All is Not Lost for Samsung in Chipmaking Business

Samsung is partnering with AI-focused companies, including NVIDIA, Tenstorrent and others, to manufacture their chips

In early April this year, Samsung decided to cut down on chip manufacturing after its semiconductor division caused the biggest fall in profits for the company since 2009. This cut came after the firm announced their results for the first quarter of 2023. Its semiconductor business reported a $3.4 billion loss, and its total operating profit was just $479 million, which was at the lowest profit in 14 years. 

Samsung has a history of loading up their inventories when the global economy is down. They do this as the company wants to be prepared to supply its customers when demand picks up after the economic crisis is over. It did the same thing during COVID-19, and it ended with an oversupply of chips. It’s not selling as fast as they thought. 

The demand for memory chips slowed down and the prices for semiconductors plummeted. 

“We are lowering the production of memory chips by a meaningful level, especially that of products with supply secured,” Samsung said in a statement. 

Samsung’s performance in the second quarter of 2023 was not impressive either as low demand for memory chips persisted. Its operating profit fell 96% compared to last year. It incurred losses worth $7 billion from its semiconductor business in the first 6 months of 2023. 

Due to this, the South Korean giant decided to extend their cut in chip production as demand for chips still remained lukewarm. There was a recovery that occurred only in high-end chips which was driven by the AI-boom. 

AI Saved Samsung

The demand recovery for lesser advanced chips has been going at a snail’s pace, but the demand for AI-chips sky-rocketed. The annual growth rate was at 30%, according to StraView. 

However, Samsung fell short in this area as well as sales for SK Hynix, it’s direct competitor, was better prepared for the AI demand and led the market in DRAM high-end chips. 

“Although Samsung was first in these high-density chips, it didn’t anticipate these markets will grow so fast, and was superseded by SK Hynix in speed and yield,” Lee Min-hee, an analyst at BNK Investment & Securities told Reuters. 

New Partnerships Open Opportunities

South Korean tech giant Samsung just got a new customer for its chip making business. Tenstorrent, a Canadian start-up gave an order to Samsung’s chip manufacturing arm to make AI chips. 

However, the details of the value of the deal or the number of chips ordered remain undisclosed. Samsung had earlier invested in the Canadian firm, which aimed at raising $100 million. 

Samsung is also seeking partnership with NVIDIA to manufacture its chip as the GPU giant is ‘too reliant’ on TSMC. NVIDIA is looking to diversify their supply-chain with Samsung as the South Korean firm is no stranger to NVIDIA’s GPUs. It made all of the RTX 3000 gaming GPUs during the pandemic and the GTX 150 mobile GPUs in 2017. 

Samsung’s chairman, Lee-Jae-yong met Elon Musk the first week of May this year to discuss cooperation to develop autonomous driving semiconductor production. This was the first time the two had a private meeting. Musk owns Starlink, Tesla, Neuralink and Hyperloop and the possibilities for Samsung to collaborate is endless. The two firms are promoting exchanges for the development of next-gen IT. 

It’s not just corporations, the government of South Korea is also equally helping Samsung catch-up with TSMC. 

Samsung faced challenges in its semiconductor business due to a decline in demand for memory chips and increased competition in the AI chip market. To address these challenges, Samsung is investing heavily in capacity expansion and advanced chip manufacturing, while also exploring potential partnerships with key players in the industry.

Setting up Foundry for Top Clients

After going through poor quarterly performances due to lack of demand, drop in sales and supply-chain shortages, Samsung has already implemented plans to safeguard their dominance in the semiconductor business. 

Amid plummeting prices of semiconductors and dismal earnings of the company, it has been working from ground up on its foundry business–making custom chipsets for customers like Tesla, Intel and Qualcomm etc. 

Samsung is building a fabrication plant worth $17 billion, in the quint town of Taylor, Texas. The plant will go online sometime in early 2024. 

Not just that, the company is also expanding capacity by building a mega cluster of 5 new fabs for a whopping $228 billion in South Korea.  This new cluster is Samsung’s bet to be the top manufacturer of the world’s most advanced chips. At the moment, it is second to TSMC beating Intel at third.

“We do not settle to be No. 2,” Jon Taylor, Samsung’s corporate vice president of fab engineering, told CNBC in an interview. 

The company announced in late 2022 their roadmap, which states that they plan to triple their capacity and make 2 nm chips by 2025 and 1.4 nm by 2027. 

Dylan Patel from research and consulting firm SemiAnalysis told CNBC, “If Samsung hits their targets, they’ll leapfrog ahead of TSMC, but that’s a big if”. 

In order to fund such large projects, Samsung has been utilising its cash reserves and also sold shares of ASML, the only company in the world which makes machines that make chips. Samsung sold 3.5 million shares, worth about $2.29 billion. It plans to spend these funds on new plants and memory chip production lines. 

Pranav Kashyap
As a financial journalist, Pranav covers various beats from Technology, Telecom and Companies. He follows the money trail, and dives deep into how companies utilize their funds. He loves to travel and is an aviation geek.

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