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SEOUL – IBM and Nvidia are two vastly different tech businesses but have one thing in common: They both recently announced that Samsung Electronics are making their most advanced semiconductors.
IBM announced in an August 17 press release the science and capabilities of its next-generation processor chip – and revealed that Samsung would be manufacturing it. On September 1, US gaming giant Nvidia revealed that the Korean giant would also make its next-generation gaming processing unit chips.
The announcements demonstrate that Samsung’s stated ambition to expand its existing dominance of the global memory semiconductor market into the richer, more sophisticated non-memory space is well on track.
It’s a massive ambition and a huge play. Samsung sells 50% of the world’s core memory products: DRAM, found in personal computers and servers, and NAND Flash chips, used primarily in hard drives and consumer electronics.
Now, with a vast universe of new applications appearing in areas such as artificial intelligence (AI), Internet of Things (IoT) and 5G, a strategic thrust into non-memory is Samsung’s latest diversification.
Non-memory chips – also known as system or logic chips – offer higher value-add than memory ones. And they demand greater technical sophistication as they must be able to conduct complex functions such as computing and control.
They include central processing units (CPUs) used in computers, application processors (APs) used in smartphones and tablets, APs for auto infotainment systems, and image sensors for cameras.
Moreover, these chipsets are not subject to the semiconductor super cycle of “up-this-year, down-next-year” pricing, which bedevils the commoditized market for memory chips.
All this means that Samsung will be casting an ever-larger shadow over all sub-sectors of the chip market in the months and years ahead. The rising diversity of Samsung’s portfolio, however, has certain drawbacks.
For one, Samsung has to diplomatically manage the moral hazard of competing with many of the clients it also manufactures chips for.
Indeed, its towering profile in the electronics supply chain is proving a curse as well as a blessing. However much the company may wish to remain neutral, it faces growing pressure to choose sides in the intensifying tech war between the US and China, where access to next-generation chips is a crucial front line.
Fitch Ratings, in a July 3 research note, wrote that Samsung’s “credit profile remains supported over the long-term by its technology leadership, robust market position and a diversified business portfolio that mitigates cash-flow fluctuation, particularly from the cyclical semiconductor and display-panel segments.”
Samsung is plenty liquid. Fitch puts the company’s reserves of cash and cash equivalents, including short-term investments, at 107 trillion won (US$899 billion), enough to amply cover its total debt of 15 trillion won ($12.6 billion) as of end-March.
Samsung does electronics from nose to tail. As well as semiconductors, the core component of multiple electronic products, Samsung manufactures smartphones. In recent years, these are the two sectors that have alternated as Samsung’s main revenue stream.
But it also produces displays and the full gamut of devices and appliances from TVs to computers. The only electronics sub-sector where Samsung, a metal basher par excellence, has failed to gain a foothold is software.
Mobile looks challenging. In July, Samsung was overtaken as the leading smartphone player globally by Huawei. In mobile, it is squeezed in a nutcracker between top-end Apple and low-end Chinese players.
But in chips – a sector which has boomed during Covid-19 lockdowns due to demand for data centers and online services – Samsung looks more dominant.
Its fortified position in memory is being bolstered by its thrust into the more lucrative, technically demanding non-memory.
To be sure, Samsung must surmount multiple technological and commercial challenges before it can bestride both sides of the chip market. But it is arguably well-placed and well-provisioned to make the leap.
“Memory chips [are] still Samsung’s stronghold, but it is expanding into system chips…Samsung has the tech leadership, the client base and capital to invest,” an industry official told Asia Times.
“AI and 5G are inevitable trends and Samsung is engaged – either in devices, in IoT or in components. The company has a strong portfolio.”
In April 2019, Samsung revealed its ambition to become “the world leader in not only memory semiconductors but also logic chips by 2030.”
To achieve this, Samsung is sinking 73 trillion won ($61 billion) into research and development (R&D) and 60 trillion ($54 billion) into production infrastructure through 2030.
While Samsung dominates memory, players like Apple, IBM, Intel and Qualcomm are key players in non-memory. Even so, non-memory is not entirely new for Samsung. The company has created in-house logic chips – image sensors, APs and even CPUs – for its own devices.
Most US tech firms, however, only design their chipsets and outsource their manufacturing to third parties’ foundries. It is this sector – the foundry business that supplies chips to external clients – that Samsung aims to gain a toehold.
Only two companies, Taiwan-based TSMC, the industry leader, and Samsung supply foundries that can produce the most sophisticated logic chips sized at 7-nano, 5-nano, and, looking into the future, 3-nano products.
