TSMC and Huawei are making efforts, Samsung is hit hard

TSMC and Huawei are making efforts, Samsung is hit hard

In its pursuit of catching up with TSMC, Samsung has made a new move.

A few days ago, Samsung announced that it would rename its second-generation 3nm process technology to 2nm, and has already notified customers and partners of this news. Last year, there were reports that the company would change the name of the process, and now it has been officially confirmed by Samsung. Samsung stated that the process will begin mass production before the end of this year.

A person from an IC design company said: "We received a notice from Samsung Electronics that they are renaming the second-generation 3nm to 2nm. The second-generation 3nm wafer foundry contract we signed with Samsung last year has also been renamed to 2nm, and we need to rewrite the contract in the near future."

Advertisement

This renaming is a measure taken by Samsung to enhance the influence of its wafer foundry brand and achieve a good marketing effect. In previous years, Samsung has done something similar; in 2020, when transitioning from the 7nm process to 5nm, it renamed its second-generation 7nm process to 5nm. After that, Intel decided to vigorously develop the wafer foundry industry. In order to "not be at a disadvantage" in the naming of advanced processes to catch up with TSMC, it also had similar renaming operations, which led to the current process names such as Intel 7 and Intel 4. Whether it is Samsung or Intel, renaming the process nodes first indicates that they attach great importance to the wafer foundry business and the market. Through such operations, they can benchmark TSMC's process nodes and not fall behind in marketing.

In the past two years, Samsung's wafer foundry business has gradually narrowed the gap with TSMC in advanced processes, especially in June 2022, when Samsung Electronics became the world's first company to mass-produce 3nm process chips based on the full-gate (GAA) process. According to the company's plan, it aims to mass-produce the second-generation 3nm process chips in 2024 and truly 2nm chips in 2025. Through renaming, Samsung has advanced the mass production timeline for 2nm.

It is reported that Samsung has obtained an artificial intelligence (AI) chip order from the Japanese AI startup Preferred Networks (PFN), which will use the 2nm process. Industry analysis believes that Samsung was able to secure the 2nm order from PFN because of its comprehensive capabilities in memory and wafer foundry services, which can provide a full set of solutions for high-bandwidth memory (HBM) production and advanced 2.5D packaging.

01

Samsung's yield issue remains to be resolved

Since entering the 5nm process era, yield has always been the biggest issue faced by Samsung's wafer foundry business, especially at the 3nm process node, where Samsung has introduced a brand-new GAA architecture transistor, which is significantly different from the previously used FinFET transistors, further amplifying the yield issue.According to a report by Notebookcheck, currently, Samsung's 3nm process yield rate is hovering around 50%, with several issues still needing to be addressed. In 2023, Samsung had stated that its 3nm process yield rate had reached over 60% after mass production, but it appears that this was overly optimistic at the time.

In February of this year, South Korean media reported that Samsung's new 3nm process had significant problems, with all trial production chips having defects and a yield rate of 0%. The report indicated that the Exynos 2500 chip, which uses the 3nm process, failed quality tests due to defects, leading to the inability to mass-produce the chipset for the subsequent Galaxy Watch 7. It was noted that due to the failure of the Exynos 2500 chip trial production, Samsung postponed large-scale production, and it is currently unclear whether the yield rate issue can be resolved in time.

In an attempt to catch up with TSMC, Samsung's 3nm process technology has adopted a more aggressive strategy, mainly reflected in the GAA transistor architecture, while TSMC's 3nm still uses FinFET. The transition to GAA transistors will only occur at the 2nm node. The aggressive approach inevitably comes with some yield sacrifices. However, despite the significant yield rate issues with Samsung's 3nm process, the performance on the 4nm process is much better, with the yield rate increased to 75%.

Overall, to catch up with TSMC, Samsung must thoroughly resolve the yield rate issues.

02

TSMC's Continuous Successes

In contrast to Samsung's struggling foundry business, TSMC has been experiencing smooth sailing recently.

According to South Korean media BusinessKorea, statistics from the global market value tracking website CompaniesMarketCap show that as of January 28th of this year, TSMC's market value stood at $608.15 billion, significantly higher than Samsung's $364.43 billion, with a gap of $243.7 billion between the two. In comparison, at the end of 2022, TSMC's market value was only $386.3 billion, just $93.3 billion higher than Samsung's.

Since TSMC's market value surpassed Samsung's at the end of 2021, it has been leading almost every year. At the end of 2020, Samsung's market value was $500.8 billion, $12.7 billion higher than TSMC's $488.1 billion. However, in 2021, 2022, and 2023, TSMC's market value was $133.8 billion, $93.3 billion, and $137.8 billion higher than Samsung's, respectively.

