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Why Samsung will give Morris Chang sleepless nights

2/5/2012

13 Comments

 
Samsung contributes just 7% to the world’s foundry revenue today. But here’s why it could be TSMC’s biggest challenge yet...

Most people will agree that Andy Grove has been the semiconductor industry's most successful CEO. After co-founding Intel and serving as COO for many years, he took over the CEO role and oversaw a 2400% increase in the company’s stock price. Among the present set of semiconductor CEOs, does anyone possess Grove’s high levels of performance, dynamism and vision? There can be only one answer: Morris Chang, the founder and CEO of TSMC.

I’m sure many of you have read Andy Grove’s classic book, “Only the Paranoid Survive”. Let’s now apply the principles in Grove’s book to the foundry industry. If you were Morris Chang and had 50% market share in the foundry industry, which competitor of yours would you be “paranoid” about?

Picture
Figure 1: Foundry Revenue in 2011 (Source: SemiMD).

Fig. 1 shows the foundry landscape at the end of 2011. Many competitors show up: there’s Globalfoundries with its plentiful oil money, UMC with its excellent customer service and high yields and SMIC with its Chinese government backing. But, to me, Samsung is undoubtedly the biggest threat to TSMC, even though its foundry market share today is just 7%. Let me explain why...

Economies of Scale due to Memory Business

Semiconductor manufacturing costs are heavily dependent on economies of scale. Fig. 2 [1][2], which is an estimate of DRAM costs and selling prices in 2003, illustrates this point. The highest volume producer, Samsung, has the lowest raw material costs in Fig. 2. The same goes for semiconductor equipment purchases. A higher volume producer gets a lower price per tool. You’ll notice the highest volume producer (Samsung) has the lowest depreciation cost in Fig. 2.
Picture
Figure 2: DRAM industry landscape in 2003. Costs are a function of production volumes. (Source: [1][2])

What does this mean for the foundry industry? Well, TSMC, since it has 50% market share, should benefit from economies of scale and build a lead over its rivals, right? That certainly gives TSMC an advantage over UMC and Globalfoundries, but doesn’t work with Samsung. Why? Because Samsung owns a huge chunk of the world’s memory business (~40%). It buys tools and raw materials in huge volumes for those markets, and you use pretty similar tools and raw materials for logic foundry manufacturing. Fig. 3 illustrates that Samsung’s capital expenditure for tools in 2012 is actually double that of TSMC. Samsung might therefore have lower raw material costs and depreciation costs than TSMC.

Picture
Figure 3: Samsung buys more semiconductor equipment than TSMC (numbers shown for 2012). Scale of equipment buying provides low prices. (Source: SemiMD)

Yield improvement methodologies

Samsung has a great set of yield improvement methodologies developed over its years in the competitive memory industry. Fig. 5 [2] illustrates yields of different DRAM manufacturers in 2003. You’ll notice Samsung has, by far, the best yields. Based on this data and Samsung’s reputation for high-yield memory products, you would expect Samsung to get good yields in the logic foundry business.  They seem to be delivering on that front. I hear from industry contacts that Samsung is the only manufacturer getting reasonable yields for gate-first high k metal gate products at 28nm.
Picture
Figure 4: Samsung’s yield enhancement methodologies gave it an advantage over competitors in the memory industry. (Source: [2])

Low cost fabs

In cost sensitive markets such as memory and foundries, the location of a fab makes a difference. Fig. 5 [3] shows a chart from the US National Academy of Engineering which reveals that fab costs in the US are ~25% higher than fab costs in the Far East. Some of TSMC’s competitors have fabs in Europe and the US, but Samsung is building a good portion of its capacity in Korea (they do have one facility in Texas though). The fab cost advantage TSMC has over its other competitors doesn’t necessarily exist with Samsung.
Picture
Figure 5: Cost of US fabs higher than those in Korea, Taiwan or Singapore. (Source: [3])

Sensible partnership strategy

One of the barriers to entry for the foundry business is availability of Intellectual property (IP) blocks and CAD tool support. Intel, which is looking to enter the foundry business, has difficulties with this, since IP blocks haven’t been developed for its technologies yet. SoC makers today show a marked preference for foundries offering competitive IP blocks at low prices.