“Foundry for logic has been a long-term goal for many years, it is nothing new,” said Mark Newman, a senior analyst at Bernstein and a former Samsung employee. “It was the 2000s when they first started focusing on it.”
Even so, the 2019 announcement made the vision public and set it in stone. As such, it is foundational for the leadership of Samsung’s third-generation heir Lee “Jay” Jae-yong.
Lee needs a strategic win. His main claim to fame, since his father, Lee Keun-hee, fell into a coma in 2014, has been his role in a 2015 price-fixing, corporate merger and inheritance scandal that helped bring down then-president Park Geun-hye.
“Samsung’s founding family looks a decade or more out to make decisions,” said Geoff Cain, author of Samsung Rising. “Jay Lee’s big announcement has been non-memory chips. I think that is his mark. That is what he will be known for in 10-20 years.”
Newman reckons that technologically, TSMC and Samsung are neck and neck, but TSMC “is bigger and more diverse in foundry.”
Handel Jones, founder and CEO of International Business Strategies, or IBS, a US-based electronics-focused consultancy, adds, “While Samsung is competitive in manufacturing technology, Samsung has not provided a major competitive advantage over TSMC to date.”
Samsung’s experience and economy of scale in memory bolsters its non-memory offensive.
“The material science – the smaller and smaller you shrink the chips, the new types of materials being used – may be developed in memory and transferred to logic,” Newman said. “The long-term future is memory and logic. They are getting closer and closer.”
Could Samsung acquire outside expertise via mergers and acquisitions?
While the company has plentiful cash, Korean firms, with top-heavy internal cultures, have customarily proven unsuccessful at integrating overseas acquisitions.
“Most major decisions made by Samsung are made in South Korea, with strong power with a core group that has worked together for many years,” said Jones. “It is difficult for Samsung to gain major benefits from acquisitions other than product expertise [and] it is difficult for management of an acquired company to fit into Samsung’s culture.”
What Samsung can do is boost manpower.
According to IBS, it hired 500 AI experts in the first half of this year, and plans an additional 500 hires in the second half. The company said in 2019 that it plans to retain 15,000 new staff in R&D and production by 2030.
Still, Samsung’s non-memory business has a long way to go to catch up with memory. The company’s 2019 revenues for non-memory products were $18 billion compared to $43.5 billion for memory, according to data supplied by IBS to Asia Times.
Meanwhile, TSMC will generate revenues of $40 billion by year-end, IBS anticipates, and will grow faster than Samsung’s earnings in the foundry space.
One delicate issue for Samsung is the moral hazard implicit in its nose-to-tail business portfolio.
Apple famously won an $800 million lawsuit against Samsung: The Korean firm, Apple alleged, copied smartphone designs at a time when one arm of Samsung was competing with Apple in mobile, while other divisions were selling Apple components.
The kind of intellectual property exposure embedded in Samsung’s business model does not impact the more focused TSMC. The Taiwanese firm exclusively creates chips designed by and for other companies.
“Samsung competes with many of its customers,” said Jones. “This is a concern to customers because they do not want to provide their product roadmaps and schedules to Samsung.”
The business landscape is relatedly complex.
“Qualcomm uses Samsung and TMSC and one of the other foundries,” said Newman. “Samsung has a very complicated relationship with Qualcomm – they are a competitor and they make their chips and sell them, and they are a client of Qualcomm and they manufacture chips for them.”
Even on home turf, Samsung suffers from trust issues.
“Small fabless companies give contracts to Taiwanese companies as they worry that, if they deal with Samsung, Samsung will steal their IP,” said Park Sang-in, a Samsung watcher at Seoul National University. “Many fabless companies won’t want a rival manufacturing their own products.”
In recent years, Samsung has apparently been more careful in curating its relationships.
“There are some signs that Samsung is not as ruthless as it was in the past,” said Jones.
Indeed, the Apple brouhaha has not stopped other industry giants from engaging Samsung foundries. Samsung itself declined to reveal client relationships to Asia Times, beyond those made public by clients such as Qualcomm and IBM.
For clients, the advantage of Samsung manufacturing is clear.
“Every big Silicon Valley company has designs for chipsets and needs someone who can make them,” said author Cain. “No one can make chips as quickly as Samsung.”
In Part 2 of this story, to appear in Asia Times tomorrow, we investigate the complex commercial and diplomatic risks that Samsung must navigate in the cross-Pacific trade war, and its relationship with China’s tech flagship, Huawei.