Samsung's logic chip biz turns to AI chips and 5G for change of fortune
Samsung System LSI, which makes logic chips such as mobile application processors, sees the advent of the 5G era as an 'unimaginable business opportunity' that may turn its fortunes within a year. Expect AI chips for data centers and safety chips for autonomous vehicles soon, its chief says.
Samsung Electronics has a business dynamic that baffles outsiders, even within South Korea, but one that makes perfect sense internally. Here's how it works: Every business is on its own. Boundaries are respected between them; they can cooperate, negotiate, or, on rarer occasions, compete. It's all fair game, but it's more contract than dialogue. It has three CEOs -- in mobile, consumer electronics, and semiconductors. These are then subdivided further. For example, Device Solutions (DS), the conglomerate's semiconductor business, is divided into Memory, Foundry, and System LSI, each with its own president.
The company is not shy about offloading businesses that don't meet its high performance standards, can't scale, or lack long-term vision. It sold its printer business to HP in 2016. It killed its digital camera division last year. System LSI, which makes logic chips, and Foundry, which contract-makes them for both Samsung and other firms, were under one roof up until May last year. Despite the advantages of keeping them together -- Foundry made most of System LSI's products for use mostly by Samsung itself -- the conglomerate split them up.
In the first quarter of the year, Samsung's semiconductor business posted 20.78 trillion won in revenue -- 17.33 trillion won from memory while System LSI and Foundry together contributed the rest. Profits were negligible outside of memory's record-high; the two other businesses are likely in the red, though the company declined to comment. Taking Samsung's culture into account, then, the implications of the split are clear. Despite their underperformance, the conglomerate sees a long-term vision in System LSI, and wants it to stand on its own two feet.
"It's a forward-looking direction for us," said Inyup Kang, president and head of Samsung System LSI, in an interview with ZDNet at the company's Hwaseong Campus where the business is based. "We embrace the split. We don't have to look over our shoulders. In the long-run, we see both businesses increasing their respective competences."
Customer relationships have been made easier, too. "There is a Chinese Wall between our set business and component business. Now there is a Chinese Wall between the component businesses. It makes it clearer for both us and clients." The move also allows System LSI to approach other contract-chip makers such as TSMC and GlobalFoundaries. This allows the business to choose the most price-competitive partner for production.
Standing tall on its own
Whether or not Samsung is innovative is a matter of debate, but few will deny the South Korean tech giant's efficiency as a manufacturer. Despite its size -- it is the world's largest electronics maker by revenue -- it is nimble. It's the leader in markets like phones and memory chips where speed is important. If there is downside to this, it's that Samsung is production conscious. System LSI is unique in that it is now the sole business that's without a factory line. The business is now strictly R&D. Memory chips are essentially commodities. But logic chips -- which arguably take more creativity and sophisticated instructions to make -- is a different ball game, and Samsung is taking it very seriously.
"It's something we [Samsung] never done before," Kang told ZDNet. "We have changed management, increased staff by 5 percent over the past year. Our only asset is our people. I won't call it a radical change; systemically there are limitations for us to do so."
In a refreshing admittance for the company, Kang said he found the business' competence "still very much lacking".
"There are still many shortcomings we have to overcome. But we have a clear roadmap that looks at the next three-year and the next five-year period," the president stressed. "We want to talk with results." The president said System LSI is very open to merger and acquisitions (M&A) going forward as a way to increase competence but declined to comment on specific targets.
All of System LSI's products are in fierce competition. Its CMOS image sensors, which it rebranded ISOCELL last year, are runner-up to Sony, but it's a level playing field with varied players such as SK Hynix and Toshiba, among others. Samsung has reduced the pixel size to .9 micrometer so far, the industry's first smaller than 1 micrometer. Both Sony and Samsung's recent image sensors have an embedded DRAM layer.
"Our number one priority is technology breakthrough, especially in pixels," Kang said. "Then it's in market share. We are the runner-up, yes, but I would say we are still far behind."
