of Samsung the brand is everywhere. From Galaxy phones and smart TVs to washing machines and refrigerators, the company says its products can be found in nearly three-quarters of US households.
But Samsung is much more than gadgets and appliances, and there’s another reason why it’s one of the most valuable companies in the world. It is the second largest manufacturer of chips that power so many popular devices.
For more than three decades, Samsung has been the leader in memory chips used to store digital data. But it was a market in turmoil. Memory chip prices have fallen over the past year and are expected to fall by as much as 23% more in the current quarter. Samsung reported dismal first-quarter earnings in April, with profit falling to its lowest level since 2009.
Samsung responded by reducing production of memory chips. Elsewhere in the industry, smaller rival Micron said recently it expects to cut 15% of its workforce.
Amid the wreckage, the giant company found growth in another corner of the semiconductor market, doubling down on its foundry business, the country that makes custom chips for massive customers like Qualcomm, Tesla, Intel and Sonyas well as thousands of smaller players.
Samsung is building a $17 billion chip manufacturing plant, or factory, in Taylor, Texas, where it is promised to begin the first American production of advanced chips next year. Applications opened in February for companies like Samsung to get their share of the $52.7 billion CHIPS and Science Act, passed by lawmakers last year to bring chip manufacturing to the US after 30 years of losing market share to Asia.
Samsung is also adding capacity in its home country of South Korea, spending $228 billion on a mega cluster of five new factories scheduled to come online by 2042.
“They spend and spend and spend,” said Dylan Patel of the research and consulting firm SemiAnalysis. “And why is that? So that they can catch up with technology, so that they can continue to maintain their leadership position.”
Samsung’s new $17 billion chip factory is under construction in Taylor, Texas on April 19, 2023.
“We don’t settle”
Samsung is one of only three companies to produce the world’s most advanced chips, ranking second only to Taiwan Semiconductor Manufacturing Company and ahead of Intel.
Now Samsung is aiming to catch TSMC.
“We’re not settling for being No. 2,” John Taylor, Samsung’s corporate vice president of factory engineering, said in an interview. “Samsung never settles for No. 2 as a business, as a company. We are very aggressive.”
The company announced an ambitious new roadmap in October, pursuing a goal of tripling its flagship manufacturing capacity and making industry-leading 2-nanometer chips by 2025 and downscaling to 1.4-nanometer by 2027.
“If Samsung hits their targets, they will leapfrog TSMC, but that’s a big if,” Patel said. “TSMC is the only one the industry trusts to deliver on their roadmap.”
CNBC recently entered Samsung’s Austin chip factory for the first in-depth tour given on camera to an American journalist. While there, we got a rare interview with the head of Samsung’s US chip business, Jinman Han.
A 34-year veteran of the company, Hahn’s U.S. oversight includes foundry operations and the memory chip business.
“We really want to be a foundation for American industry,” Hahn told CNBC.
Samsung started in 1938 as Samsung Sanghoe Trading Company founded by Lee Byung-chull in Korea.
Samsung started 85 years ago when founder Lee Byung-chull established it as a trading company to export fruits, vegetables and fish in Korea.
“His vision was for our company to be timeless, strong and powerful,” Khan said. “So he chose the name Samsung, which literally means three stars.”
To survive two major wars, the company diversified into industries such as textiles and retail. Samsung Electronics was established in 1969, the first Samsung TV came out in 1972, and two years after that Samsung bought Hankook Semiconductor in a bold attempt to create the vertically integrated consumer electronics giant that the company is today.
Samsung opened its first US offices in New Jersey in 1978. By 1983, it was producing 64KB dynamic random access memory (DRAM) chips commonly used in computers, and the company had a new US office in Silicon Valley.
Lee Kun-hee took over after his father’s death in 1987, and Samsung’s first mobile phone arrived a year later. And now Samsung is the world’s largest smartphone vendor, going head-to-head with An apple.
Just a decade after making its first memory chip, Samsung hit the market with a version that had 1,000 times the capacity. It gained international recognition in 1992 with the world’s first 64MB DRAM chip, putting the company at the top of the memory market, where it remains today.
“Its presence is so ubiquitous in South Korea that they call their country the Republic of Samsung,” said Jeffrey Kane, author of the book Samsung Rising, published in 2020.
Samsung began manufacturing chips in the U.S. with its factory in Austin, Texas, which opened in 1996. It opened a second factory in the Texas capital in 2007. Today, Samsung’s Austin operation is entirely devoted to foundry.
Samsung workers in the clean room of the chip factory in Austin on April 19, 2023.
Samsung’s expansion brought with it some legal conflict.
In 2018, the company finally ended a seven-year legal battle with Apple over whether Samsung copied the iPhone. Terms were not disclosed.
