[Chip Talk] Samsung Foundry 'Sandwiched' Between Taiwan and China... Sighs Expected in Second Half

Samsung Electronics' foundry division, which is being pursued by TSMC, the number one in the foundry (semiconductor contract manufacturing) industry, and Chinese company SMIC, is expected to turn a profit in the second half of this year. This is because, along with the seasonal peak in the second half, it has steadily increased orders in advanced processes below 5 nanometers (nm; 1 nm = one billionth of a meter) and secured a meaningful volume of customer orders. There is also anticipation that orders for the Gate-All-Around (GAA) 3nm second-generation process will become visible.

According to the industry on the 31st, Samsung Electronics' foundry has been improving its operating rate since the third quarter, pulling the reins of a positive earnings trend.

Samsung Electronics' foundry division (including System LSI) recorded a loss exceeding 1 trillion won in the first half of this year. Last year's operating loss also exceeded 2 trillion won. Although aggressive facility investments were made to secure customers, the downturn in the market caused the operating rate to decline compared to the previous year, while fixed costs such as depreciation and labor costs increased, worsening profitability.

On the 9th, the 'Samsung Foundry Forum 2024' is being held at COEX in Gangnam-gu, Seoul. The Foundry Forum is an event where Samsung Electronics shares the current status of foundry manufacturing technology and future vision with fabless customers and ecosystem members. Photo by Jinhyung Kang aymsdream@

However, this year Samsung Electronics is expected to achieve an annual sales growth rate higher than the industry growth rate by securing customers in high-value semiconductor fields such as artificial intelligence (AI) and high-performance computing (HPC).

Recently, Samsung Electronics' foundry division secured a 'big chip' order by agreeing to produce IBM's self-designed server AI chips. On the 26th (local time), IBM unveiled the latest processor Telum2 and AI accelerator Spire at the semiconductor conference 'Hot Chips 2024' held at Stanford University in the United States. Following the first-generation Telum product unveiled in 2021, IBM announced that all chips would again be manufactured at Samsung Foundry. The new AI chips will be mass-produced using Samsung's 5nm process.

IBM also expressed confidence in Samsung Electronics' 5nm process. This could become an opportunity for increased big-tech orders to Samsung. IBM explained, "Manufactured using Samsung Electronics Foundry's high-performance, high-efficiency process, the CPU area was reduced by 20% and power consumption by 15%."

IBM's 'Telum2' processor. [Photo by IBM]

Samsung Electronics is also showing confidence. Earlier, in the Q2 earnings conference call, Samsung stated that demand for AI and HPC is expanding, and growth will continue centered on advanced nodes. The goal is to quadruple the number of AI and HPC-related customers and increase sales more than ninefold by 2028.

Additionally, the second half of the year is a traditional seasonal peak for the semiconductor market, which raises expectations for improved performance. This is because semiconductor preparation is done in advance in the second half for the launch of strategic smartphones in the second half and server investments and new computer product launches at the beginning of the year.

Samsung Electronics is also accelerating preparations for mass production of the GAA 3nm second-generation (SF3) process. The recently released 'Galaxy Watch7' is equipped with the first wearable application processor (AP) 'Exynos W1000' manufactured using the 3nm second-generation process. The next-generation mobile AP 'Exynos 2500,' which will be installed in the 'Galaxy S25' to be unveiled early next year, will also be mass-produced using the 3nm second-generation process. It is analyzed that Samsung has established the first 3nm mass production system for mobile APs based on the judgment that the performance and yield of the W1000 have made significant progress.

Earlier, Samsung Electronics stated in the Q2 earnings conference call that "through the expansion of advanced process business and full-scale mass production of the GAA 3nm second-generation process, this year's sales will exceed market growth rates," so orders for the GAA 3nm second-generation process in the second half are expected to become visible.

However, to break down the still solid wall of TSMC, it remains to be seen how many customers Samsung can secure in the HPC field, where demand is expected to grow in the future. According to market research firm TrendForce, TSMC solidified its dominant position with a 61.7% market share in the first quarter of this year. The gap with Samsung Electronics, ranked second with 11.0%, widened by 50.7 percentage points compared to the fourth quarter of last year.

The gap with TSMC may widen further. Counterpoint Research said, "TSMC has raised its annual sales forecast from the low-to-mid 20% range to the mid-20% range," adding, "The supply-demand balance for TSMC's AI accelerator is expected to remain tight until the end of next year or early 2026."

TSMC is making aggressive investments by establishing production bases in the United States, Germany, Japan, and elsewhere. By diversifying factories concentrated in Taiwan, it aims to solidify its position as the number one foundry. Recently, TSMC started construction of a factory in Dresden, Germany, as a European production base. This factory, built by the joint venture ESMC led by TSMC, will produce AI chips as well as automotive and industrial semiconductor wafers, which are core to European manufacturing. Dresden, Germany, is close to TSMC customers such as Bosch, Infineon, and NXP. The factory is scheduled to operate in 2027 and will produce automotive semiconductors.

Due to measures for diversifying production bases and aggressive capacity expansion, the gap with competitors including Samsung is expected to widen further. TSMC plans to introduce 28/22nm CMOS (complementary metal-oxide-semiconductor) technology and 16/12nm FinFET processes at this factory. Full operation is expected by the end of 2027.

Chinese companies also presented higher forecasts for the third quarter this year, so the pursuit by latecomers should be watched carefully. Chinese companies are growing faster than foundries in other countries due to increased orders from domestic fabless customers. SMIC of China expects third-quarter sales to increase by 13-15% compared to the previous quarter. SMIC and another Chinese company, UMC, hold a 6% foundry market share in the second quarter.