Demystifying TSMC and Samsung's 30-year history of change

Core stuff reported on June 28 that recently, market analysis company TrendForce data shows that the average delivery time of semiconductor equipment has been extended to 18-30 months. The status quo of key semiconductor equipment and materials such as silicon wafers, electronic special gases, photoresists, and lithography machines has attracted industry attention. Among them, the leading wafer manufacturing industry's drive to local equipment and materials companies cannot be ignored.

Judging from the latest ranking of global foundry companies, TSMC and Samsung are the top two leaders and the biggest rivals in the foundry field. In the competition of the chip process approaching the physical limit, they have also driven the development of the semiconductor industry in Taiwan and South Korea respectively.

In recent years, the global semiconductor industry chain has begun to differentiate. Both TSMC and Samsung are emphasizing local supply capabilities, but the two sides have adopted completely different layout strategies.

TSMC requires upstream suppliers to build factories around its production base as much as possible. From 2004 to 2021, its suppliers will change from 14 to 41, and the number of local suppliers in Taiwan has changed from 1 to 7; Samsung In person, in 2020 and 2021, it has invested in 9 semiconductor equipment and material companies in a row to strengthen the layout of the industrial chain.

For both TSMC and Samsung, the local supply chain is a key part of their strategy. But at the same time, they did not break away from the global semiconductor supply chain to start a new business, but on the basis of the global semiconductor industry, they supplemented the supply shortage through the local supply chain and gained a unique competitive advantage.

01. TSMC drives the division of labor in the semiconductor industry to lay out masks, packaging, and storage

The emergence of the foundry model is related to the entrepreneurial experience of an old friend of TSMC founder Zhang Zhongmou.

In 1984, when Zhang Zhongmou was the president of General Instruments, an American electronics manufacturer, an old friend asked him to participate in the investment, because at this time chip companies generally had their own factories and needed $50 million. Three weeks later, he learned that the old friend had started a fabless chip design company for only $5 million.

This inspired Zhang Zhongmou, who believes that fabless chip design companies will become a new development trend, and the foundry model that specializes in wafer manufacturing can also make a difference. In 1987, Zhang Zhongmou founded TSMC, focusing on the foundry.

The emergence of TSMC has accelerated the separation of manufacturing and design among Taiwanese semiconductor companies, and more chip companies have begun to separate chip design and wafer manufacturing to avoid customer concerns caused by foundry and design confusion.

With the evolution of the chip manufacturing process, Shi Keqiang, former CEO of Chuangyi Electronics, an ASIC chip design company in Taiwan, said: "All semiconductor manufacturers have found that there is no way to make a single chip by themselves, which forces everyone to cooperate or do more. Precise division of labor."

As a part of wafer manufacturing in the industrial chain, TSMC has laid out the upstream photomask (photomask), downstream packaging and testing, and memory chip fields as early as 1994.

According to TSMC's 1994 annual report, TSMC invested in Taiwan's semiconductor materials, packaging and testing, and storage companies such as Taiwan Photomask, Xincheng Technology, and World Advanced, and provided instruments and equipment to Macronix, a Taiwanese memory chip factory, enabling Macronix. Electronics manufactures wafer products for TSMC.

It is reported that Taiwan Photomask was established in December 1988 and is the earliest and largest professional photomask factory in Taiwan, China. Taiwan Photomask also inherits the experience and technical foundation of the Electronics Institute of Taiwan Industrial Technology Research Institute and can produce 0.18/0.15/0.11 and 0.09-micron photomasks.

Xincheng Technology was established in February 1993. Its main business is packaging and testing services. Investors include TSMC, Macronix, etc. The earliest chairman was Hu Dinghua, the former chairman of Macronix, and the general manager was the former head of TSMC product testing. Liu Chenglang took office.

After 1997, Xincheng Technology and Powerchip Semiconductor established a testing factory, Licheng Technology, and a testing equipment company, Xince Technology, forming a whole packaging and testing group. However, due to poor management, Xincheng Technology was eventually taken over by the Silicon Products Group

World Advanced was established in December 1994. Its predecessor was the sub-micron process technology development plan of the Taiwan Industrial Technology Research Institute. It received investment from 13 companies including TSMC. After its establishment, it focused on the development and production of DRAM and memory chips. In 1999, with the help of TSMC, World Advanced gradually entered the field of wafer foundry. In July 2004, World Advanced officially ended the DRAM business and transformed into a foundry company.

