Foundry business is where chips’ profits are

Researchers in work suits look out monitors at Samsung Electronics’ Giheung semiconductor plant, southeast of Seoul. Samsung also operates a foundry at the 350-acre site. Provided by the company

Samsung Electronics retains the world’s top spot in computer memory chip production, but products such as DRAM and NAND chips have been a headache recently amid sagging demand for PCs. In the second quarter, operating profit from semiconductors plummeted 38 percent on-year to 1.11 trillion won ($980 million), according to results issued last Friday. Sales sagged 6 percent to 8.6 trillion won.

But the semiconductor has its bright spots, particularly one high value-added niche: the foundry business. Samsung manufactures custom-made system LSIs (Large-Scale Integrated circuits), which include mobile application processors, or APs, and image sensors for smartphones, under contract with semiconductor companies that design but don’t have wafer fabrication capacity.

“The foundry business promises stable demand volume and profitability, unlike memories such as DRAM and NAND, which are hugely volatile,” said Kang Jung-won, an analyst with Daishin Securities.

Samsung’s global presence in the foundry market is so far pretty small. As of the end of last year, it was the world’s ninth foundry player with $470 million in revenues, accounting for a 1.6 percent market share, up from 1.4 percent a year earlier, according to market researcher Gartner.

However, if the estimated $1 billion in revenues Samsung makes from A5X APs used in Apple’s iPhones and iPads are included in its foundry revenues, Samsung would easily rank fourth in industry, said Gartner in a March report. Samsung doesn’t offer specific figures on its foundry revenues.

Analysts also forecast foundry revenues at Samsung to double this year as smartphones and tablets drive the semiconductor industry’s growth.

Samsung said in its Q2 earnings report that the demand in the non-memory sector represented by system LSIs rose as new mobile products were launched during the quarter. System LSI “will maintain profitability in the following three months as demand for faster and higher-capacity chips used in mobile devices increases,” the report noted.

“Samsung’s confidence in the foundry business has been growing lately,” said an industry source on condition of anonymity. “It is aiming to launch an all-out competition against top player Taiwan Semiconductor Manufacturing Company (TSMC).”

A major turning point in Samsung’s foundry business could be a deal it has clinched with Qualcomm to supply quad-core Snapdragon S4 chipsets, a type of application processor. The news came as the U.S. mobile processor giant has been suffering from a tight supply situation with its previously exclusive manufacturing partner, TSMC.

Without providing further details, Taiwan Economic News reported earlier in July that Qualcomm has signed up UMC and Samsung Electronics as suppliers of the chips produced through a 28-nanometer process. Qualcomm designs its own chips but outsources production.

During a quarterly conference call with financial analysts on July 18, Paul Jacobs, CEO of Qualcomm, said, “We are continuing to see strong demand for our new Snapdragon S4, and other 28-nanometer chipsets, and that demand continues to exceed our available supply.” COO Steven Mollenkopf added that Qualcomm will continue to ramp up capacity with “multiple foundries” in the September quarter and again into the December quarter.

Spokesmen for Samsung and Qualcomm declined to confirm the supply partnership, citing confidentiality policies, but neither denied it.

“Foundry is one of the most security-tight businesses that Samsung’s semiconductor sector conducts,” said Ken Noh, a Samsung spokesman. “Foundry workers are even supposed to stay in a restricted area at the Giheung factory [southeast of Seoul].”

The Snapdragon S4 processor provides support for fourth-generation long-term evolution connectivity and improved battery life. It is currently used in 40 Android-based smartphones and tablet PCs made by manufacturers around the world, including Samsung’s flagship Galaxy S3. Samsung has been making its own chips called Exynos for most of its smartphones but is now using Qualcomm’s chips. In a possibly related move, Samsung will begin production at its 28-nanometer process foundry it has been building during the third quarter, according to Kim Myung-ho, vice president of the memory marketing team, during the conference call Friday. He did not mention an exact date.

Samsung also gained a leading edge in the mobile AP business after it announced two weeks ago it had acquired the mobile connectivity division of CSR, the world’s top producer of GPS chips and second biggest player in Bluetooth chips. The acquisition of CSR could pave the way for Samsung obtaining additional foundry contracts, analysts say.

“In the future, Samsung will take a bite out of the orders that foundries get,” Clark Tseng, senior manager of market analysis at chip industry association SEMI, was quoted as saying by Reuters in late June. He also predicted TSMC and Samsung would dominate the top-tier foundry business, with UMC and GlobalFoundries forming a second-tier and the rest trailing.

Gartner forecasts the global foundry market will continue its expansion over the coming years. It grew 5.1 percent from a year earlier to $29.8 billion last year and the figure is expected to climb by 50.7 percent to $44.9 billion by 2016.

By Seo Ji-eun [spring@joongang.co.kr]