There aren’t any places where chips don’t go here and there… Why Samsung Electronics’ semiconductor performance is not growing

Last year, the provisional performance of the semiconductor division of Samsung Electronics ranked third after Intel and TSMC. Sales were about 20 trillion won larger than TSMC, but the operating profit gap widened from the previous year. Experts explain that Samsung Electronics’ semiconductors have structural limitations in which operating profits fluctuate depending on the industry conditions.

According to industry sources on the 25th, last year, Samsung Electronics’ semiconductor division sales totaled 72-73 trillion won and operating profit was estimated at 19 trillion won.

Samsung Electronics is an integrated device manufacturer (IDM) that operates both chip design and production. The semiconductor division includes memory semiconductors, system (non-memory) semiconductors, and foundries (consignment production).

Samsung Electronics ranked third in the global semiconductor market after Intel and TSMC with an operating profit of less than 20 trillion won.

Intel, a general semiconductor company in the United States, maintained the No. 1 position. According to the results released on the 21st (U.S. local time), sales were 77.8 billion dollars (about 85 trillion won) and operating profit was 23.7 billion dollars (261.1 trillion won).

TSMC, a Taiwanese foundry company, recorded sales of KRW 1.3,393 trillion (about 52 trillion KRW) and Taiwanese dollars (about 22 trillion KRW) in operating profit.

Samsung Electronics’ sales are about 20 trillion won larger than TSMC’s, but its operating profit is lagging.

Looking at the operating margins of the three companies, TSMC is the highest at 42.3%, followed by Intel 30.4% and Samsung Electronics 26% (estimated).

TSMC enjoyed an operating profit increase that exceeded the sales growth rate as its operating margin rose significantly last year. In 2019, TSMC’s sales were 42.1 trillion won, its operating profit was 14.66 trillion won, and its operating margin was 35%. At the time, Samsung Electronics’ operating profit was about 14 trillion won, similar to TSMC, but last year the gap widened.

90% of Samsung Electronics’ memory semiconductors… Operating profit fluctuates due to price fluctuations

Samsung Electronics’ operating profit depends on the memory semiconductor industry. Memory semiconductors accounted for nearly 90% of the operating profit of Samsung Electronics’ semiconductor division last year.

In memory semiconductors, there are DRAMs that retain data only when the power is turned on as a storage device, and NAND flashes that store data even when the power is turned off. It is installed on devices that require storage functions such as smartphones, PCs, and game consoles, and is essential for building data centers that are in increasing demand.

Memory semiconductors, which are produced in large quantities of small items, are highly fluctuating in price due to supply and demand. When the order of the ordering company increases, the price rises, and when it enters a lull, it falls sharply. Conversely, changes in supply volume resulting from investment in semiconductor companies’ facilities also affect memory semiconductor prices.

According to DRAMeXchange, a market research firm, the spot price of DRAM (based on DDR4 8Gb for PCs) dropped from $8 in June 2018 to more than 60% in July of the following year, dropping the $3 mark. Recently, it has been at the low $3.

From 2017 to 2018, when the’semiconductor cycle’ leading to the rising semiconductor price was formed, the operating profit of the semiconductor division of Samsung Electronics recorded 35 trillion won and 44 trillion won, respectively. Memory semiconductor prices are two to three times that of 14 trillion won in 2019, when prices plummeted. Even last year, when operating profit is expected to fall below 20 trillion won, the increase in semiconductor prices was limited.

Memory semiconductors account for less than 10% of Intel’s sales, and TSMC is hardly affected by memory semiconductor price fluctuations as it is a foundry company with explosive growth in demand.

Kim Yang-paeng, an expert member of the Institute for Industry Research, said, “It is difficult to secure a structurally stable operating margin due to the high proportion of memory semiconductors that prices fluctuate.”

System semiconductors account for 70% of the total market… Samsung Electronics’ share is insignificant

The proportion of non-memory and memory semiconductors in the overall semiconductor market is about 7 to 3. Samsung Electronics is ranked first in the world in memory semiconductors, but the market share of non-memory semiconductors is less than 4%. Intel is the leader in non-memory semiconductors.

Non-memory semiconductors are relatively stable in price. As a multi-kind, small-scale product, there is no price fluctuation as the production volume is set according to the order of the client.

Non-memory semiconductors play a role in operation, conversion, and processing, with a wide range of uses and tens of thousands of types.

A typical non-memory semiconductor is the CPU (Central Processing Unit), which is called the brain of a computer. CPU is Intel’s flagship product, and the Intel market share reaches 90%. Notebook PC manufacturers such as Lenovo and HP are procuring CPUs by placing orders from semiconductor companies.

With the spread of non-face-to-face activities due to Corona 19, demand for laptops and PCs surged, leading to an increase in Intel CPU sales. According to IDC, a market research firm, PC shipments last year increased by more than 13% compared to the previous year.

The smartphone is equipped with an application processor (AP) in which a CPU and a graphics processing unit (GPU) are integrated. In the AP market, Qualcomm and MediaTek occupy the first and second places with a market share in the mid-20% range. Samsung Electronics’ Exynos series market share is in the early 10% level, and it competes for third place with Apple, which designs its own AP.

As ADAS technology advances, non-memory semiconductors used in automobiles are also increasing. Non-memory semiconductors are required in the process of converting images taken with a camera into digital information. The trend of electric vehicle conversion also increases the demand for non-memory semiconductors. Non-memory semiconductors are used for battery power management and motor driving.

