[ANALYSIS] Why 3-nanometer chip tech matters most for Samsung

TSMC's huge presence leaves global supply chains vulnerable to natural disasters, China-Taiwan tensions

By Kim Yoo-chul

Since the launch of its New Management Initiative in 1993, Korea's top exporter Samsung has been improving its R&D significantly while retaining its core competencies in manufacturing, factory operations as well as other steady advances.

The advanced levels of its integrated business management systems have been effective over the last few decades, as Samsung surpassed Nokia and Sony in mobile phones and TVs, respectively. More importantly, the company's blockbuster patent battle with Apple helped it reach new heights as the multi-billion-dollar legal fight was the prime source for Samsung to transcend its success in Korea and move onto the global stage.

Samsung used its Apple fight as a chance to incorporate key elements of Apple's business model after the iPhone designer surpassed ExxonMobil as the world's most valuable firm in 2011. Plus, its legal engagement with Apple ― now one of Samsung's top corporate clients ― helped a lot in terms of successfully modifying its vertically integrated business strategies. Samsung started responding through mergers and acquisitions (M&As) and partnerships to broaden its corporate business territory and fortify its core manufacturing strengths further.

Samsung doesn't believe that only inventors can lead the market because it believes innovation is more about "doing something better." This assessment defined the company as a "fast follower" with some describing it as a "hawk," because Samsung waits until its competitors gain attention and then very aggressively releases with its own versions cheaper than the offerings of its rival companies. This kind of focus on speed and execution usually pays off, although it has also backfired previously, as seen in the case of the problems with the Galaxy Note 7.

But unnamed Samsung officials and sources inside the company have said it is on track to reposition itself as "the most trusted and reliable parts supplier to corporate clients." The key rationale behind this move at Samsung is that several budget Chinese companies are moving into Samsung's territory in mobile phones and TVs by releasing their own versions with better pricing ― using the exact same second-mover strategy as has been done by Samsung.

"What's happening in the mobile phone, TV and appliance markets is kind of reminiscent of what Samsung tried to do earlier. Chinese tech companies are playing in the playgrounds that Samsung developed. Televisions, mobile phones and appliances are no longer promising business segments for Samsung," said Hwang Min-seong, chief of the tech team at Samsung Securities. At the time of the announcement for its second-quarter earnings guidelines, Samsung Electronics said that it will focus on profitability.

Competition with TSMC

Samsung's business models are focused on vertical integration of supply chains and bulking up production volume.

Because Apple's huge rise is thanks to its highly focused business structures ― a core factor behind the iPhone designer's sustainable growth despite recent supply chain turmoil ― Samsung also wants to focus more on semiconductors, but this time, the prime focus has been set on how to guarantee high-volume production of the world's most efficient logic chips.

The signatures of President Yoon Suk-yeol, left, and U.S. President Joe Biden are seen on wafers that Samsung manufactured using very fine 3-nanometer processing technology, on the sidelines of Biden's recent visit to Samsung's semiconductor factory in Pyeongtaek, Gyeonggi Province, May 20. Yonhap

Samsung holds a 46 percent share in the global memory chip market by revenue as of the first quarter of this year, followed by SK with 24 percent, according to data by Strategy Analytics (SA). Samsung, SK and Micron of the United States control the global memory chip market.

Given the fact that Samsung already reached a cross-licensing deal with SK, and Micron is focused on profitability, there are no anticipated legal risks or other types of outstanding challenges that could threaten Samsung's position at least in the memory chip business.

"Businesses that led earlier to Samsung's growth are being challenged. The foundry business, a type of business that opens up Samsung plants to manufacture chips designed by customers, should be Samsung's next flashpoint in its focus toward becoming the world's most trusted component supplier," one Samsung insider said.

Every aspect of defense, intelligence and government operations is becoming digitalized. Today's semiconductor shortage has helped the production of chips become a much more attractive business, allowing chipmakers to raise prices more than 20 percent.

According to market researcher TrendForce, TSMC led the global foundry chip market with $17.5 billion in revenue during the January-March period of this year, followed by Samsung with $5.28 billion.

A few months after TSMC said it was close to starting the high-volume production of chips using 5-nanometer (nm) central processing units (CPUs), Samsung said that its chips using better 3-nm technology are commercially available. TSMC won't lag far behind in the race for the thinnest chips, as it is also working on a version of gate-all-around (GAA) tech ― which Samsung used for its newest chips.

