With prices of memory chips highly volatile, South Korea and its flagship company Samsung Electronics are seeking to reduce their heavy reliance on the sector by expanding into the higher-value added – and less volatile – semiconductor market.
With Samsung Electronics having announced on April 24 that it would invest 133 trillion won ($111.4 billion) by 2030 to foster system semiconductors, also known as logic chips, the South Korean government followed up on April 28 with an announcement that it would inject 1 trillion won into the research and development of logic chips.
However, the move from memory to logic chips will be a stern challenge. The design requirements and marketing strategies of the different chipsets are very different, and existing players may resist Samsung’s push onto their turf.
The logic of logic chips
Although Samsung is an almost unbeatable powerhouse in the memory business, where it holds more than 60% of the global market, its performance in the logic-chip sector is far weaker: It has just a 3.4% share of the market.
Logic chips are used mainly in mobile phones and automobiles. Memory chips store information for smartphones, personal computers, servers, etc. Logic chips are more sophisticated: They conduct complex functions such as computing and control. Logic chips include central processing units (CPUs) used in computers, application processors (APs) used in smartphones and tablets, APs for automotive infotainment systems, and image sensors used in cameras.
As logic chips are more design-centric and more varied, they are less commodified and so less vulnerable to the cyclical downturns that plague the memory sector. Those downturns are reflected not just in Samsung’s business results, but have a wider impact on the South Korean economy.
Experts say that success in the logic-chip business depends on securing clients rather than simply technological capabilities, so anticipate Samsung – which is sitting on an enormous stash of cash – to acquire system-chip companies that have both the technologies and solid relationships with customers.
However, Samsung is also betting big on manufacturing in-house. The electronics colossus plans to expand its foundry business, where it will produce chips designed by both itself and by fabless companies – that is, companies that design, but do not have the fabrication plants (“fabs”) to manufacture chips.
The logic-chip sector comprises “fabless” businesses that design system semiconductors; foundry businesses that produce wafers, the basic chip, which are designed by the fabless companies; packaging firms that finish off the chips; and testing companies.
Qualcomm, which makes APs for mobile phones, is the leading global fabless company in logic chips. Taiwan Semiconductor Manufacturing Company (TSMC), which creates the system semiconductor wafers designed by Qualcomm, is a leading foundry company.
Intel and Samsung Electronics have a different business model; as integrated device manufacturers (IDMs), they design, manufacture, package and test chips.
Unlike the memory-chip business, which needs large-capacity investments and refined processing technology for mass production of a small variety of semiconductors, the logic-chip business needs highly advanced chip-design skills to meet the various needs of customers.
For this reason, Samsung has decided to invest more in research and developments than in facilities. The company will invest 60 trillion won over 12 years in facilities, but R&D expenditure will amount to 73 trillion won during the same period.
“Considering Intel and TSMC spend $10 billion to $12 billion a year in facility investment, this is not a big deal,” said Lee Seung-woo, a semiconductor industry analyst with Eugene Investment & Securities. “On the other hand, the amount of R&D investment is huge.”
Manufacturing vs marketing
Taiwan’s TSMC, which specializes in the foundry business, dominates the global market, taking up more than 50%.
To compete with TSMC, Samsung Electronics is currently building a foundry-only plant in Hwaseong, about 40 kilometers south of Seoul, with an investment of 6 trillion won. To secure a competitive edge in chip processing technology, the firm is going to introduce a 7-nano process that uses EUVL (extreme ultraviolet lithography) to draw circuits more accurately.
While TSMC is a pure foundry business that only produces wafers, Samsung Electronics wants to be a nose-to-tail IDM foundry business that produces, packages and does testing as well.
Samsung expects completion of the EUVL line to give it an advantage in securing customers, but experts say this will not be easy considering the tight relationships between fabless and foundry companies.
“When Samsung applied 14-nano FinFET processing technology, many people expected Samsung to catch up with TSMC as Samsung was considered to be ahead of TSMC technologically, but that didn’t happen,” Lee said. “Success in the foundry business is not just a matter of technology.”
He pointed out that Samsung’s product portfolio, which ranges from chips to APs and mobile phones, could be a negative when it comes to the expansion of its foundry business, as trust will be a factor.
