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According to the Nikkei, Samsung Electronics said on Thursday that it plans to strengthen its foundry chip technology and increase customers as a global chip shortage disrupts production in key industries from cars to smartphones, which also gives them strong quarterly earnings in third place.
The South Korean tech giant is improving the competitiveness of its foundry business — which produces tailor-made chips for corporate customers — and plans to make those components more cost-effective. The company announced earlier this month that it plans to produce its first 3nm chip designs for customers in the first half of 2022, while its second-generation 3nm chip is expected to be produced in 2023.
"By ensuring technology leadership through the 3nm full gate process and meeting demand through aggressive investments, the foundry business is expected to continue to deliver strong performance improvements," Samsung said in a statement after announcing full earnings for the third quarter.
The company plans to significantly increase earnings by expanding the supply of advanced processes below 5 nanometer processes as well as increasing sales to customers worldwide and normalizing prices for future sustainable investments," they added.
Net profit during the July-September period surged 31.3 percent from the same period last year to 12.3 trillion won ($10.5 billion), the company said.
Samsung also said operating profit for the third quarter increased 28 percent year-on-year to 15.8 trillion won, in line with guidance issued earlier this month. But revenue was revised upwards, up 10.5% over the same period to 74 trillion won. Sequentially, operating profit increased by 25.9% and revenue increased by 16.2%.
Analysts say Samsung's foundry business will triple over five years, adding hundreds of customers.
"Samsung foundries are providing customers with a stable platform and collaborative ecosystem," Lee Su-bin, an analyst at Daishin Securities, wrote in a report ahead of the earnings report.
Lee said Samsung's customer base is increasing dramatically, from 35 in 2017 to more than 100 this year. Lee expects more than 300 by 2026.
By industry, memory chips led the way due to strong demand for DRAM and NAND chips during the coronavirus pandemic. With Samsung's latest foldable smartphones — the Galaxy Z Fold3 and Flip3 launched in August — gaining global popularity, the mobile space has also contributed.
Despite this year's strong performance, Samsung's stock price has underperformed as investors fear that a cyclical downward trend in memory chips could soon emerge and weigh on the company's value.
Samsung shares fell 0.29% in early trading after earnings before the opening.
The Economist: Samsung wants to dominate chip manufacturing, and it is difficult
Samsung Electronics is a behemoth. The South Korean tech company is the crown jewel of powerful Samsung chaebols. She makes more smartphones and home entertainment systems and appliances than any other company in the world. At the same time, it also dominates the manufacture of memory chips, which are used to store data on electronic devices, whose prices are pushed up by the global shortage of semiconductors. Samsung's $200 billion in annual revenue isn't much lower than Apple, the most valuable company in history, and it also sits on $100 billion in cash reserves.
Now, Samsung and its parent company are entering a key new chapter. In August, Lee Jae-yong, a descendant of Samsung's founders who founded Samsung in 1938, was released from prison and spent two stints in prison after being convicted of his involvement in a bribery scandal. He then finally took full control of the empire from his father, Lee Kin-hee, who died last year.
After being free, Mr. Lee made grand plans for the company, and he wanted the company to dominate the production of cutting-edge logic chips for processing information, just like in memory and smartphones. That would put them head-to-head with chip manufacturing giants like Taiwan's TSMC and Intel in the U.S., and push it into a fierce global competition for one of the world's most strategically important industries.
On October 7, the company confirmed that it will manufacture some of the world's most advanced logic microprocessors in 2022, based on its new "GAA" architecture with three-nanometer (part-a-billionth of a meter) transistor. It also announced plans to surprise analysts by plans to start mass production of two-nanometer chips starting in 2025. It is expected to invest around $37 billion in capital expenditures on its business this year. It is winning over new customers, such as U.S. chip designer Nvidia and electric car maker Tesla.
The outcome of Mr. Lee's gamble will have far-reaching implications — not just for Samsung. Given the importance of chaebols to the economy, the South Korean president believes that Mr. Lee's parole is in the national interest, which is important for South Korea. It will affect the global semiconductor industry, and the global chip shortage highlights the critical nature of the semiconductor industry. To ensure success, people whom acquaintances describe as shy, decent, and shrewd must also summon a certain level of ruthlessness.
Samsung is a complex business facing strategic challenges and the stock market is underperforming. It is best understood to be divided into two main businesses. The first manufacturing "kits": smartphones, TVs and household appliances. The second produces "components," which go into Samsung's own devices and sell to outside customers like Apple. Samsung further split its TV business into two divisions: appliances such as televisions and washing machines, and digital devices (mainly smartphones). At the same time, the component business includes semiconductors and displays.
