How Samsung became the world’s No. 2 advanced chipmaker and set the stage for a U.S. manufacturing boom

Samsung’s model is in all places. From Galaxy phones and sensible TVs to washing machines and fridges, the firm says its merchandise could be present in practically three-quarters of U.S. households. 

But Samsung is rather more than devices and home equipment, and there’s one more reason why it is certainly one of the world’s most beneficial firms. It’s the second-biggest maker of chips which are powering so many common gadgets.

For greater than three many years, Samsung has been a chief in reminiscence chips, that are used for digital information storage. But that is been a market in turmoil. Over the final 12 months, costs for reminiscence chips have taken a dive, and they’re anticipated to fall up to 23% more in the current quarter. In April, Samsung reported dismal earnings for the first quarter, with revenue plunging to its lowest stage since 2009.

Samsung responded by cutting production of reminiscence chips. Elsewhere in the {industry}, smaller rival Micron stated not too long ago that it expects to slash 15% of its workforce.

Amid the wreckage, the large firm has discovered development in one other nook of the semiconductor market, doubling down on its foundry enterprise, the facet that makes customized chips for large prospects like Qualcomm, Tesla, Intel and Sony, in addition to 1000’s of smaller gamers.

Samsung is constructing a $17 billion chip fabrication plant, or fab, in Taylor, Texas, the place it is promised to start out the first U.S. manufacturing of advanced chips subsequent 12 months. In February, functions opened for firms like Samsung to get their lower of the $52.7 billion CHIPS and Science Act, handed by lawmakers final 12 months with the intention of bringing chip manufacturing to the U.S. after 30 years of market share losses to Asia.

Samsung can be including capability in its house nation of South Korea, spending $228 billion on a mega cluster of five new fabs which are scheduled to return on-line by 2042.

“They’re spending and spending and spending,” stated Dylan Patel of analysis and consulting agency SemiAnalysis. “And why is that? So they’ll atone for expertise, to allow them to proceed to keep up their management place.”

Samsung is certainly one of solely three firms that manufacture the world’s most advanced chips, rating second behind Taiwan Semiconductor Manufacturing Company and forward of Intel.

Now Samsung is setting its sights on catching TSMC.

“We don’t settle to be No. 2,” stated Jon Taylor, Samsung’s company vice chairman of fab engineering, in an interview. “Samsung is rarely glad with No. 2 as a enterprise, as a firm. We’re very aggressive.”

The firm introduced an formidable new highway map in October, pursuing a purpose to triple capability of modern manufacturing, and to make industry-leading 2-nanometer chips by 2025 and get them down to 1.4-nanometer by 2027.

“If Samsung hits their targets, they will leapfrog forward of TSMC, however that is a huge if,” Patel stated. “TSMC is the just one that the {industry} trusts to hit their highway map.”

CNBC not too long ago went inside Samsung’s Austin chip fab, for the first in-depth tour given on digicam to a U.S. journalist. While there, we obtained a uncommon interview with the head of Samsung’s U.S. chip enterprise, Jinman Han.

A 34-year veteran of the firm, Han’s U.S. oversight contains the foundry operations and the reminiscence chips enterprise.

“We actually wish to be a bedrock for U.S. {industry},” Han advised CNBC.

Samsung obtained its begin 85 years in the past, when founder Lee Byung-chull created it as a buying and selling firm for exporting fruit, greens and fish in Korea. 

“His imaginative and prescient was for our firm to be everlasting, robust and highly effective,” Han stated. “So, he selected the identify Samsung, which accurately means three stars.”

To survive two main wars, the firm diversified into industries like textiles and retail. Samsung Electronics was established in 1969, the first Samsung TV got here out in 1972, and two years after that Samsung purchased Hankook Semiconductor in a daring effort to determine the vertically built-in client electronics large the firm is at this time.

Samsung opened its first U.S. workplaces in New Jersey in 1978. By 1983, it was making 64KB dynamic random-access reminiscence (DRAM) chips, which had been generally utilized in computer systems, and the firm had a new U.S. workplace in Silicon Valley.

Lee Kun-hee took over after his father’s loss of life in 1987, and Samsung’s first cell phone got here a 12 months later. And now Samsung is the world’s biggest smartphone provider, going head-to-head with Apple.

Just a decade after making its first reminiscence chip, Samsung was coming to market with a model that had 1,000 occasions the capability. It gained worldwide acclaim in 1992 with the world’s first 64MB DRAM chip, inserting the firm squarely in first place in reminiscence, the place it stays at this time.

“Its presence is so ubiquitous in South Korea that they name their nation the Republic of Samsung,” stated Geoffrey Cain, writer of the e book “Samsung Rising,” revealed in 2020.

Samsung began making chips in the U.S. with its fab in Austin, Texas, which broke floor in 1996. It opened a second fab in the Texas capital metropolis in 2007. Today, Samsung’s Austin operation is totally dedicated to foundry.