“Fabless businesses may not be happy to entrust the production of chips to Samsung, which is a competitor,” Lee said. “To overcome such difficulties, Samsung needs to convince clients of their superior processing technology and products.”
Samsung’s foundry market share for logic chips stood at 14.9% as of the end of last year, according to IBS, a semiconductor market research firm.
“As a foundry contract is a long-term contract that lasts for three to five years, trust with customers is important,” another industry expert said. “Once you become a customer, you don’t easily change the consigned company.”
Still, Samsung is on a marketing drive. “Samsung has been holding foundry forums in the US, China, and Europe since 2017,” the expert said. “Fabless companies’ initial reaction was skeptical, but now they are paying more attention, asking about production costs. They can induce price competition by expanding supply lines.
“As there are not many companies with technological excellence, I think Samsung can increase its foundry market share though it will take time,” the expert added.
An ecosystem arises
While promoting its foundry business, Samsung has also decided to support South Korea’s small and medium-sized fabless companies that specialize in semiconductor design. It plans to provide intellectual property, such as design-related analysis tools and software, so that Korean fabless customers can strengthen their competitive edge and shorten development periods. Samsung also plans to utilize a small number of products designed by these SMEs.
The Korean government also announced that it will invest 1 trillion won in research-and-development projects by 2030 in an attempt to nurture system semiconductors. This project seeks to establish a domestic ecosystem in the logic-chip industry, which includes semiconductor design and manufacturing.
Experts say creating a broad ecosystem is the key to fostering a logic-chip industry. This step marks a key difference from previous policies that had the same goal, but which were unsuccessful in the past.
“Recently introduced measures take a broader view of system semiconductors,” said Kim Yang-paeng, a researcher at the Korea Institute for Industrial Economics and Trade (KIET). “Until now, we’ve only cared about developing semiconductor technologies, but this time, we’ve expanded our policy to support relations between foundry and fabless companies.”
He noted that South Korea players have the capability to design system semiconductor technologies in areas such as biochips, graphics, and telecommunications.
However, experts point out that there have been difficulties in producing or commercializing prototype semiconductors developed by these companies due to the small size of the Korean market and the lack of foundries for logic chips.
Samsung has developed system semiconductors as well as its core memory-chip business – but on a far, far smaller scale.
“Samsung has been developing system chips for automobiles, but has not successfully sold them as they have not been certified for safety,” said Kim. “Samsung is also producing APs for mobile devices, but they are used only for the local market. Its mobile phone for export uses Qualcomm’s chipsets. This is because laws and regulations vary from country to country.”
However, things are changing. This month, Samsung received the international safety standard “ISO 26262” certification from the German testing and certification agency TUV Rheinland for the development and management processes of semiconductors for vehicles. With this in hand, Samsung will now supply Audi with its “Exynos Auto V9,” a logic chip for vehicles that comprehensively controls onboard infotainment systems.
In addition to its foundry business, Lee said Samsung needs to attain a competitive edge in the development and sale of system semiconductors for automobiles, mobile APs and CPUs.
“It will not be easy for carmakers to cut their deals with existing partner companies and use Samsung products unless Samsung proves its technological excellence,” the Eugene analyst said. “Besides, many expect future cars to be similar to ‘wheeled phones,’ and in this regard, car makers could be wary of Samsung eventually jumping into the auto industry.”
Regarding the CPU sub-sector, critics advise Samsung to focus on foundry production, since it is difficult to grow fast in that sector because of licensing issues. “Samsung developed CPUs for servers, but the result was not good,” Lee said. “The time may be right to attract AMD, Intel’s rival, as a CPU foundry client.”
Image sensors used in mobile-phone cameras are considered the best products that Samsung offers among its existing portfolio of system semiconductors. Samsung’s global market share for image sensors stood at 19.6% at the end of last year, second only to Japan’s Sony, according to chip market researcher IHS Markit Inc.
Considering that Samsung is the world’s top mobile-phone maker, synergies exist, suggesting a brighter outlook.
“Samsung is doing well in the field of image sensors,” Lee said. “It is a business that does not have a huge gap in technology, and Samsung can rise to be number one.”