Chip business "life and death," can Samsung seize this "lifeline" from Tesla?

Samsung Electronics is facing a critical turning point in its chip business, and the $16.5 billion chip manufacturing contract signed with Tesla has attracted significant market attention regarding whether it can save its struggling foundry business.

This eight-year Tesla AI6 chip foundry contract is seen as an important opportunity for the recovery of Samsung's foundry business. The company's foundry market share has dropped from its once global leading position to 7.7% in the first quarter of this year, far behind TSMC's 67.6%.

Analysts say that Tesla's choice of Samsung as a discerning customer will help boost other large tech companies' confidence in Samsung's technology, but the company's execution capability and cultural transformation remain key challenges.

Foundry Business Facing "Life and Death"

Samsung's chip foundry business is at a critical "life and death" moment. The department's predicament can be traced back to the mid-2010s when Apple abandoned Samsung in favor of TSMC due to production issues.

Samsung's second-quarter financial report released on Thursday showed that the company's operating profit fell 55% year-on-year to 4.7 trillion won, the lowest level in six quarters. The chip division's profit was only 400 billion won, far below the 6.5 trillion won from the same period last year. Samsung stated in its financial report that the decline in the chip division's profit was mainly due to export restrictions leading to a write-down of the value of memory chip inventory.

In recent years, Samsung has fallen behind competitors like SK Hynix in the HBM chip development race, raising investor concerns about its ability to catch up with rivals.

Lee Jong-hwan, a professor of semiconductor engineering at Sangmyung University in Seoul, stated:

"Samsung is in a life-and-death situation, with losses in the foundry business and a crisis in the memory chip business. The Tesla agreement will give other potential foundry customers more confidence in Samsung's technology, but the key is not to repeat past mistakes."

Due to a lack of major customers, Samsung has delayed production at its flagship factory in Taylor, Texas, in stark contrast to TSMC's Arizona 2nm factory, which has secured major clients like Apple and Nvidia.

For Samsung, the lack of major customers and large orders makes it difficult for the company to improve yield rates (the proportion of usable chips produced from a certain number of wafers). Low yield rates increase costs, making it difficult to attract large orders, leading to a vicious cycle. Macquarie analysts warned last year that the factory risks becoming a "stranded asset."

Opportunities and Challenges of the Tesla Contract

The Tesla foundry contract is seen as an important opportunity for the recovery of Samsung's foundry business.

This eight-year contract will produce AI6 chips at Samsung's Taylor, Texas factory for Tesla's video-based AI model training project. Samsung stated that the agreement "demonstrates our capabilities in advanced process technology" and will help "operate the new factory in the U.S. in a stable manner."

Peter Lee, a semiconductor analyst at Citigroup, believes that producing AI6 chips "will help Samsung internalize AI chip production and attract other AI customers." Since Tesla is a discerning customer, choosing Samsung as a foundry partner will help win orders from other large tech companies.

However, Dylan Patel, founder of chip consulting firm SemiAnalysis, warned that the long contract term means Tesla has many opportunities to "exit due to Samsung's execution failures." Professor Lee Jong-hwan also questioned the contract's profitability, believing that Samsung is "fighting for its life," and the terms of the agreement may be unfavorable to it Industry insiders pointed out that if Tesla insists on producing AI6 chips in the United States, Samsung may implicitly receive orders due to TSMC's insufficient capacity at its Arizona factory. Musk stated this week that he will personally oversee the production line at the Taylor factory to "accelerate progress."