June 5, on the Korea Inventory Change. Morgan Stanley lately named it a prime choose.

A part of the rally could replicate the most recent chapter within the geopolitical chip struggle between China and the U.S.

In Might, China banned merchandise from U.S. reminiscence maker Micron, which led to a inventory pop for Samsung. The U.S. additionally granted Samsung a one-year waiver to function its two chip fabs in China, regardless of new guidelines in October that cease many chip firms from exporting their most superior expertise to the world’s second-biggest financial system.

Samsung says it is including capability in Taylor, Texas, which is northeast of Austin, due to U.S. demand. Greater than 90% of superior chips are at the moment made in Taiwan.

“Bringing Taylor on board is simply going to extend their capability to supply their chips domestically and never have to enter areas of the world the place they could have some discomfort,” stated Samsung’s Jon Taylor.

During the last three a long time, the U.S. share of world chip manufacturing has plummeted from 37% to simply 12%. That is largely as a result of estimates present it prices at the least 20% extra to construct and function a brand new fab within the U.S. than in Asia, the place labor is cheaper, the provision chain is extra accessible and authorities incentives are far higher.

For Samsung’s Texas enlargement, environmental issues are huge and rising.

The best-price items of kit Samsung will carry into Taylor are most likely the $200 million EUV lithography machines made by ASML. They’re the one units on the planet that may etch with sufficient precision for essentially the most superior chips. 

Every EUV machine is rated to devour about 1 megawatt of electrical energy, which is 10% greater than the earlier technology. One examine discovered Samsung used greater than 20% of South Korea’s whole photo voltaic and wind energy capability in 2020.

“Electrical energy is the lifeblood of a semiconductor fab in a way,” stated Patel of SemiAnalysis. “There have been a number of situations the place electrical energy has gone out and firms have needed to scrap months of manufacturing.”

Texas’ vitality grid is basically minimize off from its neighbors, limiting its borrowing energy throughout state traces. In 2021, that grid failed throughout an excessive winter storm, leaving thousands and thousands of Texans with out energy and inflicting at the least 57 deaths.

“I already signed 12 legal guidelines to make the facility grid extra dependable, extra resilient and safer,” Texas Republican Gov. Greg Abbott instructed CNBC in April. “And so we will positively guarantee any enterprise shifting right here they’ll have entry to the facility they want, but additionally at a low value.”

Water is one other main want for chip fabs. In 2021, Samsung used about 38 billion gallons of water to make its chips. Roughly 80% of Texas stays affected by drought.

“We have now the Texas Water Board that is engaged on that and laws that we’re engaged on this session to make it possible for with a rising inhabitants in Texas, we can present for the water wants, not simply of companies, but additionally for our rising inhabitants,” Abbott stated.

Samsung instructed CNBC its aim in Austin is to reuse greater than 1 billion gallons of water in 2023. On the new Taylor fab, it goals to reclaim greater than 75% of the water used.

Of late, all of the hype in expertise has been round synthetic intelligence fashions to energy providers like OpenAI’s ChatGPT. These functions require much more highly effective processors, made primarily as of now by Nvidia.

“There are increasingly individuals around the globe who could make reminiscence chips,” Cain stated. “To remain forward of the sport, you have to get into the newer logic applied sciences.”

Cain stated he sees Samsung “diving deeper into the logic chip section. So, [that’s] the AI chips, the long run functions for semiconductor expertise.”

When requested about what’s subsequent, Samsung’s Taylor stated the corporate finally plans so as to add extra chip manufacturing capability at its 1,200-acre web site in Texas.

“We at the moment simply have one fab introduced there,” he stated. “However loads of room for extra.”

Watch the video to go behind the scenes at Samsung’s Austin chip fab and the constructing undertaking in Taylor, Texas.