Samsung teams up in chip market

Samsung Electronics and Globalfoundries are teaming up in the made-to-order chip business, an alliance aimed at stealing orders from Taiwan Semiconductor Manufacturing.

Globalfoundries will license Samsung’s most advanced new chipmaking technology, called 14-nanometer FinFET, giving customers access to production at plants in Texas, New York state, and Korea. Terms of the accord weren’t disclosed.

The companies are seeking to pose a bigger challenge to Taiwan Semiconductor, which last year controlled about half of the $38.9 billion chip-foundry business. Samsung and Globalfoundries are betting the advanced technology and scale they can offer together will help ensure they remain central in the market for building smartphone and tablet parts.

“This offers a huge competitive threat to TSMC and provides an alternative to those companies who are looking to use leading-edge production,” said Jim McGregor, an analyst at Tirias Research. “It’s a huge deal.”

Samsung will reach full production on the new manufacturing technology by year’s end, said Jeong Seh-woong, an executive vice president in charge of the foundry business.

The Suwon-based company is the world’s second-largest chipmaker and has the lead in new production technology, while Globalfoundries has a broader customer list, and unlike Samsung - which is also the biggest maker of mobile phones and televisions - it doesn’t compete directly with potential customers. The alliance may also make it tougher for Intel to build a position in the foundry business, McGregor said.

Globalfoundries ranked second in the made-to-order chip market last year, and Samsung was fourth, together generating about $8.2 billion of revenue, according to market researcher IC Insights. Samsung’s main customers for chipbuilding work are Apple and itself - the company makes parts for its own phone and tablet divisions, McGregor said.

If Samsung and Globalfoundries bring the technology to the market in the time frame they are promising, it could put them at least six months ahead of the competition and tempt multiple chipmakers to give them orders, said Len Jelinek, an analyst at market-research firm IHS. The partnership would also reduce the cost for chipmakers of alternating between the two suppliers, because products wouldn’t need to be redesigned, as they do now when companies switch, he said.

“Now you have two well-respected organizations combining forces,” Jelinek said. “For a customer, if you can truly have multiple sources, it changes everything.”

The foundry business is gaining importance as more semiconductor companies decide not to produce their own designs, instead outsourcing the manufacturing to the few chipmakers that can afford to keep developing advanced production techniques. Most chips at the heart of smartphones and tablets are manufactured by foundries such as Taiwan Semiconductor.

The consequences of being limited to one supplier can be painful. Qualcomm, which in 2012 became the world’s third-largest chip provider, has never built its own products. In the same year it reached that position, the company told investors that sales would be held back because of limited smartphone-chip production at Taiwan Semiconductor. Switching manufacturing to other suppliers would take time, the company said, meaning that some demand went unmet.

“Our customers are very excited about having access to world-class technology from multiple sources,” Globalfoundries Chief Executive Officer Sanjay Jha said in an interview. “We bring an entirely different customer base, and Samsung has its own.” Executives declined to comment on existing or potential customers.

The choice of which of the two companies gets the orders will be left to the customer. Samsung and Santa Clara, California-based Globalfoundries will operate their foundry businesses independently and cooperate only on technology.

Bloomberg