When Samsung entered the foundry industry, it addressed this issue by joining the IBM alliance, and so its customers could use IP blocks developed for the IBM alliance. Samsung did not have much experience developing logic technologies either, and the alliance helped Samsung learn from existing players in the logic business such as IBM and Globalfoundries. In spite of having a similar technology offering to Globalfoundries and IBM, Samsung retains an advantage over these competitors since it is better at ramping up yields and because it has low cost fabs.

R&D costs for next-generation logic technologies are $1-2 billion today. Sharing the cost with IBM and Globalfoundries gives Samsung a R&D cost advantage over companies such as TSMC and UMC which develop new technologies alone.

Ability to fund large capital expenditures

TSMC, UMC, Globalfoundries and SMIC derive almost all their sales from the foundry industry. This limits the amount of capacity they can add every year, since their balance sheets place restrictions on maximum cap-ex to revenue ratio (Globalfoundries is an exception here due to its oil money). Samsung, on the other hand, is a diversified company that sells everything from TVs to DRAM to NAND flash to cell phones. It routinely takes profits from other divisions and invests it in the logic foundry industry. Fig. 6 [4] illustrates this trend. Samsung’s capex to revenue ratio for its foundry business is way higher than anyone else. This added capacity is helping Samsung’s foundry business grow rapidly  – notice how Samsung’s froundry revenues increased almost 7x between 2010 and 2012. Samsung used this “capacity-add-like-there-is-no-tomorrow” strategy to become our industry’s biggest DRAM producer, so the foundry folks had better watch out!
Picture
 Figure 6: Samsung has the highest cap-ex to revenue ratio among all foundries. (Source: SemiMD)

Proven Research Expertise

If you talk with engineering folks in our industry and ask them which companies do the best research, you will find Samsung near the top of the list. Let me illustrate Samsung’s research capabilities using Monolithic 3D as an example. They started working on the technology almost 10 years back, and have developed monolithic 3D technologies for NAND flash, SRAM and resistive memories. In addition, their roadmap calls for commercialization of Monolithic 3D NAND flash memories within 2 years. Check out Fig. 7. This is some of the best work I’ve seen on monolithic 3D so far. This phenomenal research capability will help Samsung make strides in the logic space.
Picture
Figure 7: Samsung has a long history of developing monolithic 3D technologies.

Caveat

While the above capabilities of Samsung threaten TSMC in the long term, there are stormy clouds looming for Samsung in the short term. Apple, which accounts for more than 75% of Samsung’s foundry revenues [4] today, is flirting with TSMC due to its increasingly litigious competition with Samsung in the mobile space. If TSMC executes well and takes this business away from Samsung, it could be a big blow to Samsung’s ambitions.

To summarize

I explained why I believe Morris Chang will consider Samsung his biggest competitor in the long-term. The economies of scale Samsung has due to its memory business could help its logic operations. Samsung’s superb yield ramp capabilities and low cost Korean fabs are another key asset. Probably the biggest weapon Samsung has is its conglomerate (chaebol) structure, which allows it to make huge capital investments and grow rapidly.

At the start of this write-up, I talked about how Morris Chang has grown TSMC the way Andy Grove grew Intel. One of Andy Grove’s strengths was that he recognized Intel’s biggest challenges, and channelized his “paranoia” and limitless energy into finding counter-measures. What can Morris Chang do to deal with “the Samsung challenge”? In a future blog post, I will describe strategies for this... stay tuned!

- Post by Deepak Sekar

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13 Comments
Scott Kim
2/5/2012 10:48:53 pm

Very informative. I'm more concerned competition between US semiconductor companies with fab vs fabless semiconductor companies in Taiwan and China using TSMC. If the fab cost for US is ~25% higher than Asia is true, then it'll be much more cost effective solution.

