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Huawei crackdown

Samsung-TSMC rivalry heats up as US cracks down on Huawei

Two giants rush to expand foundry capacity and develop cutting-edge chips

Samsung and TSMC are both spending big on 5-nanometer chip development. (Source photo by Reuters) 

SEOUL/TAIPEI -- The rivalry between Samsung Electronics and Taiwan Semiconductor Manufacturing Co. is intensifying as the latest U.S. ban on Huawei Technologies changes the landscape of the chip foundry business.

Samsung announced on Thursday that it is building new production lines in Pyeongtaek, south of Seoul, to mass produce 5-nanometer chips from the second half of next year. This follows production lines in Hwaseong, where Samsung aims to start producing the cutting-edge chips this year.

The two production lines will manufacture the chips using extreme ultraviolet technology, one of the most advanced chipmaking techniques currently available.

The announcement of the new lines came less than a week after the U.S. Department of Commerce introduced tighter export control rules that require any non-U.S. company to acquire a license if they use American software or technology to produce chips from the designs of Huawei or its affiliates. The new rules are expected to hurt TSMC, as the company is a key chips producer for Huawei. The department has granted a four-month of grace period, but this only applies to chips that were ordered before the new rules were announced.

TSMC also announced last week that it intends to build and operate an advanced facility in the U.S. that will utilize 5-nanometer technology for semiconductor wafer fabrication. Construction is planned to start in 2021, with production targeted to begin in 2024. TSMC's total spending on this project, including capital expenditure, will be approximately $12 billion from 2021 to 2029. The company's 5-nanometer investment in Taiwan, including R&D expenses and an advanced chip facility, has reached 700 billion New Taiwan dollars ($23 billion), according to the company.

Samsung, meanwhile, has vowed to invest 133 trillion won in system chips and its foundry business by 2030. Samsung declined to comment on how much it will invest in the Pyeongtaek lines, but an industry source familiar with the matter said the company plans to spend 10 trillion won in the project. 

Analysts say competition between Samsung and TSMC in the foundry business -- basically making chips for other companies -- will heat up, although Samsung will need to tackle customer concerns about relying too heavily on a company that is also a competitor. Huawei said in April that it could allocate chip orders to Samsung if the U.S. further restricts foreign suppliers like TSMC from trading with the Chinese company. However, Huawei also competes with Samsung in both the smartphone and telecom equipment businesses.

"Samsung is definitely a formidable rival for TSMC," said Eric Chen, a veteran semiconductor analyst and managing partner of Cornucopia Capital Partner. "However, Samsung is also a huge empire making electronic devices. No single tech company or chip developer in the world will hope to source many of crucial chip components from its rival, or potential rival. That's always an issue with Samsung."

Samsung is the world's biggest smartphone maker, with a 20% share of the global shipments market in the first quarter, according to Counterpoint Technology Market Research. Huawei and Apple are competing fiercely for second, with the Chinese company currently holding the No. 2 spot with 17%, followed by the U.S. company with 14%, according to the latest data. 

In contrast, TSMC only does contract chipmaking and does not have any consumer businesses that compete with those of its customers. That is the reason it has a wider portfolio of the world's top chip developers and is closer to tech companies' hearts, Chen said.

Adding the 5-nanometer foundry lines is crucial for Samsung to expand its presence in the contract chipmaking sector. TSMC currently controls more than half of share the global foundry market by revenue, followed by Samsung with about 15%, according to data from TrendForce. The two companies also compete in producing high-tech chips. The smaller the nanometer size, the more advanced the chips and thus more expensive and challenging to produce.

TSMC and Samsung lead the race, followed by Intel. The first phase of TSMC's "Plant 18," a sprawling production site in Taiwan, will soon start churning out 5-nanometer chips, the most advanced semiconductors so far in the industry, for use in the upcoming 5G iPhones.

Samsung said its 5-nanometer chips will be ready for mass production in the second half of this year, while Intel will start mass production of less advanced 10-nanometer chips in the second half of 2020.

Samsung, the world's biggest memory chipmaker, has long harbored ambitions of challenging TSMC in the contract chipmaking sector. It has seen some success so far, convincing both Qualcomm and Nvidia -- two key TSMC customers -- to switch some chip orders to the South Korean company. But Samsung's position as an electronics titan continues to hinder its contract chipmaking ambitions.

For instance, TSMC used to split orders for iPhone mobile processor chips with Samsung, but the Taiwanese company is now the sole supplier of such high-end mobile chips. Apple still buys advanced displays and memory chips from Samsung but has avoided relying heavily on its smartphone rival for vital processor chips.

"So, the key matter is how [Samsung] can have a stable customer portfolio," said Lee Seung-woo, an analyst at Eugene Investment & Securities. "It seems to be important [for the company] to set up a careful mid- and long-term strategy for how it can expand orders from current customers such as Qualcomm and Nvidia as well as regain key customers in the past like Apple and Xilink."

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