Since the beginning of 2024, Samsung's market value has decreased by 9.24%, while TSMC's market value has increased by 12.75%.TSMC's financial report for 2023 shows that its annual revenue was $69.298 billion, a year-on-year decrease of 4.5%, but better than expected. Financial analyst Dan Nystedt, who specializes in semiconductor companies, stated that measured by 2023 revenue, TSMC became the world's largest semiconductor manufacturer for the first time. The company's revenue of $69.3 billion in 2023 surpassed Intel's $54.23 billion and Samsung's $50.99 billion.

Looking ahead to 2024, TSMC President C.C. Wei stated that as semiconductor inventory returns to a healthy level, the overall semiconductor value (excluding memory) is expected to grow by 10% this year. The wafer manufacturing industry is expected to grow by about 20%, and it is estimated that TSMC's annual revenue could increase by 21% to 25%, driven by demand in AI and high-performance computing (HPC).

From Wei's judgment, it can be seen that TSMC is focusing this year's revenue on AI and HPC, while the automotive chip foundry business, which previously saved the performance of many semiconductor giants during the semiconductor cycle, was not mentioned. In terms of revenue structure, the proportion of IoT and automotive business in TSMC's total revenue is also declining. In the fourth quarter of 2023, the automotive business accounted for 5% of the company's total revenue, unchanged from the previous quarter, and down 1 percentage point year-on-year. The IoT business accounted for 5% of the total revenue, down 4 percentage points from the previous quarter, and down 3 percentage points year-on-year.

A large influx of orders from major customers

Currently, TSMC has many large orders for AI chips, including Nvidia, AMD, and Intel, as well as many AI chip startups that are also using TSMC's most advanced 4nm and 3nm processes. The industry believes that Nvidia will launch the latest generation of Blackwell architecture B100 GPU at the GTC conference on March 17, which will use TSMC's 3nm process.

Dan Nystedt estimates that in 2023, Apple accounted for 25% of TSMC's revenue, paying $17.52 billion to TSMC. At the same time, Nvidia paid $7.73 billion to TSMC, accounting for 11% of its 2023 revenue.

"In 2023, TSMC's top 10 customers accounted for 91% of its revenue, up from 82% in 2022," Nysted wrote in a post on X: "These companies include MediaTek, AMD, Qualcomm, Broadcom, Sony, and Marvell."

For many years, Apple has been TSMC's top customer and will continue to be TSMC's largest customer for many years to come. As the market demand for AI processors increases, Nvidia's share of TSMC's revenue may increase in 2024, as the company has already booked 3nm process and CoWoS packaging capacity. This year, AMD's share of TSMC's revenue is expected to reach 10%, with the company's EPYC processor sales for data centers increasing, and the market demand for its Instinct MI300 series GPU for AI and HPC is also high.

This year, Nvidia's new product H200 and AMD's MI300 will provide a large number of orders for TSMC's 3nm process. Intel's next-generation low-power architecture Lunar Lake MX (LNL) CPU will use TSMC's N3B process. Recently, TSMC has started to accelerate the progress, and the Arrow Lake H/HX CPU will also use the 3nm process, which is expected to further improve TSMC's capacity utilization.Due to the continuous growth in demand for advanced processes, TSMC plans to increase the utilization rate of 3nm capacity to 80% by the end of 2024.

With a surge of customer orders, in the first quarter of this year, TSMC's 8-inch wafer capacity utilization steadily rebounded, and the 12-inch capacity utilization even exceeded 80%. In the 5nm and 4nm processes, where the foundry pricing exceeds $10,000, the proportion of TSMC's revenue in the fourth quarter of 2023 has risen to 35%, with the full year at 33%, and the capacity utilization rate at the end of 2023 approached 90%, currently close to full load. The utilization rate of the 3nm (N3B, N3E) process, with a foundry price close to $20,000, has further increased from 75% at the end of 2023 to 95%, with the monthly capacity already reaching 100,000 wafers ahead of schedule in the first quarter.

TSMC plans to introduce the 2nm process in 2025, which will adopt nanosheet technology. The company has initiated the preliminary work for the 2nm trial production and expects to introduce the most advanced AI systems to accelerate the trial production efficiency, aiming for nearly a thousand trial production wafers this year. After a successful trial production, it will be integrated into the subsequent construction of the completed Fab 20 in Hsinchu Science Park.

Kumamoto Plant Welcomes Large Orders

TSMC's newly established Kumamoto plant in Japan has also welcomed large orders, with global CIS image sensor leader Sony recently placing a significant order at TSMC's Kumamoto plant.

In the fourth quarter of 2023, the CIS market began to recover, coupled with strong AI market demand, and various end applications started to adopt lenses specifically developed for AI, which is expected to lead to a new wave of lens renewal for CIS components.

Sony is optimistic about the future opportunities in automotive and consumer electronics and will extensively use TSMC's 22nm process to produce CIS and image signal processor (ISP) chips.

