Samsung flexes dominance in the face of global chip wars

When Chinese leader Xi Jinping, US president Joe Biden and Ursula von der Leyen, president of the European Commission, each set out plans to spend billions to reduce dependence on foreign-made computer chips, the global supply chain looked set to be reshaped.

But analysts and Samsung, the world’s biggest producer of memory chips, do not expect the South Korean group to be supplanted any time soon.

“For the foreseeable future I believe we can maintain our market share, if not increase it,” a senior Samsung executive told the Financial Times at a factory south of Seoul.

The US, China and Europe are vying to boost investment in the sector after a pandemic-related car chip shortage exacerbated fears of relying on foreign manufacturers of critical technologies.

Biden has proposed a $50bn plan for chipmaking and research and Xi has committed to spending more than $1tn on high-tech industries, with a particular focus on semiconductors.

But analysts said Samsung’s leadership was unlikely to be challenged imminently.

“If there’s a new foundry that’s going to be brought online by 2025, you’re practically breaking ground by the end of this year,” said Velu Sinha, a partner at Bain & Company. “So the likelihood that anything is happening now that’s going to go off and alter the mix in the next two or three years is pretty unlikely.”

Samsung has for decades dominated production of Dram and Nand chips. The former enables short-term storage for graphic, mobile and server chips, while the latter allows for files and data to be stored without power.

But the company’s warning to challengers was not just based on past performance. Samsung also believes its position is secure both because of its advances in manufacturing technologies and how expensive chips are becoming to make.

“The pace of that migration right now is accelerating. It is even extremely hard for incumbents like Samsung to keep doing that research and investment,” the executive said. “It will not be any easier for any other suppliers.”

Since 1974 — when Samsung founder Lee Byung-chul and his son Lee Kun-hee shrugged off scepticism from their management teams and bankrolled the company’s first investment in semiconductors — legions of engineers have been focused on a singular task: figuring out how to store more data on smaller chips. The company squeezes 16bn cells on to its thumbnail-sized Dram chips, a vast improvement from 64m bits in the 1990s.

The complexity and scale involved in producing cutting-edge chips pose a serious challenge for any company or government trying to eat into Samsung’s lead.

In the bowels of a nondescript tower block inside the company’s campus at Hwaseong, south of Seoul, a mechanical arm suspended from the ceiling picks up a plastic container containing a stack of wafers — thin slices of silicon extracted from sand — and whizzes it to its next destination. For about three months, the wafers will move through a series of automated steps including etching, cleaning and circuitry drawing. Some of these processes will be repeated hundreds of times.

Samsung accounted for 15 per cent of the total global capacity for production of these wafers at the end of 2020. That put the company ahead of Taiwan Semiconductor Manufacturing Company, the world’s biggest producer of processor chips, as well as memory chip rivals Micron and SK Hynix.

Samsung has also pointed to its leadership in intellectual property and engineering experience as evidence that it could defend its position.

Chief among them is its use of extreme ultraviolet lithography in the manufacturing of DRAM chips. EUV is a step-change from deep ultraviolet lithography, which means progressively finer circuitry can be drawn on to the chips. The result is far greater power and energy efficiency.

Samsung, TSMC and Intel use EUV technology to make cutting-edge advanced processor chips. But the South Korean company said it was ahead of its competitors in rolling out the technology in Dram chips, leveraging its joint research and development centre for both processor chips and memory.

Spending by Asia’s biggest chipmakers has also dwarfed that promised by Washington, Brussels and even Beijing.

IC Insights, the market research group, said Samsung spent $93.2bn on its semiconductor business in the past three years, double that of China’s semiconductor suppliers combined.

“Can governments like the EU, US, and China . . . catch up in the [semiconductor] technology race with Samsung and TSMC? Considering how far behind they are . . . governments would need to spend at least $30bn per year for a minimum of five years to have any reasonable chance of success,” IC Insights said.

South Korean policymakers are also drawing up plans for tax breaks and other incentives for its chipmaking champions. Analysts expected Samsung to this month announce increased capital expenditure on its processor chip business, including investments in the US.

Nonetheless, Chinese challengers are slowly making gains.

Dan Wang, a Shanghai-based tech analyst at Gavekal Dragonomics, pointed to Yangtze Memory Technologies and Changxin Memory Technologies, which have cornered about 3 per cent of their respective Nand and Dram markets.

“Both companies have hired large numbers of Korean engineers, who make up most of the global talent in memory chips. Most in the industry today expects that YMTC will become a significant global player in three to five years,” Wang wrote in a note.

Bain’s Sinha said China’s chip sector was slowly showing signs of weaning itself off “western-origin” technologies. But he cautioned that he did not expect the global industry incumbents to change in the next 3-5 years.

“There are alternatives that are emerging that will allow the ecosystem in China to continue to develop richly,” he said.