In fingerprint sensors, the situation is less clear. According to IHS Markit, "under-display" fingerprint sensors will reach 9 million units this year and 100 million in 2019. The players are: Synaptics, Goodix, Qualcomm, Egis Technology, Samsung System LSI, FPC, VkanSee, CrucialTec, BeyondEyes, and FocalTech.
"We are working hard on development. But it is up to Samsung Mobile [to] decide which vendors to choose," the president said. According to company insiders, Samsung Mobile rejected System LSI's sensors last year.
There are rumours that Samsung was developing its own graphic processing unit (GPU) but Kang declined to comment on the matter.
The flagship of the company is its mobile application processors (AP), branded Exynos. Samsung is ranked behind Qualcomm, Apple, and MediaTek in APs. The majority of them are used by Samsung's own mobile business. Another client is Meizu Technology in China, though the company was "always in active discussion with Chinese vendors".
But the AP market, or to be more exact, the one-chip set market, is a complicated situation --the elephant in the room is Qualcomm. And that is ripe for change when 5G arrives.
Bye bye, Qualcomm?
Samsung and Qualcomm have a nuanced relationship. For Foundry, the US chip giant -- which doesn't have its own fab, or factory line -- is an important client for contract production. For System LSI, Qualcomm is a competitor. The South Korean tech giant first launched its own AP in 2010 for use in its own Galaxy smartphone brand. The brand Exynos was introduced in 2011. In the beginning, Samsung didn't integrate its AP with a modem chip. It didn't have its own modem so it used those of other vendors.
The US chip giant, meanwhile, launched its Snapdragon series of System-On-a-Chip (SoC) that integrated AP and its own CDMA-compatible modem, helping it become the dominating player in mobile that it is today. Samsung's Galaxy series, the biggest buyer of the chips, was a direct contributor to Qualcomm's growth, especially in 2013 and 2014. One-chip was the dream of smartphone vendors. Samsung began its attempt to integrate its self-developed modem during the same period, starting in the low-end.
AP use for Samsung smartphones was effectively split in half: Snapdragon for North America and China (Verizon and Sprint uses CDMA) and Exynos (GSM) for other markets such as Europe and Asia. There was a practical reason for this co-existence: Samsung couldn't handle the AP need of its huge volume of smartphones alone. Despite Qualcomm's AP being pricier -- the company having to buy the chips and pay a licensing fee -- the smartphone market was enjoying stellar growth, so no one really had an incentive to upset the status quo. Samsung Mobile also found System LSI's AP technology not up to its standard, according to insiders.
The licensing agreement disputes between Qualcomm and smartphone vendors began to boil over slowly in late 2014, however. In 2015, Snapdragon 810's overheating issue caused Samsung to go all-Exynos in the Galaxy S6 series. And in 2016, Samsung unveiled the Exynos 8890 with its own integrated LTE modem on the Galaxy S7 series, its silent rebuke of sorts against Qualcomm. Fair trade regulators in South Korea and China announced fines against the US chip giant for unfair licensing practices. The company rolled dead for China quickly in 2015 and paid $975 million to resolve the dispute. Korean authorities in December 2016 announced a 1.03 trillion won fine against Qualcomm -- Samsung was the main plaintiff in that dispute. The US chip giant has since faced litigation from Apple for the same licensing practices.
However, the dispute in Korea is seen as sizzling down as the two companies renewed their licensing agreement earlier this year, with Samsung withdrawing from the anti-trust dispute. The South Korean tech giant likely got a favorable deal against the US chip conglomerate. Kang declined to comment on the new licensing agreement or Qualcomm.
"In terms of modem technology, we are completely independent. We have achieved and excelled at integrating the AP with the modem. Moving forward, we will make strategic choices that best meet market needs," Kang said, leaving open partnership options.
In the 4G era, Samsung has already reached peak compatibility and speed. The 10-nanometer Exynos 9 series 9810 -- which powers the Galaxy S9 series -- supports Cat.18 LTE, or 6CA (Carrier Aggregation). The company supports all six modes -- CDMA, GSM, TD-SCDMA, WCDMA, LTE-FDD, LTE-TDD -- which allows it to roll out phones anywhere in the world.