Samsung’s enlargement has introduced with it some authorized battle.

In 2018, the firm lastly ended a seven-year legal battle with Apple over whether or not Samsung copied the iPhone. Terms weren’t disclosed.

“Apple obtained a fee from Samsung, so Apple technically gained,” Cain stated. “But while you add up all the authorized prices, all the combating, all these years, it was simply a impartial zero on zero for either side.”

Challenges have not been restricted to the courtroom.

In South Korea, protests have erupted round Jay Y. Lee, the third technology of Samsung’s founding household to take the helm. He served time in jail for bribery earlier than being pardoned in August and becoming executive chairman in October.

And throughout the pandemic, Samsung was damage by the international chip scarcity as demand peaked and the provide chain was disrupted.    

“It was actually painful,” Han stated. “When you have a look at your prospects asking for extra chips, however there is no method you possibly can present that, it was so painful.”

That dynamic is altering. As shoppers rein of their spending in the face of rising inflation, demand for reminiscence chips has weakened sharply. Han stated Samsung’s inner information evaluation exhibits “the market will rebound presumably by finish of this 12 months.”

Investors have already been coming again. The inventory dropped virtually 30% final 12 months, alongside a broader decline in the international tech {industry}. The shares are up 28% this 12 months and hit a 52-week excessive on June 5, on the Korea Stock Exchange. Morgan Stanley not too long ago named it a top pick.

Part of the rally might mirror the newest chapter in the geopolitical chip struggle between China and the U.S.

In May, China banned products from U.S. reminiscence maker Micron, which led to a stock pop for Samsung. The U.S. additionally granted Samsung a one-year waiver to function its two chip fabs in China, regardless of new rules in October that cease many chip firms from exporting their most advanced expertise to the world’s second-biggest financial system.

Samsung says it is including capability in Taylor, Texas, which is northeast of Austin, due to U.S. demand. More than 90% of advanced chips are at present made in Taiwan.

“Bringing Taylor on board is simply going to extend their capability to supply their chips domestically and not have to enter areas of the world the place they could have some discomfort,” stated Samsung’s Jon Taylor.

Over the final three many years, the U.S. share of world chip manufacturing has plummeted from 37% to just 12%. That’s largely as a result of estimates present it prices not less than 20% more to construct and function a new fab in the U.S. than in Asia, the place labor is cheaper, the provide chain is extra accessible and government incentives are far greater.

The highest-price items of apparatus Samsung will deliver into Taylor are in all probability the $200 million EUV lithography machines made by ASML. They are the solely gadgets in the world that may etch with sufficient precision for the most advanced chips. 

Each EUV machine is rated to devour about 1 megawatt of electricity, which is 10% greater than the earlier technology. One study discovered Samsung used greater than 20% of South Korea’s complete photo voltaic and wind energy capability in 2020.

“Electricity is the lifeblood of a semiconductor fab in a sense,” stated Patel of SemiAnalysis. “There have been a number of cases the place electrical energy has gone out and firms have needed to scrap months of manufacturing.”

Texas’ vitality grid is essentially lower off from its neighbors, limiting its borrowing energy throughout state strains. In 2021, that grid failed throughout an excessive winter storm, leaving millions of Texans without power and causing at least 57 deaths.

“I already signed 12 legal guidelines to make the energy grid extra dependable, extra resilient and safer,” Texas Republican Gov. Greg Abbott advised CNBC in April. “And so we are able to undoubtedly guarantee any enterprise transferring right here they may have entry to the energy they want, but in addition at a low value.”

Water is one other main want for chip fabs. In 2021, Samsung used about 38 billion gallons of water to make its chips. Roughly 80% of Texas stays stricken by drought.

“We have the Texas Water Board that is engaged on that and laws that we’re engaged on this session to make it possible for with a rising inhabitants in Texas, we can present for the water wants, not simply of companies, but in addition for our rising inhabitants,” Abbott stated.

Samsung advised CNBC its purpose in Austin is to reuse greater than 1 billion gallons of water in 2023. At the new Taylor fab, it goals to reclaim greater than 75% of the water used.

Of late, all the hype in expertise has been round synthetic intelligence fashions to energy providers like OpenAI’s ChatGPT. Those functions require even more powerful processors, made primarily as of now by Nvidia.

“There are extra and extra individuals round the world who could make reminiscence chips,” Cain stated. “To keep forward of the sport, you have to get into the newer logic applied sciences.”

Cain stated he sees Samsung “diving deeper into the logic chip section. So, [that’s] the AI chips, the future functions for semiconductor expertise.”

When requested about what’s subsequent, Samsung’s Taylor stated the firm finally plans so as to add extra chip manufacturing capability at its 1,200-acre website in Texas.

“We at present simply have one fab introduced there,” he stated. “But loads of room for extra.”

Watch the video to go behind the scenes at Samsung’s Austin chip fab and the constructing undertaking in Taylor, Texas.