Author: Tronserve admin
Sunday 18th April 2021 11:26 PM
Samsung’s $116 Billion Bet Ratchets up Competition with Chip Giants
This year, Samsung Electronics shares hit an all-time high—rising more than 60% since the start of 2019. The rise has been fueled by optimism about the turnaround of prices for memory chips, a market the South Korean tech giant dominates as the world’s top producer.
While memory chips remain crucial for Samsung—which has a wide range of businesses including smartphones and theme parks—the volatility of their prices is prompting the conglomerate to diversify its semiconductor business. The company aims to create another major revenue stream as the smartphone market, where Samsung is the world’s top producer, appears to be saturated and stagnant.
The Suwon-based tech company is spending billions to strengthen in other areas of semiconductors—the sector powering the likes of artificial intelligence and 5G as well as a myriad of devices. Decades ago, Samsung’s late founder Lee Byung-chull made a big bet on semiconductors that helped boost the fortunes of the company and his family. His son Lee Kun-hee was ranked No. 1 on the most recent list of South Korea’s 50 richest people with a net worth of $16.8 billion, while grandson Jay Y. Lee was No. 4 with $6.1 billion.
In April last year, Samsung announced that it plans to invest a total of 133 trillion won (about $116 billion) over the next decade into two areas: system LSI (non-memory chips, like application processors) and foundry (contract chip manufacturing).
For a conglomerate with a total market cap of roughly $330 billion, Samsung is making a huge investment that has analysts questioning whether the company can capture market share from entrenched competitors Qualcomm and TSMC, the leaders in mobile processors and foundry, respectively.
The world’s biggest smartphone maker can cut costs and improve efficiency by using its own processors for its Galaxy devices. Samsung has the third-largest market share in the mobile processor market, with 16% in the third quarter last year, behind Qualcomm’s 31% and MediaTek’s 21%, according to a report by IHS Markit earlier this month.
Samsung gained market share from Qualcomm by using its own mobile processors for its own devices; according to the IHS Markit report, Samsung used Exynos chips for about 75.4% of Galaxy devices, up from 61.4% in the previous year.
But that won’t be enough. The Korean company needs more external customers, and to do that, it needs to compete with Qualcomm’s better-performing Snapdragon processors, which are used in high-end smartphones.
Even when Samsung makes mobile processors as good as Snapdragon chips—which Roger Sheng, research vice president at Gartner, expects will take at least 3 years—the biggest smartphone makers already use their own chips. Apple has its own A-series processors, and Huawei is also increasingly using its Kirin chips, according to the IHS Markit report.
In fact, Vivo is the only major smartphone maker currently using Exynos chips, notes Sheng. Vivo uses Samsung’s chips as it has a long business relationship with the Korean company, says Sheng. Plus, the Chinese smartphone maker needs an alternative to San Diego-based Qualcomm. “If there is only Qualcomm, it will be very difficult to negotiate the price and make differentiated products,” he explains.
And the trade tensions between the U.S. and China helped Samsung increase its sales to Chinese smartphone makers. “Vivo will continue to use Qualcomm and MediaTek, but has likely added Samsung to diversify away from Qualcomm during this unpredictable trade dispute between the U.S. and China,” says Phil Solis, research director at IDC.
“The situation the U.S. put Huawei in has caused Chinese OEMs [original equipment manufacturers] to be cautious for the long term when it comes to relying too heavily on U.S. chip suppliers,” he adds. Since last year, the U.S. government has blocked Huawei from buying American-made technology for national security concerns.
Other major Chinese smartphone makers include Oppo, a sister brand of Vivo, and Xiaomi. Both companies are considering using Exynos chips, but they have not decided yet, says Sheng.
Samsung’s toughest challenge will be in the foundry market, which is dominated by TSMC. According to TrendForce data, the Taiwanese chip maker holds 50% of the market share, while Samsung’s is about 20%.
TSMC has built a considerable lead in foundry since it was established by its billionaire founder Morris Chang in 1987. It is miles ahead of Samsung in terms of technology and production capacity—and has no plans to slow down. Last year, TSMC spent a record $15 billion on technology and capacity in 2019—about 50% more than originally planned. And earlier this month, the company said it will increase capital expenditure for 2020 by $1 billion.
Plus, Samsung has a unique disadvantage. The conglomerate competes with potential clients of its foundry in other areas, like smartphones and processors. Other major foundries, including TSMC, focus solely on its foundry business.
Qualcomm, for example, recently shifted its flagship Snapdragon processors from Samsung to TSMC. And Qualcomm is planning to use TSMC again for its latest flagship Snapdragon chips this year, reported Korean magazine BusinessKorea last month.
“Qualcomm would have been a major customer, but it shifted away from Samsung’s foundry to TSMC’s because of the conflict of interest where Samsung would have access to a competitor’s intellectual property,” says IDC’s Solis.
While Samsung faces an uphill battle against TSMC, the $70 billion foundry market may be big enough for the two to have sufficient business. A variety of companies need foundries for everything from smartphones to servers to sensors—and TSMC, no matter how big it is, can’t make them all.
“It seems to be that there is enough room for Samsung,” notes Solis. “TSMC will be making the vast majority of 5G chipsets for Apple, HiSilicon, MediaTek, Qualcomm and Unisoc as well as chipsets for AMD—who is gaining share against Intel—so TSMC’s capacity will be filled up.”
Although the sprawling conglomerate has a tough task taking on market leaders in mobile processors and foundry in the near future, its track record in LCD display, television and mobile phones show Samsung has beaten the odds before.