“Apple got paid by Samsung, so Apple technically won,” Cain said. “But when you add up all the legal costs, all the battles, all those years, it was just a neutral zero to zero for both sides.”
The challenges are not limited to the courtroom.
Protests erupted in South Korea over J.I. Lee, the third generation of Samsung’s founding family, taking the helm. He served time in prison for bribery before being pardoned in August and becoming executive chairman in October.
And during the pandemic, Samsung was hurt by global chip shortages as demand peaked and supply chains were disrupted.
“It was really painful,” Hahn said. “When you see your customers asking for more chips, but there’s no way to provide them, it was so painful.”
That dynamic is changing. As consumers curb spending in the face of rising inflation, demand for memory chips has weakened sharply. Han said Samsung’s internal data analysis showed that “the market will probably recover by the end of this year.”
A geopolitical tug of war
Investors have already returned. Shares have fallen nearly 30% in the past year, along with the broader decline in the global technology industry. The stock has risen 28% this year and hit a 52-week high on June 5 on the Korea Stock Exchange. Morgan Stanley recently named it a top pick.
Part of the rally may reflect the latest chapter in the geopolitical chip war between China and the US
In May, China banned products from US memory maker Micron, sending Samsung shares tumbling. The US also granted Samsung a one-year exemption from operating its two chip factories in China, despite new rules in October that stop many chip companies from exporting their cutting-edge technology to the world’s second-largest economy.
Samsung says it is adding capacity in Taylor, Texas, which is northeast of Austin, due to demand in the US. More than 90% of modern chips are currently manufactured in Taiwan.
“Bringing Taylor on board will simply increase their ability to source their chips domestically and not have to go to parts of the world where they might experience some discomfort,” said Samsung’s John Taylor.
Over the past three decades, the US share of global chip production has fallen from 37% to just 12%. That’s largely because estimates show it costs at least 20 percent more to build and operate a new factory in the U.S. than in Asia, where labor is cheaper, the supply chain is more accessible and government incentives are much larger.
South Korean President Yoon Suk-yeol watches U.S. President Joe Biden’s speech during a visit to a semiconductor factory at the Samsung Electronics Pyeongtaek campus in Pyeongtaek, South Korea, May 20, 2022.
Jonathan Ernst | Reuters
Electricity and water
For Samsung’s Texas expansion, environmental concerns are high and growing.
The highest-priced equipment Samsung will bring to Taylor is likely the $200 million EUV lithography machines manufactured by ASML. They are the only devices in the world that can engrave with sufficient precision for the most advanced chips.
Each EUV machine is designed to consume about 1 megawatt of electricity, which is 10% more than the previous generation. One study found that Samsung used more than 20% of South Korea’s entire solar and wind power capacity in 2020.
“Electricity is the lifeblood of the semiconductor factory in a sense,” said Patel of SemiAnalysis. “There have been numerous instances where the electricity has gone out and companies have had to eliminate months of production.”
Texas’ energy grid is largely cut off from its neighbors, limiting its ability to borrow across state lines. In 2021, that grid failed during an extreme winter storm, leaving millions of Texans without power and causing at least 57 deaths.
“I’ve already signed 12 pieces of legislation to make the electric grid more reliable, more resilient and more secure,” Texas Republican Gov. Greg Abbott told CNBC in April. “And so we can definitely ensure that any business that moves here will have access to the energy they need, but at a low cost.”
Water is another major necessity for chip factories. In 2021, Samsung used about 38 billion gallons of water to make its chips. Approximately 80% of Texas remains affected by drought.
“We have the Texas Water Board working on that and legislation we’re working on this session to make sure that with the growing population in Texas, we’ll be able to provide the water needs not only for businesses, but for our growing population as well.” , Abbott said.
Samsung told CNBC that its goal in Austin is to reuse more than 1 billion gallons of water by 2023. At the new Taylor factory, the company aims to recycle more than 75 percent of the water it uses.
All the buzz in tech lately has been around AI models to power services like OpenAI’s ChatGPT. These applications require even more powerful processors, mostly made from now Nvidia.
“There are more and more people around the world who can make memory chips,” Cain said. “To stay ahead of the game, you need to get into the newer logic technologies.”
Cain said he sees Samsung “diving deeper into the logic chip segment. So, [that’s] AI chips, the future applications of semiconductor technology.”
When asked what’s next, Samsung’s Taylor said the company eventually plans to add more chip manufacturing capacity at its 1,200-acre site in Texas.
“We only have one factory listed there right now,” he said. “But there’s plenty of room for more.”
Watch the video for a behind-the-scenes look at Samsung’s chip factory in Austin and the construction project in Taylor, Texas.