Samsung’s brand is omnipresent, with its products ranging from smartphones and televisions to home appliances, found in nearly 75% of American households. However, Samsung’s success extends beyond consumer electronics, as it holds a prominent position as the second-largest chipmaker globally, powering numerous popular devices.
While Samsung has long been a dominant player in memory chips for digital data storage, this market has experienced significant turbulence. Memory chip prices have plummeted over the past year, with a further projected decline of up to 23% in the current quarter. Consequently, Samsung reported a sharp drop in profits for the first quarter of the year, reaching its lowest level since 2009.
To address these challenges, Samsung responded by reducing production of memory chips. In a similar vein, Micron, a smaller competitor, announced plans to cut its workforce by 15%. However, amidst this industry turmoil, Samsung has discovered growth opportunities in another segment of the semiconductor market: its foundry business. This division specializes in manufacturing custom chips for major clients such as Qualcomm, Tesla, Intel, Sony, and numerous smaller companies.
In a strategic move, Samsung is investing $17 billion to construct a chip fabrication plant, or fab, in Taylor, Texas. The company has committed to initiating the first production of advanced chips in the United States at this facility next year. Additionally, Samsung is expanding its manufacturing capabilities in its home country of South Korea. It plans to invest $228 billion in establishing a cluster of five new fabs, which are expected to become operational by 2042.
The substantial investments made by Samsung in chip manufacturing signify their determination to catch up on technological advancements and maintain their leadership position in the industry. According to Dylan Patel from the research and consulting firm SemiAnalysis, Samsung’s continuous spending is driven by the goal of staying ahead in technology and retaining their market dominance.
“We refuse to compromise.”
Samsung stands out as one of the three companies involved in manufacturing the world’s most advanced chips, occupying the second position after Taiwan Semiconductor Manufacturing Company (TSMC) and surpassing Intel. Driven by their relentless ambition, Samsung refuses to settle for being second best and is determined to surpass TSMC. The company unveiled an ambitious roadmap aiming to triple its leading-edge manufacturing capacity, produce industry-leading 2-nanometer chips by 2025, and further reduce the size to 1.4 nanometers by 2027.
CNBC recently had the opportunity to tour Samsung’s chip fabrication facility in Austin, Texas, offering an exclusive interview with Jinman Han, the head of Samsung’s chip business in the United States. Han, with 34 years of experience at Samsung, oversees the company’s foundry operations and memory chips business. He expressed the company’s strong desire to be a fundamental pillar of the U.S. industry.
Samsung’s journey began 85 years ago when founder Lee Byung-chull established it as a trading company in Korea. To endure through two major wars, the company diversified into various industries, including textiles and retail. In 1969, Samsung Electronics was established, followed by the release of the first Samsung TV in 1972. Two years later, Samsung made a bold move by acquiring Hankook Semiconductor, solidifying its position as a vertically integrated consumer electronics giant.
Samsung entered the U.S. market in 1978 with its offices in New Jersey, and by 1983, it started manufacturing 64KB dynamic random-access memory (DRAM) chips, widely used in computers. The company expanded its presence by opening a new office in Silicon Valley. After Lee Kun-hee took over in 1987, Samsung launched its first mobile phone a year later, and it has now become the world’s leading smartphone provider, competing directly with Apple.
Within a decade of its initial foray into memory chips, Samsung introduced a version with 1,000 times greater capacity, gaining global recognition in 1992 with the world’s first 64MB DRAM chip, securing its dominant position in the memory market that persists to this day.
Samsung initiated chip production in the United States with its fab in Austin, Texas, which began construction in 1996. A second fab was established in the same city in 2007, focusing entirely on foundry operations.
While Samsung’s expansion has brought success, it has also faced legal disputes. In 2018, the company reached a settlement with Apple, ending a seven-year legal battle over patent infringement. However, the details of the agreement were not disclosed, resulting in a neutral outcome for both parties after years of litigation and associated costs.
The company has also encountered challenges, including protests in South Korea surrounding Jay Y. Lee, the third-generation leader of Samsung’s founding family, who faced legal issues related to bribery. Additionally, the global chip shortage during the pandemic disrupted Samsung’s supply chain and impacted its operations.