But these businesses won't be Samsung's future growth engines. People close to the company said home appliances were at the bottom of Mr Lee's Samsung business hierarchy and below the TV division, with equally low margins but playing a bigger role in strengthening Samsung's valuable brand. Next up was the mobile phone business, which in the early 2010s contributed more than half of its profits. Despite many previous concerns about its future, it continues to generate a lot of cash, and the market has burst with some new optimism as new phones with foldable screens sell well.
At the top of the hierarchy are semiconductors. Historically, Samsung has focused on memory chips, with a 44% global market share in dram chips (temporary storage for desktops) and nand devices (permanent storage for mobile devices). The memory business generated just over 20 percent of revenue, but nearly half of its operating profit (see chart below). Everything else could possibly serve high profits.
Insiders said that if there is a disagreement between the low-level business and the component department on pricing or other terms, the component business will take precedence. According to the company, its unique ecosystem benefits from diversified businesses that allow for internal innovation while providing stability in the ups and downs of industry cycles.
< h1 toutiao-origin="h2" > volatile storage market</h1>
Analysts believe that Samsung's storage business still has a lot of leeway. UBS's Nicolas Gaudois said that because such chips are critical to storing data across industries, it "will only go in one direction: that is, upwards". Research firm Omdia predicts that the global memory chip market will grow at a double-digit rate per year from 2020 to 2025. Due to surges in demand for data centers, as well as supply-side, market consolidation, it is now less cyclical. Increasingly extreme miniaturization means that competitors can no longer increase productivity as easily as they once did. Samsung says it has proven its ability to innovate and extract value in mature businesses. Internally, though, some senior executives worry that memory is a mature operation. Some investors are concerned that demand for memory chips could weaken before the end of the year.
One option is to follow Apple in growing the services business, which has grown from 8 percent of iPhone maker revenue in 2012 to one-fifth. However, despite some successes, especially when it comes to payments and health apps, Samsung's efforts to add software and services to its world-class hardware have been sporadic.
That's partly because Samsung's hardware-first approach is deeply rooted in its culture. Mr Lee's character and experience may reinforce this. "His character is very cautious and conservative, even more cautious than his father," said one former executive. This innate conservatism may have been reinforced in his first major effort since entering Harvard Business School. In the late 1990s, at the height of the dot-com bubble, he invested in venture capital firm eSamsung. The former executive said that looking at the subsequent bankruptcy, Mr. Lee was skeptical of South Korean software engineers. eSamsung was subsequently shut down.
Vigorously developing services could also jeopardize Samsung's long-standing successful partnerships with software giants such as Google and Microsoft. In 2014, Samsung launched a music streaming service called Milk Music, which, despite its success, was canceled two years later. "Google saw Samsung's software work as splitting the Android ecosystem and feeling threatened," recalled one former executive. "I'm pretty sure Samsung has abandoned software and services," he sighed. He feared missing out. He added that even if the company talks about trying again, it may just be to keep Google and other partners honest.
Another problem is China. The country is an important source of demand for memory and logic chips. To meet its needs, Samsung will complete its second memory chip factory in the western city of Xi'an this year. Despite growing tensions between China and the West, and especially the United States, neither domestically nor any other South Korean chipmaker is likely to abandon their huge neighbor, which is likely to remain a big buyer for years (especially for more technologically complex chipmakers). This means that Samsung must proceed with caution to retain Chinese customers while not abandoning U.S. customers.
This series of "complications" and risks helps explain Samsung's poor performance relative to other giants, whether in consumer technology (Apple and Xiaomi in China) or chip manufacturing (TSMC and Intel), the company has faced many strong competitors, and the company has also suffered group discounts. It is only listed in Seoul, and past exposure restrictions on individual stocks prompted local investors to sell Samsung, which accounts for nearly a fifth of the KOSPI stock market index, when its stock price soared. And Samsung's huge cash reserves have depressed returns.
As a result, despite solid operating performance, Samsung's share price is still 1 to 1 and a half times the forward book value, well below its peers. Raising its dividend from 22% of its net profit in 2018 to 78% in 2020 has helped Samsung's market capitalization more than double in the two years to January. But over the same period, Apple almost tripled. The strong outlook for semiconductors and the lower periodicity of memory chips have yet to translate into higher valuations. Samsung's market capitalization surged nearly 50 percent in late 2020 but has fallen 13 percent since the start of the year, while new York's tech-dominated NASDAQ and a basket of global chipmakers have both risen (see chart).
< h1 toutiao-origin="h2" > logic chip</h1>
Mr Lee is betting on cutting-edge logic chips aimed at reversing the poor performance. The idea is to win a large portion of the fast-growing and lucrative non-memory chip market, which accounts for 70 percent of the $550 billion global semiconductor market. Mr. Lee set a goal of matching Samsung's market share of approximately 40 percent of memory in the "foundry" business of manufacturing processors for customers.