5G: The ultimate opportunity
Samsung's technology independence is a clear foundation for possibly System LSI's biggest opportunity: 5G. In December last year, the first 5G NR standard was approved by the 3GPP, the global standard-setting body. It is clear that the next-generation network will be built atop the foundations of LTE and LTE-Advanced currently deployed for compatibility. An advantage in LTE is an advantage in 5G.
"5G is an opportunity Samsung System LSI cannot miss," Kang said. "In terms of technology we are complete. We are prepared in every way. Results will be clearly seen within a year."
The South Korean tech giant has been in full discussions with global telcos and the five top vendors in network equipment, the president said.
"We believe there will be drastic changes in the system semiconductor industry. Their respective performances in 5G, IoT [Internet of Things], and AI will determine how big a company will grow in the future. It will provide an unimaginable business opportunity," he said.
The overall antagonism against Qualcomm can be seen as a prelude to the coming war in 5G. The US chip giant has ruled with an iron fist for the past 10 years of 4G LTE -- challengers Intel, Nvidia, Broadcom, among others, all more or less failed. And global top smartphone vendors are saying no more. Qualcomm announced the Snapdragon X50 5G NR modem at CES earlier this year, going so far as to announce their handset and device manufacturing partners. Big names were curiously absent.
Apple, meanwhile, is cozying to Intel and going its own way at the same time with its A series. How they proceed will depend on the ongoing lawsuit. Huawei's subsidiary HiSilicon and Samsung System LSI are securing their own leverage as much as possible in terms of technology while keeping an open mind for "strategic partnerships".
"The competition will be fierce. In South Korea, the first commercial 5G service will be launched within the first half of 2019. Timing and performance will determine who succeeds and who fails," said Kang. "There will be many unforeseen circumstances and problems. It's really hard to predict."
AI chips for data centers, safety chips for cars
Concurrently with 5G in mind, System LSI has been preparing a yet-to-be-announced line-up for AI and autonomous vehicles. The South Korean tech giant is preparing an AI chip for use in datacentres, specifically for network intelligence. Another one in the pipeline is a safety chip for autonomous vehicles -- chips that crunch sensor data to hit the brakes. Kang didn't elaborate further but the safety chip likely uses ARM's Cortex-R52 chip designed for that purpose. Samsung uses ARM architecture for all its logic designs.
Samsung also expanded its Exynos brand outside of mobile in recent years. Exynos i T200, a chipset for IoT applications, was launched in 2017.
"Exynos i T200 performed much better than we expected in terms of revenue," the president said. "We are just getting to learn the IoT ecosystem." Its ExynosAuto brand, which provides chip solutions for automobile, clinched its first client, Audi, last year. The South Korean tech giant is now looking forward to more partnerships with European car makers, Kang said.
Neighbouring China is big in autonomous vehicles, AI, and security. According to the 2017 China Artificial Intelligence Industry Data Report released by China Information Technology Institute, the country's AI market reached 21.69 billion yuan in 2017, an increase of 52.8 percent year-on-year. It expects the market to grow to 33.9 billion yuan ($5.3 billion) in 2018. By 2020 this will grow to be worth 150 billion yuan, it said. Chinese telcos China Telecom, China Mobile, and China Unicom have all vowed investment. China also deploys a system logic project with a larger scale than other countries. The massive population provides massive data, making a perfect testing ground for sophisticated logic.
"We are studying the market. There are some very interesting developments in AI, sensors and camera. It's not an easy market to enter but we are keen on finding new opportunities," said Kang.
Going forward, System LSI envisions new products that capitalise on Samsung's large library of technologies. "We have a portfolio that includes SoC, CMOS image sensor, and displays. We are planning to fuse these together to deploy new products. The market will see soon," he added.
One of the biggest bits of news in the logic chip industry in recent years was arguably Japanese tech giant SoftBank's $31 billion acquisition of UK chip company Arm. Arm's customers use its designs or create their own chips using the UK firm's architecture by paying licensing fees. There has been little effect in the short-term, but it's a long bet that can affect the market in the future.
"We have a comprehensive licensing agreement with Arm," said Kang. "So we don't expect an effect in our bottom line for the foreseeable future. But it could possibly at a later date."
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