Samsung faces bumpy road ahead to becoming system chip leader

Goal of becoming No. 1 foundry player appears elusive

By Baek Byung-yeul

Three years have passed since Samsung Electronics ambitiously declared that it will become the global leader in system semiconductors by 2030, but the chip giant is still suffering from sluggish growth in the sector that includes processing chips and the foundry business, according to industry analysts.

They say Samsung's growth potential, especially in the foundry business that manufactures chips for fabless customers, lags behind its biggest rival TSMC in terms of production capacity. As a result, its global market share remains unchanged since 2019, unable to catch up with the Taiwanese competitor.

Analysts stress that Samsung needs to make sizable corporate acquisitions in order to make a breakthrough. But the company's leadership vacancy, in which Vice Chairman Lee Jae-yong is currently unavailable to return to his post due to legal issues, makes it that much more difficult for the chip giant to take necessary steps.

The United States has tightened restrictions on exports of technology to China, which prompted analysts to project that Samsung will try to seek a breakthrough by investing in promising startups rather than buying big companies in order to avoid attracting the attention of regulatory officials at semiconductor powerhouse countries.

"It may be possible for Samsung to catch up with TSMC in the foundry sector to produce expensive semiconductors using the latest manufacturing process. In order to achieve Samsung's 2030 goal, there are seven years left and Samsung needs to invest more than three times its current expenditure assuming that TSMC does nothing. So, when it comes to overall production capacity, it is difficult to say that it will catch up with the Taiwanese company by 2030," Kim Yang-paeng, a senior researcher at the Korea Institute for Industrial Economics and Trade (KIET), said.

On April 30, Samsung's vice chairman declared that the company "will take first place in the system semiconductor field including foundry" at its Hwaseong plant in Gyeonggi Province.

To that end, Samsung announced a major plan to invest 133 trillion won ($105 billion) by 2030 only in the system semiconductor sector. The company added last year that it would inject 38 trillion won more.

However, Samsung's competitiveness has not improved significantly since then. In the market for mobile application processor chips, which serve as the brain of mobile devices, Samsung's share fell to 6.6 percent in 2021 from 12 percent in 2019, according to data by Strategy Analytics. During the same period, Qualcomm's share increased from 34.8 percent to 37.7 percent, while Apple's share increased from 22.9 percent to 26 percent.

Samsung's market share by revenue in the global foundry business in 2021 also remained at second place with an 18-percent share, following TSMC with 53 percent, according to data by market tracker TrendForce. But the market share gap between the No. 1 and No. 2 players could widen further as the Taiwanese company is estimated to account for 56 percent and Samsung 16 percent.

Although Samsung is trying to enhance its presence in the foundry business, the market researcher estimated the dominance of Taiwanese companies in the sector will be solidified this year.

"Under the looming shadow of chip shortages caused by the pandemic and geopolitical turmoil in the past two years, various governments have quickly become aware of the fact that localization of chip manufacturing is necessary to avoid being cut off from access to chips due to logistics difficulties or cross-border shipment bans. Taiwanese companies have ridden this wave to become partners that governments around the world are eager to invite to set up factories in various locales," TrendForce said.

The KIET researcher said, however, that Samsung's 2030 declaration needs to be interpreted as a bid to beef up what the company has not been good at.

"The system semiconductor we're talking about contains a wide variety of parts such as CPU and foundry semiconductor production. Intel is still the No. 1 player in system semiconductors and TSMC is No. 1 only in the semiconductor foundry area," he said.

"I think it is right to interpret the 2030 vision to mean that Samsung will do better in areas where it has been poor at rather than criticizing why it still remains behind strong players," the senior researcher said.

While questions have been raised that Samsung would lose its customers in the foundry business that produce chips using the latest technologies such as below 4-nanometer production technology, a Samsung executive denied the speculations saying its order backlog in the foundry business has been on a steady increase.

"Contrary to concerns about our semiconductor foundry business, demand from major customers currently remains solid," Kang Moon-soo, senior vice president and head of Samsung's foundry market and strategy team, said during a conference call on April 28.

"Over the next five years, the balance of orders is eight times larger than the sales in foundry business last year," the executive said.

Regarding the speculation that Samsung is lagging far behind TSMC in terms of 4-nanometer process, Kang said, "The 5-nanometer process has entered the stage of a mature yield rate and is maximizing supply to major customers. The expansion of production in the initial stage of the 4-nanometer process was somewhat delayed, but we are currently entering the expected yield improvement curve by focusing on stabilization."

A local semiconductor industry source said, "Samsung's detailed explanation of its foundry business was aimed at dispelling market concerns."

"There have been concerns in the market that Samsung is losing its foundry customers who ordered the production of chips based on the 4-nanometer process due to a low yield rate. The company officially confirmed that such concerns are different from what the company sees," the official said asking not to be identified.

Leadership vacuum becomes obstacle for corporate acquisition

Industry experts pointed out that sizable corporate acquisitions are needed for Samsung to take a step forward, but the company has faced obstacles due to a leadership vacuum.

"Samsung needs to acquire companies with high growth potential to strengthen its business portfolio, but its leader Lee Jae-yong is currently embroiled in legal issues, so there is no one who can make a risk-taking decision," Kim Dae-jong, a professor of business administration at Sejong University, said.

"The role of a leader is very important to Korean conglomerates. This is because the business proceeds only after they take responsibility and take over other companies or execute the investment with lots of money," he said.

Lee is not allowed to return to management until 2027 due to a five-year ban imposed by the Ministry of Justice. He was convicted of offering bribes to former President Park Geun-hye and has been on parole since August 2021.

Industry officials said Samsung has been preparing to buy another company and recently organized a taskforce led by Vice Chairman Han Jong-hee. In April, the company also recruited former Bank of America banker Marco Chisari, who's known as a takeover expert in the semiconductor business.

"Acquiring another company is the fastest way to change a company's business structure. However, even if Samsung decides to acquire a company, it will not be easy to get approval from other countries," the KIET researcher said.

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