The work of Samsung's successor has been completed. In 2016, when Apple moved all of its business on the iPhone's A-series processors to the TSMC, Samsung's foundry division took a hit. The shock provides a stark example of how Samsung's complex structure can crack a potential conflict of interest with major customers. Half of Samsung's foundry capacity goes to the rest of the company's equipment divisions, and the rest is supplied to external customers. Apple prefers pure foundry company TSMC to Samsung because it competes in the smartphone space.
So far, the ambitious goals that Mr. Lee first proposed a few years ago have been slow to progress. The company has about 15 percent of the foundry market share, while TSMC has more than 50 percent of the market, and TSMC plans to spend $100 billion over the next three years on new capacity. Samsung's non-memory chip revenue is only 7% of total sales (although this was self-made in 2005, and the company also produces some other specialized processors for sensors and the like). If you count the profit share, it is even lower.
Perceived conflicts of interest are not the only challenge. Although memory and logical businesses have some commonalities and overheads, they differ in important ways. Producing memory chips is primarily about speed, quantity, and economies of scale. Manufacturing high-end logic processors is much more technically complex, the engineering is done at the nanoscale, and customers are increasingly looking to customize chips for their purposes.
When it comes to technology, it's fair to say that almost everyone else has lagged behind the TSMC at least in the last two generations of cutting-edge processors. Part of the reason may be wise caution. But another company's semiconductor executive said silence further complicates relationships with customers, many of whom are reluctant to place orders unless they can get capacity assurances. The executive said Samsung did not anticipate their needs, but reacted.
Aware of these issues, Mr. Lee clearly wants to accelerate Samsung's transformation. The company is leveraging its research and development (R&D) strengths and taking some of the risks on next-generation logic chips, such as adopting its new advanced chip architecture. The company did not disclose how much of its capital expenditure was spent on memory chips and how much was spent on logic. According to brokerage CLSA, the focus is on logic chips, which are also R&D intensive.
< h1 toutiao-origin="h2" > expanding constellation</h1>
Samsung is also considering building a $17 billion factory in Texas to make cutting-edge logic chips to appease the U.S. desire to bring more chip manufacturing home from Asia. CLSA's Sanjeev Rana noted that it is fighting for new customers, such as Nvidia and Tesla, who do not overlap with its other businesses.
The semiconductor industry's worrying geopolitics could help. While the rise of technological nationalism in chip design and manufacturing has led the government to favor domestic production and local champions, it could ultimately benefit them. At the same time, everyone's concerns about the future of TSMC are also increasing. A semiconductor executive said many companies using tsmc are scrambling to reduce their reliance on the Taiwanese company, just in case. As TSMC's closest competitor, Samsung could be a big beneficiary. Mark Newman, a former Samsung Group executive and chief commercial officer of battery startup Nyobolt, said Samsung has the world's largest semiconductor factory and industrial complex for engineers, as well as some of the best chip technologies.
As investment bankers have long suggested, one way to accelerate the transformation is to split it into component businesses. It would also remove potential conflicts of interest that hinder Samsung's foundry department. At the same time, a double listing in the U.S. could help address the drag associated with KOSPI.
However, neither a breakup nor a re-listing looks unlikely. Mr Lee seems reluctant to support radical first choice. Around 2016, attempts to persuade them to move on to a second attempt as part of the aggressive campaign of U.S. hedge fund Elliott Management failed. Aware of this, shareholders are therefore pressuring Samsung to do at least something about its unused cash. One idea is to pay them 100% free cash flow. Alternatively, Samsung could make a big acquisition. "The founding family is clearly aligned with all other shareholders with the goal of creating maximum value and correctly reflecting that value in the market," the company said. ”
For a significant impact on Samsung's financial results, any transaction must be substantial. Mr. Lee's tendencies and preferences make such a gamble impossible when it comes to software and services. This makes chip manufacturing a place where companies can spend cash. One potential acquisition target is NXP Semiconductors, a Dutch company specializing in the fast-growing automotive chip market. At a market capitalization of $50 billion, this would be a daunting task, but not impossible.
If Samsung Electronics is going to become a logic chip star competing with TSMC, Mr. Li had better be promoted. Last year, he vowed not to hand over management of Samsung to his children (though Lee may retain the largest stake in the company through various family-controlled businesses). Lee's promise to be the last person to manage the company, coupled with what insiders say other improvements to corporate governance, cleared the way to the top for many of his talented executives. They must have hoped that mr. Lee's legacy to them would not be as complicated as his father's.
Original link:
https://asia.nikkei.com/Business/Technology/Samsung-strengthens-foundry-business-amid-global-chip-shortage
https://www.economist.com/business/2021/10/21/samsung-electronics-wants-to-dominate-cutting-edge-chipmaking
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