Baek Byung-yeul is a journalist at The Korea Times focused on cultural content, including films and cultural events in South Korea. You can contact him at baekby@koreatimes.co.kr to share your insights.
Virus disrupting Chinese supply chains, helping Samsung
Samsung Electronics' semiconductor manufacturing plant in Hwaseong, outskirts of Seoul / Courtesy of Samsung Electronics
By Baek Byung-yeul
By Baek Byung-yeul
As the blockbuster U.S.-China trade war escalates in the wake of the deadly coronavirus' lingering effect on tech companies with Chinese-centric supply chains, Samsung Electronics is aiming to harness the ongoing uncertainty to win lucrative deals with American tech companies.
Samsung has been leading the global memory chip market over the past decades; but its presence in the logic-chip making sector is less significant than Taiwan's TSMC, which has a greater share in the non-memory semiconductor market.
The Korean powerhouse is aiming to produce the chips that will power next-generation devices from companies such as Apple, Google and Amazon, all of which want to blend fifth-generation (5G) and AI into their new mobile products. Specifically and more importantly, Samsung is betting big on chip supremacy beyond its capability to make faster and higher capacity flash storage semiconductors.
Samsung Electronics Vice Chairman Lee Jae-yong, the de facto head of the conglomerate, has told President Moon Jae-in several times that he will directly ensure Samsung beats TSMC in the logic-chip business, with plans to spend up to $116 billion over the next decade.
In the foundry business, Samsung has been behind TSMC, which has a more than 50 percent market share. According to data from market researcher TrendForce, TSMC had a 52.7 percent market share in the fourth quarter of 2019, followed by Samsung with a paltry17.8 percent.
Samsung has reportedly signed a new deal with Qualcomm to make its new X60 modem chip that connects smart devices to 5G networks. Plus, it is in talks with its biggest smartphone competitor ― and a top client ― Apple, to manufacture its iPhone processor chips.
“Samsung is known to be in the final stages of fabricating some Apple-designed iPhone processors,” a source familiar with the issue said last week. Regarding the specifics of its new contracts with the two U.S. tech leaders, Samsung Electronics said it wouldn't comment on client-related issues.
The situation is looking favorable for Samsung as trade policy uncertainty and U.S. relations with major Chinese corporations such as Huawei could have a great effect on supply chain strategies across the technology sector. Additionally, the coronavirus epidemic is adding additional risks to China-focused supply chains.
The COVID-19 outbreak has provided a stark illustration of how reliant many companies still are on China and certain other supply chains for sourcing production materials. For those resilient enough to survive, it may provide the necessary impetus for supply chain diversification, according to market analysts.
While TSMC is a Taiwanese company, the trade friction between the U.S. and China and the outbreak of the virus are forcing Facebook, Amazon, Apple and Google to actively consider finding “next sources” for their supply chains.
The Pentagon also recently pressured leading U.S. fabless firms such as Intel, Apple and Qualcomm to reduce their dependence on TSMC, citing security concerns. This is because TSMC, which produces computer chips used in F-35 fighters, is also a key supplier of Chinese tech firm Huawei Technologies, which Washington regards as a security threat. The Chinese company contributed to about 10 percent of TSMC's revenue in 2018.
“Prolonged production disruptions and reduced end-market demand in downstream hardware could cause inventory build for upstream companies. Foxconn, for example, a major supplier to many U.S. tech companies including Apple, earlier shut down its factory, and the phased reopening of its plants could put Apple's first-half 2020 product launches at risk,” Fitch Ratings said in a recent note to clients.
Regarding questions over possible benefits from the U.S.-China trade war and the outbreak of the virus, a source knowledgeable on the matter said the company was looking at the uncertainties as a “good chance” to promote its non-memory chip making capability to existing and future clients.
“Samsung is aware that switching to new component suppliers may come with costs in addition to higher prices as quality assurance and relevant logistical networks have to be guaranteed. Apple aims to diversify its chip foundry source. Samsung doesn't believe it will win the vast majority of processor chip orders from Apple right away but upcoming contract volume could be quite a bit higher than previous ones,” the source noted.
The foundry business refers to contract-based chip manufacturing for companies that don't have their own facilities. Samsung has been betting on nurturing its foundry business since 2019, as it has been lagging in its non-memory and foundry businesses that account for about 70 percent of the entire semiconductor market, which was worth about $500 billion in 2018.