Currently, TSMC's Kumamoto plant is undergoing equipment installation and is expected to start mass production in the fourth quarter of this year, focusing on 40nm, 28nm, and 22nm processes, providing wafer foundry capacity for automotive, industrial, and other customers.

Increasing R&D Investment to Outpace Competitors

At the critical moment when the 3nm process technology has successfully achieved mass production and the 2nm process technology is about to enter mass production, in December 2023, TSMC granted a special contribution bonus to the R&D team in December to recognize their efforts in technology research and development. TSMC confirmed this move, stating that it aims to motivate and retain talent.TSMC has always placed a high emphasis on R&D investment. According to reports, in 2022, the company's R&D expenditure reached as high as $5.47 billion, primarily used to expand its technological lead. In June 2023, TSMC released a sustainability report, disclosing average compensation statistics for employees and stating that the majority of staff participate in an equity incentive plan, allowing them to purchase and hold company shares at a 15% discount.

TSMC is also generous with dividend bonuses; in 2021, the total performance bonuses and dividends for employees amounted to approximately NT$71.2 billion, averaging around NT$1.25 million per person based on 57,000 employees. The dividends for the past two years have set historical records, with 2022 seeing a total of NT$121.4 billion in performance bonuses and dividends. Based on 65,000 employees, this averages out to NT$1.86 million per person, a significant increase of about 70% from the previous year, marking a new high in TSMC's history, with an average annual growth rate of employee bonuses at 49.5%. In 2023, such incentive measures continue.

With continuous and substantial R&D investment, TSMC's advanced process technology has always been at the forefront of the industry. Currently, the 5nm process is in its third year of mass production, contributing 26% of TSMC's revenue. Additionally, the 4nm process technology began mass production in 2022, with upgraded versions such as N4P and N4X introduced. The 3nm process started mass production in 2022, with the upgraded version N3E entering mass production in the second half of 2023.

In the realm of even more advanced 2nm process technology, TSMC has demonstrated prototype process test results to key customers, such as Apple and NVIDIA. The 2nm process is scheduled to begin mass production in 2025, with Apple expected to be a major customer. Furthermore, a high-performance computing process technology designed for higher power loads will be introduced subsequently.

TSMC's President, C. C. Wei, has stated that the company does not underestimate its competitors, but its N3P process's PPA (Power, Performance, and Area) is superior to its competitors' 18A process in terms of cost and technological maturity. The upcoming 2nm process will be the most advanced technology in the industry.

At the end of February this year, C. C. Wei indicated that TSMC does not compete with its customers and wins their trust. While competitors may catch up in process and technology, TSMC's pure foundry model has earned customer trust, which is the key to victory. Competitors from South Korea and the United States have tried to compete with TSMC in technology and products, but have been defeated. Regarding competitors, in C. C. Wei's own words, to compete with TSMC, "there is no way."

The competitors C. C. Wei alluded to are Samsung and Intel.

03

Conclusion

In the wafer foundry market, Samsung's relentless pursuit has indeed achieved certain results, especially in the 3nm process. TSMC's advantage over Samsung has decreased compared to the 7nm and 5nm processes of previous years, but the gap still exists. Moreover, Samsung has encountered numerous issues, such as yield and marketing, as it continues to advance the 3nm process. Currently, Samsung is working to address these challenges, but the difficulty is not small.In contrast, TSMC, amid the overall downturn in the global electronics semiconductor industry in 2023, has continued to demonstrate steady technological progress and revenue performance, so much so that its stability is somewhat despairing for its competitors. In the coming years, Samsung and Intel's foundry businesses are expected to face tough times.

For Samsung, the challenges are even greater, as the company must not only catch up with TSMC but also guard against the unexpected emergence of Intel. Moreover, the alarms are not just sounding in the foundry business; Samsung's other business areas, where it was once renowned, are also raising concerns, such as in the display panel sector.

Recently, the supply chain consulting firm DSCC released a report indicating that in the fourth quarter of 2023, BOE Technology Group Co., Ltd. (referred to as "BOE") surpassed Samsung to become the leader in the shipment of foldable display panels. Since entering the foldable market in the third quarter of 2019, Samsung has consistently led in shipment volumes and maintained the top position in procurement. However, these records were broken in the fourth quarter of 2023.

The report shows that in the fourth quarter of 2023, BOE held a 42% share of the foldable panel market, ranking first, while Samsung's share plummeted from 76% in the third quarter to 36% in the fourth quarter. According to DSCC's analysis, Samsung's foldable panel shipments declined by 70% quarter-on-quarter in the fourth quarter. The firm stated that the significant increase in BOE's market share is largely attributed to the substantial growth of Huawei's foldable phones, with Huawei's procurement volume in the fourth quarter increasing by 122% compared to the previous quarter.