Samsung Says It's Serious About Foundry, Creates Business Unit

(Bloomberg) -- Samsung Electronics Co., the world’s second-biggest chipmaker, is increasing its effort in semiconductor outsourcing, separating the company’s foundry business into a new unit as part of a challenge to market leader Taiwan Semiconductor Manufacturing Co.

Samsung is elevating the foundry business to show its independence and guarantee its access to resources within the company. The South Korean company on Wednesday also promised customers that it will introduce new production techniques ahead of competitors and have a new plant up and running by the fourth quarter of this year.

Creating a separate unit for the business may ease the concerns of some potential customers who compete with other parts of Samsung, said Kelvin Low, a senior director of foundry marketing.

“As part of our commitment to play seriously in the foundry area we felt that it was best that we create an independent organization,” Low said. “That will result in less conflict of interest -- although that’s not really an issue these days -- it’s still a perception in some customers’ minds.”

Samsung’s commitment underlines the importance of its chip unit and the growth in demand for outsourced production of chips. Fewer companies than before can afford to invest the billions of dollars it takes to build and equip plants and fund research into new manufacturing. TSMC, which dominates the market by producing components for companies such as Apple Inc., has posted double-digit percentage revenue gains for the last five years.

In March, Intel Corp., which is the world’s largest maker of chips through its lead in the market for computer microprocessors, said it’s recommitting itself to building its own made-to-order chip business and claimed its manufacturing is still ahead of Samsung and TSMC. All three companies fight for orders from companies such as Qualcomm Inc. and Apple, which design their own chips but don’t own any manufacturing.

The electronics arm of South Korea’s largest business group doesn’t currently break out sales of its foundry unit. As the world’s biggest maker of memory chips, sales of those components make up most of the company’s total semiconductor revenue, contributing 12.12 trillion won ($10.5 billion) of 15.66 trillion won in the first quarter. That indicates the other chips, including foundry produced and those made for its own internal consumption, had sales of 3.54 trillion won in the quarter, a gain of 10 percent from a year earlier. That’s still less than half of the $7.53 billion in revenue TSMC posted in the quarter.

Samsung, whose chip unit provided two-thirds of companywide operating profit, is locked in a race with TSMC and Intel to improve factory output in increments the industry refers to as nanometers. Currently the best is 10-nanometer production. Samsung said it was the first to mass produce at that node and TSMC said it’s now in full production of 10 nanometer with a rapid increase in output due in the second half of this year.

Samsung on Wednesday said 8 nanometer is coming later this year and 7 will follow in 2018. Its 7-nanometer production will be the first to use extreme ultraviolet lithography -- a new version of the process of burning the circuit patterns into layers of materials on silicon to create chips. Switching to that will reduce the number of steps required, reduce cost and make the chips perform better, Samsung said. The company believes it will begin to introduce 4-nanometer production in 2020, a step which will require a brand new arrangements of transistors, the fundamental building blocks of chips.

To contact the reporter on this story: Ian King in San Francisco at ianking@bloomberg.net.

To contact the editors responsible for this story: Jillian Ward at jward56@bloomberg.net, Andrew Pollack, Molly Schuetz