[The Editors' Verdict] Why Can't Samsung Surpass TSMC?

Gap Widens Between World's No.1 Foundry Taiwan TSMC and Samsung Electronics
Samsung Starts World's First Foundry 3nm Process Initial Mass Production, but Yield Is Key
In Gloomy Semiconductor Market Outlook for Second Half, Lee Jae-yong's Leadership

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Lee Cho-hee] Until a few years ago, TSMC was an unfamiliar company to the general public. When explained as a Taiwanese semiconductor foundry (contract manufacturing) company, seven or eight out of ten would respond, "Taiwan? Isn't Samsung the best in semiconductors?" Recently, when U.S. President Joe Biden visited Korea, the first place he rushed to after getting off the plane was Samsung Electronics' semiconductor factory. This shows how sincere President Biden is about securing the semiconductor supply chain, having repeatedly mentioned "Thank you, Samsung" in official settings since last year. Despite Samsung Electronics' tremendous status, TSMC overwhelmingly surpasses Samsung in the foundry sector. Its global market share and quarterly sales are more than three times higher.

TSMC is a company that ‘created’ the ingenious business model of semiconductor contract manufacturing. The founder, Morris Chang, was an expert who spent his entire career working at American semiconductor companies and even served as a vice president. In 1985, at the age of 54, he returned to Taiwan. At that time, Taiwan’s semiconductor technology lagged at least two generations behind Japan and the U.S., and the possibility of overturning this was slim. Morris Chang established TSMC and completely gave up semiconductor design competition, starting a ‘novel’ business focused solely on production. At the same time, American fabless companies dedicated only to semiconductor design began to emerge in the private sector, and TSMC thrived.

Morris Chang’s management principle can be summarized in one line: ‘Do not compete with customers.’ System semiconductors are core components of all electronic products. Entrusting the production of such critical parts to another company is hard to imagine, but TSMC gained trust by protecting confidentiality even at a loss. In fact, two competing graphics card companies in the market entrusted TSMC with producing their core chips.

What is the difference with Samsung Electronics? Samsung also operates a foundry business but simultaneously designs semiconductors like a fabless company. It also manufactures finished IT products such as smartphones. Apple entrusts the foundry production of iPhone application processors (AP) to TSMC for this reason. Although the business sectors differ, entrusting a competitor with producing core parts of one’s own products is not something done lightly. This is a fundamental weakness Samsung has in the foundry field.

There have long been rumors in the market that Samsung Electronics might ‘spin off’ its foundry division. If spun off as a company dedicated solely to contract manufacturing, it could alleviate customers’ concerns about ‘What if they copy our chips?’ Samsung has dismissed such rumors so far, confident that it can outcompete TSMC by pouring company-wide resources into competitiveness.

However, the situation is not easy. While Vice Chairman Lee Jae-yong has been hampered by legal risks for years, Samsung’s foundry business has encountered obstacles in many areas. There are even open rumors about which customers have raised issues regarding ‘yield,’ the ratio of producing good-quality chips. Samsung recently announced that it entered the 3-nanometer process ahead of TSMC. Although this was emphasized as being ahead of competitors, industry experts agree that achieving meaningful yield rates is what truly matters.

The Yoon Seok-yeol administration has declared its ambition to become a semiconductor powerhouse since its inauguration. It has promised tax support, deregulation, and talent development. However, the solution might be simpler than expected. It just needs to enable companies to operate freely. Let Samsung act ‘like Samsung.’ Compared to competitors racing on the highway, Samsung, unable to have its leader participate in management, is like running with a boulder tied to its leg. Samsung reached the world’s top position on its own even without government help. True support might be enabling the private sector to handle private matters well.