Samsung Electronics' foundry division is reportedly struggling to attract major customers due to low yield rates and persistent quality issues. These challenges are affecting the company's second-half performance in 2024, particularly in its mobile business. Internal sources suggest that key products like application processors (AP) and CMOS image sensors (CIS) may be outsourced, adding further pressure to the division. Meanwhile, competitors such as TSMC, which continue to lead in 2-nanometer (nm) and 3nm chip production, are increasing the competitive pressure on Samsung's foundry operations.
Samsung 3nm yield reportedly at 20% in 3Q24
According to South Korean media outlet Deal Site, Samsung's foundry division has been unable to achieve stable yield rates in its most advanced processes, including 3nm technology. This has caused major clients to lose interest. If Samsung's internal divisions stop relying on its foundry for production, losses could widen in the second half of 2024.
The Korea Times reported that Samsung's 3nm process had yield rates in the single digits until the first quarter of 2024, delaying the production of engineering samples for the Exynos 2500 chipsets. By the third quarter, the yield had improved to around 20%, as per local analysts. However, this is still far below the 60% yield typically needed for large-scale production, making it challenging for Samsung to secure substantial foundry orders.
Industry sources have reported that Samsung's Mobile eXperience (MX) division has decided that the upcoming flagship Galaxy S25 series will not use the in-house Exynos 2500 chipset, opting instead for Qualcomm Snapdragon 8 Gen 4 across all models. Similar to the situation in 2023, yield rates and quality were key factors influencing the MX division's decision.
Sources disclosed that as of the first half of 2024, Samsung's second-generation 3nm gate-all-around (GAA) process had a yield rate of only 20% to 30%. Reflecting on 2022, when Samsung launched the Galaxy S22 series with the Exynos 2200, the Game Optimization Service (GOS) controversy arose. After that, the Galaxy S23 series fully switched to Qualcomm's mobile APs, while the Galaxy S24 series partially used the Exynos 2400.
The industry had high hopes for the Galaxy S25 series to fully adopt the Exynos 2500, as this move could have boosted Samsung's foundry performance and significantly reduced the MX division's AP procurement costs.
Samsung's second-generation 3nm process continues to struggle with low yields, leading the MX division to outfit the entire Galaxy S25 series with Qualcomm's Snapdragon 8 Gen 4 AP instead of the Exynos 2500 chipset. Reports from Hankyung and K.bench Digital suggest that this shift may negatively affect both Samsung's foundry and mobile business revenues. The Snapdragon 8 Gen 4 offers superior AI and performance capabilities compared to the Exynos 2500, which remains delayed due to ongoing yield issues.
Samsung struggles to close yield gap as market pressures and component costs mount
According to Businesskorea, Samsung's foundry yield for sub-3nm processes remains below 50%, while TSMC's advanced process yields are significantly higher, ranging from 60% to 70%. This disparity has widened the market share gap between the two companies, with TSMC controlling 62.3% of the global foundry market in the second quarter, compared to Samsung's 11.5%. The growing yield gap has intensified competition, with TSMC now leading Samsung by 50.8 percentage points in the global market.
Samsung's foundry division aims to improve its yield rates by the end of 2024, potentially enabling the Exynos 2500 to be included in select devices, similar to its partial use in the Galaxy S24 series. However, many industry experts believe that significantly boosting yield rates in such a short period will be difficult, reflecting the broader challenges of ramping up production efficiency in advanced chip manufacturing.
With smartphone sales weakening recently, any renewed controversy over AP performance could pose a real risk to Samsung's MX division. Industry experts suggest that if the MX division stops using Exynos chips, it may face a weaker negotiating position with Qualcomm, potentially leading to higher costs for procuring Qualcomm's APs.
APs and other key components to exit Samsung's supply chain?
Samsung's foundry issues extend beyond the Exynos 2500, with other products also moving away from in-house chip production. Recently, Samsung's System LSI division decided to stop using its foundry for CIS production, citing a lack of price competitiveness. Additionally, reports indicate that Samsung is partnering with TSMC for the development of the sixth-generation high-bandwidth memory (HBM4). This shift underscores the broader challenges faced by Samsung's foundry division in maintaining competitiveness in advanced chip manufacturing.
Reports reveal that Samsung originally intended to use its advanced 3nm process for HBM4 production, aiming for an all-in-one solution that included both manufacturing and packaging within its foundry. However, low 3nm yields and persistent overheating issues forced Samsung to seek external support from TSMC to stabilize production and remain competitive.
Switching to the less advanced 4nm process for HBM4 production would have placed Samsung at a competitive disadvantage against SK Hynix, a major rival in the HBM market. As a result, Samsung had to set aside its initial plans and collaborate with TSMC to stay competitive in the high-bandwidth memory sector.
Samsung's non-memory business losses up to KRW2 trillion
Samsung typically does not disclose the individual revenues of its Device Solutions (DS) division. However, industry estimates suggest that Samsung's non-memory business suffered losses of KRW2 trillion (approx. US$1.5 billion) in 2023, with losses in 2024 projected to exceed KRW2 trillion.
Industry forecasts predict that if Samsung does not receive internal support, the foundry division's performance will suffer a severe blow. South Korean securities analysts estimate that losses for Samsung's System LSI and foundry divisions in 2024 could range from KRW1.4 trillion to over KRW2 trillion.
On the other hand, with Qualcomm's AP prices continuously rising, the procurement costs for Samsung MX division's mobile APs have skyrocketed accordingly, hence harming profitability. Looking ahead to 2025, if the Exynos 2500 cannot be used, the MX division's profits could deteriorate further. Industry insiders note that Qualcomm raises prices by up to 30% with each new generation of processors.
To strengthen the competitiveness of the MX division, the company plans to roll out its "Galaxy AI" technology to older models and mid-range Galaxy smartphones. Samsung aims to equip over 200 million devices with Galaxy AI by the end of 2024. This strategic move is expected to broaden AI capabilities across a larger user base, boosting performance and enhancing user experience across its device lineup.
Article translated by Levi Li