Reply
Deepak Sekar
2/5/2012 11:20:47 pm

Hi Scott,

Thanks for your comment. Here is some more material on the fab cost issue. Paul Otellini, the CEO of Intel, complains about a fab in the US costing about $1B more than elsewhere...
http://www.eetimes.com/electronics-news/4209358/Intel-calls-for-manufacturing-tax-breaks

In terms of US semiconductor companies with fabs, you're probably referring to Intel. There are a few considerations:

- A foundry has its own margins... so companies with fabs avoid paying a foundry its margins. So, someone like Intel can have a lot of US fabs and still be competitive.

- Intel's main competition for x86 processors is AMD, which is producing products from a foundry in Dresden, Europe (at the moment). So, Intel's core business, x86 processors, may not be affected too much by them manufacturing in the US. But, in the future, if Intel wants to build SoCs for mobile in a big way, they're competing with TSMC/Samsung's low cost Asian fabs... they might need to re-evaluate their manufacturing strategy.

Reply
George Luo
2/8/2012 11:30:58 am

There are two category in semiconductors, analog and digital. For digital, the foundary is playing a significant role to the industry, as more and more fabless IC deisgners become thriving, with the support from ARM. Regarding analog, it is quite mixed. Foundary could be a cheap path for many companies making clone products, but the field is still dominated by IDMs, coz the sophisticated design can not be independ of the process. The one who owns manufacuturing will be pioneer in the new generation development.

Reply
Bill Johnson
2/6/2012 10:59:02 pm

Really interesting read, Deepak. Thanks.

Quick note...when you say "Few will argue that Andy Grove has been the semiconductor industry's most successful CEO..."

Do you mean few will argue that he has NOT been the most successful CEO?

Reply
Deepak Sekar
2/6/2012 11:12:07 pm

Oops... thanks for catching the typo, Bill. Have made the change.

Reply
Christian Gregor Dieseldorff link
2/23/2012 02:51:26 am

Great article, I am impressed! Abbie Gregg presented at the Albany Symposium on Sept 26, 2005 "The Paradigm for Financing Fabs" that in a 10-year life time of a fab it would cost about $1B more to build and maintain a fab in the US.

Reply
Deepak Sekar
2/25/2012 03:47:28 am

Hi Christian,

Thank you for your kind feedback. Is it possible that you can please send me Abbie Gregg's presentation (if you have it)? I would love to see it.

Best Regards,
Deepak

Reply
Boris link
2/23/2012 07:02:50 am

Given that Intel and Samsung are IDMs and that, for example, 3D packaging of processor and memory prefers a single point of responsibility (no finger pointing for yield issues) WHAT is your opinion on the advantages of IDM versus fabless IC vendors five years from now?

Reply
Zvi
2/24/2012 09:34:40 am

This issue provide an important advantage for Samsung. And add to it that they are also the manufacture of the DRAM and NAND Memory products that would be an important part of 3D device.

Reply
boris link
2/24/2012 10:02:10 am

Thanks Zvi.

Samsung and Intel are the only vendors manufacturing both mobile application processsors - see new Quad core Exynos in 32nm HK/MG just introduced this week - and Samsung is also No. 1 vendor of DRAM and NAND memories (Intel is only in NAND).

Also - only Samsung, Apple, and TI use S/A APs - Intel and nVidia announced integration of BBs (Icera and ex-Infineon respectively). And TI is not a handset vendor like Samsung and Apple to exert control.

3D packaging in mobile APs in 20nm will likely be challenging for fabless and foundry companies....

Reply
Ashis
3/6/2012 02:41:55 pm

I wonder if the difficult relationship with Samsung will eventually move Apple into TSMC camp?

Reply
Sam brown
3/14/2012 01:08:45 am

I used to work for Morris, and I assure you, he gives other people sleepiness nights.

Reply
Online electronics link
9/21/2012 07:50:10 pm

The economies of scale Samsung has due to its memory business could help its logic operations. Samsung’s superb yield ramp capabilities and low cost Korean fabs are another key asset.

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