"Samsung intends to take some of the spotlight from TSMC's booming foundry business by announcing the latest (developments)," another Samsung insider said. In chip making, thinner technology means a lot as chips using thinner technology are more efficient, faster and more advanced.

"Well, yes, Samsung needs new growth momentum. The question is whether or not Samsung has the ability to guarantee the high-volume production of chips using the 3-nm level with increased yield rates," a Samsung executive said. "Samsung's longtime pride lies in its ability to lead its rivals in chip-making technology. As it proved in the memory chip business, Samsung wants to reclaim its lead in the foundry business." TSMC dominates the market share in 7-nanometer and 5-nm nodes, whereas Samsung suffered several yield issues in chips using 4-nm processing technology.

US interests, geopolitical issues

Of note is that the Samsung semiconductor factory that U.S. President Joe Biden visited recently before his summits in Korea and Japan was the actual site handling the production of 3-nm chips.

The COVID-19 pandemic has greatly illustrated the vulnerability of in-time supply chains. Washington officials said that because the global chip shortage was contributing to higher prices that also affected the U.S.' backbone industries, maintaining closer a partnership with Korea ― the base of Samsung and SK ― matters a lot in terms of keeping the chip supply chain resilient.

U.S. President Joe Biden, left, and President Yoon Suk-yeol, second from left, visit Samsung Electronics' semiconductor plant in Pyeongtaek, Gyeonggi Province, ahead of Biden's summit in Korea, May 20. Behind Yoon is Samsung Electronics Vice Chairman Lee Jae-yong. Yonhap

As Washington was preparing to pass a bill that includes a proposed $52 billion in subsidies for semiconductor companies ― including Intel ― that vow to produce in the United States, if Samsung stabilizes the yield rates of its 3-nm chips, then there will be more chances for it to win back more foundry orders from lucrative corporate clients, according to Samsung insiders and market analysts.

"Because the launch of the Indo-Pacific Economic Framework (IPEF) is aimed at cutting dependence on a single country for batteries and semiconductors, TSMC's dominance in chips with thinner technology won't be good from the supply chain standpoint," the executive said.

TSMC plans to invest $44 billion this year alone. As of last year, TSMC had 65,151 employees, while those at Samsung's device solutions unit, which oversees its semiconductor business, numbered 63,902. Out of the total, some 20,000 were assigned to handle Samsung's foundry business, according to data from each company.

But TSMC's huge presence could possibly leave the global chip supply chain vulnerable to natural disasters like earthquakes. There is also the escalating geopolitical tension between Taiwan and mainland China, as well as the continued competition between Washington and Beijing. Out of its planned capital expenditures this year, most of the spending will go into the construction of chip plants using 3-nm and 2-nm nodes in Taiwan.

In a bid to secure U.S. intervention in case of an attack by China, the Taiwanese government-owned TSMC is constructing advanced manufacturing lines in Taiwan.

"If Samsung improves the yield rates of its chips using 3-nm and then applies this technology in its plants in the United States, then it will be better-positioned to win more orders from big name clients as well as benefits from the state and federal governments in the U.S.," another Samsung source said. TSMC is the main contract chip supplier for Apple, NVIDIA and Qualcomm, considered the top buyers in the foundry business segment.

Samsung chief Lee Jae-yong recently visited the headquarters of Holland-based ASML, which provides essential extreme ultraviolet lithography (EUV) equipment for the production of advanced chips. TSMC was doing 70 percent of ASML's production. Without EUV technology, it's impossible to manufacture advanced chips. ASML controls the entire EUV system market.

Meritz Securities analyst Kim Seon-woo said that Samsung will need to have "risk production" periods before guaranteeing the volume output of the chips using the thinner technologies. "Investors are hoping to see the specifics of Samsung's medium-term business strategies, specifically regarding its inventory management policy in semiconductors and chip investment plans," the analyst claimed.

Concerns over a global economic recession and a possible downturn in the memory chip market have been dragging down investor sentiment toward Samsung Electronics' stock. Its stock price has fallen to below 60,000 won on the KOSPI, having been in a downward trend since the beginning of this year.