Wall Street research firm surpisingly says that this foundry is the only alternative to TSMC
A Wall Street research firm says only one foundry can be an alternative to TSMC.
Many of you are familiar with TSMC, the Taiwan-based foundry that has a dominating 67.6% market share in the contract chip manufacturing industry. Its client list sounds like a who's who of tech leaders. Apple is its biggest client, and TSMC also produces chips for companies like Nvidia, AMD, Qualcomm, MediaTek, Sony, and Broadcom. Its top competitor is Samsung Foundry, but calling the latter a rival to TSMC is like calling the San Jose Sharks rivals of the back-to-back Stanley Cup Champion Florida Panthers.
Some see the $16.5 billion deal with Tesla as the start of a turnaround for Samsung Foundry
The other day, we told you about the first sign indicating that Samsung Foundry could be starting a turnaround. Tesla placed an order for $16.5 billion worth of chips, and the contract runs until 2033. But Samsung has a huge gap to fill as its 7.7% market share is nearly 6,000 basis points behind TSMC. Samsung Foundry has had serious issues with low yields, which could end up raising the prices of chips sold to clients.
Samsung Foundry recently announced a $16.5 billion deal with Tesla to make its AI6 chip. | Image credit-X
A foundry's yield measures the percentage of usable chips divided by the maximum number that could have been made on a silicon wafer. A low yield means that the customer has to pay more to get the number of non-defective chips it needs. With it weighed down by low yields, many in the industry wondered howSamsung Foundry could get a new customer, and whether Samsung would sell off the unit.
Even though Intel's experiment to create a contract chip manufacturing unit to challenge TSMC and Samsung hasn't exactly paid off as expected, Intel is still going ahead with the production of advanced chips. But most of these components will be used by Intel itself. So far, Intel Foundry Services (IFS) has been a major flop as the company has zero significant external customers and the foundry's market share isn't in the top ten globally. Making matters worse, Intel is losing huge amounts of money. It has even taken hundreds of millions in write-offs for equipment it bought but has no use for.
With construction delays slowing down the building of fabs in Ohio, and the cancellation of projects in Germany and Poland, it is hard to understand why some analysts still see Intel as a reasonable alternative to TSMC. One Wall Street research firm, Bernstein, says that Samsung Foundry is the only logical choice to be an alternative to TSMC.
In a note to its clients, Bernstein, after the $16.5 billion deal between Samsung Foundry and Tesla was announced, wrote, "The world needs a leading-logic semiconductor producer in addition to TSMC, and that Samsung…is better positioned than Intel to be the alternative." Bernstein says that the announced deal for the AI6 custom-designed AI chips for Tesla will result in peak annual revenue for Samsung Foundry of $2 billion-$2.5 billion. The research firm says that for the length of the deal, the contract will contribute only $8 billion to Samsung Foundry's revenue.
The Samsung Foundry-Tesla deal could end up being worth more than $16.5 billion
But this isn't necessarily bad news for Samsung Foundry. Bernstein says that the value of the contract Tesla has with Samsung is much lower than the disclosed US$16.5B." But the Wall Street firm notes that Tesla CEO Elon Musk says that the potential valuation of the contract could be "several times higher" than the initially reported $16.5 billion indicating that besides building chips for Tesla's vehicles, some of the contract could cover the manufacturing of chips for robotics or other products.
Bernstein says that the $16.5 billion deal with Tesla could raise Samsung Foundry's revenue by 30% to 40% and the improvement to Samsung Foundry's profitability should be higher. The Wall Street research firm says that Samsung Foundry's fab in Taylor, Texas, is currently running at low capacity; this deal should help that fab's business grow..
As for what will happen to TSMC in light of the deal between Tesla and Samsung Foundry, Bernstein says that "The impact on TSMC is negligible." The research firm estimates that the amount of revenue Tesla generates for TSMC is very low.
Overall, Bernstein sees Samsung Foundry remaining as the only alternative tech companies have if TSMC can't build their chip due to lack of capacity at a certain time of the year or for any other reason.
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