Although TSMC has invested in both upstream and downstream industry chains, as a whole, as of 2004, most of its semiconductor equipment and material suppliers are still Japanese, Korean, European, and American companies.

In 2004, most of TSMC's semiconductor material suppliers were foreign companies such as Europe, America, Japan, and South Korea (photo source: TSMC's 2004 Annual Report)

02. Samsung's equipment companies have become the world's top ten due to the intensive investment in the local supply chain due to sanctions

Similar to TSMC, Samsung Electronics' semiconductor equipment and material suppliers are also mostly global industry chain players such as Japan's Shin-Etsu Chemical, Japan's Shengco, Netherlands ASML, and American Applied Materials. The difference is that Samsung Electronics has encountered semiconductor equipment/material shortages and sanctions, so it pays more attention to localized supply chains.
Samsung Electronics’ investment in semiconductor equipment and materials (as of December 31, 2021)

Due to the inability to obtain sufficient material and equipment production capacity, Samsung Electronics established a joint venture with Japanese manufacturers to establish a semiconductor equipment company KDNS when it first entered the semiconductor industry.

In 2005, Samsung Electronics founded the foundry business and began to compete with the industry leader TSMC. In the same year, KDNS changed its name to SEMES and became a wholly-owned subsidiary of Samsung Electronics. In 2021, SEMES' revenue will be 3.12 trillion won (about 2.486 billion U.S. dollars), ranking ninth among global semiconductor equipment companies and first in South Korea.

2019 is very important for Samsung Electronics and the entire Korean semiconductor industry. That year, Japan imposed a semiconductor material ban on South Korea, prohibiting the export of three semiconductor materials, photoresist, hydrogen fluoride etching gas, and fluorinated polyimide, to South Korea.

These three materials are all key semiconductor materials that Japanese companies occupy an absolute monopoly position and have high technical barriers. In order to lift such sanctions, Samsung Electronics Vice Chairman Lee Jae-yong flew to Japan to communicate with upstream material manufacturers.

In response to Japan's material ban, South Korea announced a $6.5 billion investment plan to help South Korean semiconductor material suppliers grow. On the one hand, Samsung Electronics has selected suppliers from mainland China, Taiwan, and Belgium to replace them, and on the other hand, it has also begun to cultivate local suppliers.

In 2020 and 2021 after Japan's ban on semiconductor materials, Samsung Electronics invested in 9 semiconductor equipment and material suppliers in a row, and listed the investments of these companies as "Management Participation (participation in management)" rather than "Simple Investment ( pure investment)".

With the investment and support of Samsung Electronics, these semiconductor equipment and material companies have not only gone public but have also become a new force for the Korean semiconductor industry to break through the Japanese material blockade.

Take Soulbrain in South Korea as an example. The company was established in 1986 and its business scope includes chemical materials in semiconductor, display, battery, and other fields. After Japan initiated sanctions on semiconductor materials, Soulbrain established a new hydrogen fluoride plant in Gongju, Chungcheongnam-do, South Korea, doubling its hydrogen fluoride solution production capacity, which can meet about 2/3 of the needs of South Korean semiconductor companies. Today, Soulbrain has become a core supplier to South Korean chip manufacturers such as Samsung Electronics.

South Korea's Ministry of Trade, Industry, and Energy officials said it was the first time South Korea had localized materials since Japan sanctioned it.

In addition to its own investment in semiconductor equipment and material companies, Samsung Electronics is also accepting more local Korean companies as its suppliers. According to reports, South Korea's semiconductor laser equipment supplier EO Technics, ceramic material supplier Cinos, chemical vapor deposition system (LPCVD) supplier Eugene Technology, and plasma equipment supplier PSK have started cooperation to produce local production for Samsung Electronics' fabs. semiconductor equipment.

Sung Kyu-dong, CEO of EO Technics, said its employees are proud of Samsung Electronics' development of laser equipment.