However, the market dynamics are changing, as demand for memory chips weakened due to consumer spending constraints caused by rising inflation. Samsung’s internal analysis indicates a potential market rebound by the end of this year.
A struggle for power and influence on a global scale.
Investors are returning to Samsung as the stock has rebounded after experiencing a nearly 30% decline last year, aligning with the broader slump in the global tech industry. This year, the shares have risen by 28%, reaching a 52-week high on June 5 on the Korea Stock Exchange. Notably, Morgan Stanley has recently designated Samsung as a top pick.
Part of the stock’s resurgence can be attributed to the ongoing geopolitical competition in the chip industry between China and the United States. In May, China implemented a ban on products from American memory maker Micron, resulting in a stock boost for Samsung. Additionally, despite new regulations implemented in October that restrict many chip companies from exporting advanced technology to China, Samsung received a one-year waiver from the United States to operate its two chip fabs in the country.
Samsung’s decision to expand its capacity in Taylor, Texas, located northeast of Austin, is driven by the increasing demand within the United States. Currently, more than 90% of advanced chips are manufactured in Taiwan. By establishing operations in Taylor, Samsung aims to enhance its ability to domestically source chips and reduce reliance on regions where it may face geopolitical uncertainties.
Over the past three decades, the United States’ share of global chip production has significantly declined from 37% to a mere 12%. This is largely due to the higher costs associated with constructing and operating fabs in the United States, which are estimated to be at least 20% higher compared to Asia. Asian countries benefit from lower labor costs, a more accessible supply chain, and greater government incentives.
Samsung’s investment in the Taylor fab, with a total cost of $17 billion, allocates $11 billion for machinery and equipment. Notably, the chip-building machines for the facility will be supplied by Applied Materials. The company recently announced a $4 billion semiconductor facility in Silicon Valley, which is the largest in the region in several decades. This suggests that chip manufacturing costs in the United States may become more competitive as more companies in the supply chain expand their operations domestically. Intel is also constructing large fabs in Arizona, Ohio, and Europe, while TSMC plans to invest $40 billion in new chip fabs in Arizona.
The combination of power and water resources.
Environmental concerns loom large for Samsung’s expansion in Texas, particularly in relation to power and water resources.
The most costly equipment that Samsung will bring to its Taylor facility are the EUV lithography machines manufactured by ASML, priced at around $200 million each. These machines are crucial for etching the most advanced chips with high precision. However, each EUV machine consumes approximately 1 megawatt of electricity, which is 10% more than the previous generation. In 2020, Samsung’s chip production in South Korea accounted for over 20% of the country’s entire solar and wind power capacity.
Reliable and uninterrupted electricity supply is essential for semiconductor fabs, as power outages can result in significant production losses. Texas, however, faces challenges with its energy grid, which operates relatively independently from neighboring states. The grid failure during a severe winter storm in 2021 led to widespread power outages and numerous fatalities. In response, Texas Governor Greg Abbott has signed multiple laws to enhance the reliability, resilience, and security of the power grid, assuring businesses that they will have access to the necessary power at a low cost.
Water is another critical requirement for chip fabrication. In 2021, Samsung consumed approximately 38 billion gallons of water for chip manufacturing. However, around 80% of Texas is affected by drought conditions. Efforts are being made by the Texas Water Board and through legislation to address water needs, not only for businesses but also for the growing population. Samsung aims to reuse over 1 billion gallons of water in Austin by 2023 and plans to reclaim more than 75% of the water used at the new Taylor facility.
With the growing focus on artificial intelligence (AI) models that require powerful processors, there is a shift towards developing more advanced logic chips. Nvidia currently dominates this field. Samsung is expected to deepen its involvement in logic chip production, including AI chips and future semiconductor technologies.
Looking ahead, Samsung envisions expanding its chip manufacturing capacity at the 1,200-acre site in Texas, with the possibility of adding more fabs in the future.
To gain a deeper understanding of Samsung’s operations, including its Austin chip fab and the Taylor building project, watch the accompanying video.