The automotive semiconductor market, which companies such as Germany Infineon, NXP in the Netherlands, and Renesas in Japan are competing against, was about 40 trillion won last year, less than 10% of the total semiconductor market, but it is expected to grow at an annual average of 7% in the future. Samsung Electronics is expanding its pace by designing automotive semiconductors and supplying them to Audi, but as a latecomer, it currently has a small market share.

With the proliferation of artificial intelligence and the Internet of Things (IoT), the demand for system semiconductors for products such as home appliances and TVs is also increasing.

It is observed that it will not be easy for Samsung Electronics to rapidly stand out in the non-memory semiconductor market. Expert Commissioner Kim said, “It is almost impossible for Samsung Electronics, which has grown around memory semiconductors, to create a CPU comparable to Intel, which has accumulated non-memory semiconductor design technology for decades.” “Abandoning the memory semiconductor market and focusing only on non-memory It is also a difficult option in reality.”

92 trillion won foundry market… Samsung Electronics’ low operating profit seems to be affected by high internal weighting

Non-memory semiconductors are divided into design and production fields. Memory semiconductors are handled by general semiconductor companies, but non-memory semiconductors with many product types are designed by fabless companies and entrusted to foundry companies to produce them.

TSMC, the No. 1 company in the foundry market worth 92 trillion won, has a market share of more than 50%. TSMC does not design, only specializes in consignment production. As orders increased due to increased demand for non-memory semiconductors, operating profit rebounded from about 15 trillion won in 2017 to 2019 to 22 trillion won last year. This is because the production volume of non-memory semiconductors, which has increased demand in various fields, has been driven.

Samsung Electronics’ foundry market share is about 17%, ranking second. Samsung Electronics started the foundry business in 2005 and entered the market in earnest by separating it from the system LSI division in charge of design in 2017. In terms of foundries alone, their business is not long compared to TSMC, which is more than 30 years old.

Samsung Electronics foundry seems to be behind TSMC not only in market share but also in operating margin. Samsung Electronics’ non-memory semiconductor operating margin, including fabless and foundries, is less than 15%, less than half of TSMC’s operating profit.

The low operating margin is attributed to the high proportion of internal transactions. More than half of Samsung Electronics’ foundry sales are in-house, which is higher than the proportion of external orders. Non-memory semiconductors designed by Samsung Electronics, including Exynos, are produced in-house. It is known that the unit price for internal transactions of Samsung Electronics is lower than the unit price for external orders.

Expert Commissioner Kim said, “It is not possible to confirm the operating margin of Samsung Electronics foundry in detail, but it is estimated that it will be lower than that of TSMC in that the proportion of internal transactions is high.” I can.”

Intel, the number one semiconductor company, gave up on the foundry ultra-fine… Investments exceeding ’30 trillion won per year’ operating profit

The foundry industry is facing fierce investment competition. The industry divides the foundry market into TSMC·Samsung Electronics and the rest. The criterion is the skill gap. In semiconductors, the narrower the line width of the light rays engraving the circuit, the higher the performance by drawing more circuits on the same area wafer. Currently, only Samsung Electronics and TSMC are able to process 7nm or less.

Intel lags behind in the technology race. It has been struggling with 7-nano introduction and stays on 10-nano process. As process development was delayed, Apple and Microsoft (MS) decided to replace Intel CPUs with their own semiconductors. Apple and Microsoft have installed Intel CPUs in consumer PCs and server PCs, respectively. Apple applied the M1, which it designed itself as a MacBook product CPU released last year and left it to be produced by TSMC.

Intel has chosen to increase the proportion of external foundry utilization. Intel’s chief executive nominee Pat Galsinger said, “We will produce most of the 7-nano products to be released in 2023 by ourselves,” but said, “It is highly likely that we will expand the use of foundries for certain technologies and products.”

Investment in production facilities is also competitive. In a situation where foundry production capacity cannot keep up with demand, investment in production facilities has a direct impact on securing market share.

TSMC proposed 27 trillion to 31 trillion won as an expected facility investment this year. Last year’s facility investment execution scale (19 trillion won), as well as operating profits, exceeded significantly. Most of the investment resources are expected to be concentrated on the ultra-fine front-end process (3, 5, 7 nano). In addition, TSMC is promoting the establishment of a foundry plant in Arizona, US with more than 12 trillion won.

Samsung Electronics has also expanded its foundry investment, but it is unclear whether it will be able to keep up with the size of TSMC investment. Through the’Semiconductor Vision 2030′ announced in 2019, it announced a plan to invest a total of 133 trillion won in system semiconductors by 2030. With an annual average of 11 trillion won, the amount of investment encompasses the semiconductor design and foundry sectors. The funding for investment in the foundry sector is unlikely to fall. Following the operation of the 2nd line in Pyeongtaek last year, Samsung Electronics is also preparing to construct the 3rd line in Pyeongtaek worth 30 trillion won as a follow-up measure for the Semiconductor Vision 2030.

There is also a prospect that it will increase its factories in the US. Recently, the Wall Street Journal and Bloomberg News reported that Samsung Electronics is considering a plan to build a new production line in the US by investing about 11 to 18 trillion won. Samsung Electronics said, “There is no official confirmation.”

There are also warnings that Samsung Electronics should approach US investments carefully. Expert Commissioner Kim said, “As TSMC builds a foundry plant in the US and Intel is expanding the proportion of consignment production, the idea of ​​establishing a US plant by Samsung Electronics came out.” “There is a formula that an American company entrusts the quantity to a plant in the US It is not that, and the fact that the burden of tariffs and logistics costs for semiconductors is low, should be decided comprehensively.”