03. Samsung strengthens its own competitiveness and TSMC's supply aggregation reduces costs

Today, Japanese semiconductor suppliers have bypassed Japan’s sanctions on South Korean semiconductor materials by setting up factories in South Korea, but the development ideas of local semiconductor equipment and materials subsidiaries invested by Samsung are also changing.

Taking SEMES, Samsung’s earliest semiconductor equipment subsidiary, as an example, its goal has changed from securing Samsung’s semiconductor equipment supply to targeting Applied Materials and Tokyo Electron to strengthen Samsung’s own chip manufacturing competitiveness through independent semiconductor equipment.

SEMES CEO Kang Changjin once said in an interview that he hopes SEMES will become a semiconductor equipment giant like Applied Materials, Panlin Semiconductor, Tokyo Electronics, and ASML. He said: "Every time the semiconductor technology is replaced, the investment cost increases exponentially. It is because of this risk that SEMES can boldly challenge new concept devices that Applied Materials and Tokyo Electron are reluctant to develop."

If SEMES develops more advanced semiconductor equipment, it will help Samsung Electronics gain an advantage in the competition with TSMC.

Compared with Samsung, TSMC has faced fewer sanctions from upstream semiconductor equipment and material manufacturers, and the local supply chain companies it cultivated are more for efficiency and cost considerations.

TSMC's procurement categories can be roughly divided into six categories: equipment, components, raw materials, factory affairs, and automation products. In Taiwan, China, TSMC's Hsinchu headquarters is responsible for the procurement of its factories; TSMC's subsidiaries in mainland China and the United States have independent procurement organizations.

To strengthen relationships with suppliers, TSMC has been promoting localized procurement to improve supply flexibility, shorten new product development time, reduce unnecessary costs, reduce carbon emissions and create more local jobs. Its official website mentions that many key suppliers have responded to TSMC's call since 2004 and have successively come to Taiwan for production.

From 2004 to 2021, the biggest change in TSMC's supply companies is the emergence of local branches and joint ventures established by foreign suppliers of Linde Group and Japan's Shenggao, and the number of suppliers has greatly increased, which has improved TSMC's supply. The diversification and anti-risk ability of the chain.

In 2004, TSMC had a total of 14 suppliers of silicon wafers, chemical materials, photoresists, and special gases, of which only Tai-Young High Tech was an enterprise established by Japan's Mitsubishi Chemical Corporation in Taiwan, China, and the rest were foreign companies; 2021 In 2018, TSMC disclosed 34 suppliers, including Global Wafer, Guangming Industrial, Shengyi Chemical, Huali Enterprise, 4 Taiwanese enterprises, and Formosa Plastics Shengco, Lianhua Linde Gas Company, Maotai Technology, etc. A foreign company establishes a joint venture in Taiwan.

TSMC supplier status (as of December 31, 2021)

In addition, TSMC's annual report shows that most of its suppliers in the three major fields of chemical raw materials, yellow light process materials, polishing liquid/polishing pad/diamond disc have built their production bases near TSMC's fab.

In order to ensure product quality, TSMC also established a cross-departmental supplier coaching team, stationed in the supplier's production line, and cooperated with suppliers from the four processes of feeding, production, filling, and testing.

04. TSMC and Samsung leverage the global industrial chain to fly semiconductors in two places

Semiconductor equipment and materials are the keys for wafer manufacturing companies to increase production capacity and yield. If there is a shortage of key equipment and materials, it will affect and drag down the process of research and development and capacity expansion of wafer manufacturing companies.

Therefore, for wafer manufacturing leaders such as TSMC and Samsung, their layout of upstream semiconductor materials and equipment must be based on the company's development strategy and its position in the supply chain.

TSMC is the leader in wafer manufacturing and has a greater say in the supply chain. It requires upstream manufacturers to arrange their factories around their factories to achieve the best efficiency and cost; Sanctions on semiconductor materials emphasize local supply, and in order to gain an advantage over TSMC, increase investment in its semiconductor equipment companies and master unique supply advantages.

It is worth noting that although the two major wafer manufacturing giants both emphasize the local supply chain, they have not abandoned the global semiconductor supply chain, but have driven the local semiconductor industry with the help of global semiconductor material and equipment companies to achieve their own strategic goals. It is worth learning from the domestic semiconductor industry.

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