Samsung's HBM3E Has Been A Disaster, But There's A Path Back

Comment Despite reporting a seemingly impressive 274 percent increase in operating profit for calendar Q3 2024, Samsung Electronics is in crisis mode. Beneath these financials lies a semiconductor strategy that is unraveling, posing serious challenges for the South Korean tech giant.

The company last week issued a public apology to investors, customers, and employees, indicating awareness of the hurdles it faces. The reported profits mask deeper issues, including missed market opportunities, competitive setbacks, and a leadership shake-up that suggests internal turmoil.

At the core of Samsung's difficulties is a series of missteps in its semiconductor business. The company had promised substantial advancements to investors, betting heavily on technologies like its 12-layer HBM3E (high-bandwidth memory) chips. However, these efforts were marred by failures, allowing competitors to gain an advantage.

Samsung's venture into 12-layer HBM3E has not met expectations. The product was intended to capitalize on the burgeoning AI market, and indications were that Samsung would supply essential components for Nvidia's next-generation GPUs. Instead, the rollout has become hindered by thermal issues and excessive power consumption. These technical problems are particularly detrimental when – as was reportedly the case – the key customer is Nvidia, a leading player in AI hardware known for stringent supplier requirements. After months of reported missed deadlines and unresolved issues, Nvidia appears to have bought a substantial amount of product from SK hynix.

The problem of not immediately being able to meet the need for certain advanced AI chips sends a message to the industry about Samsung's reliability. In a rapidly growing memory market fueled by AI, potentially losing key players like Nvidia could be a substantial setback. While Samsung addresses its technical issues, SK hynix and Micron have capitalized on the opportunity, establishing themselves as the tech industry's preferred suppliers of functional 12-layer HBM3E memory. This situation damages Samsung's reputation as a leader in memory chips and may have long-term repercussions.

In response to these challenges, Samsung has undertaken a major corporate restructuring. Top executives across the memory, foundry, System LSI, and manufacturing divisions were replaced, with new leadership appointed in key roles. While Samsung presents this move as a strategic initiative, it appears to be a concerted effort to demonstrate seriousness in addressing the problems. However, merely changing management may not be sufficient to resolve fundamental issues in product delivery and quality.

In the foundry business back in May, Kye-Hyun Kyung has assumed leadership in an environment dominated by Taiwan's TSMC. Samsung had previously sought to attract customers like AMD and Apple by promising superior performance compared to TSMC. However, the reality has been less favorable as Samsung struggled with poor production yields. Kye's objective is to improve these yields, regain client trust, and demonstrate that Samsung's foundry ambitions are credible. Given TSMC's strong reputation and consistent performance in advanced node manufacturing, this will be a challenge.

Lee Jung-bae, a DRAM technology veteran and President of Samsung's memory business, faces the formidable task of rectifying the HBM3E issues and ensuring that Samsung can deliver products that meet Nvidia's rigorous standards – a goal that has reportedly proved elusive thus far. His priorities include resolving thermal and power consumption problems, and preventing future iterations of Samsung's high-bandwidth memory from encountering similar setbacks.

Samsung's difficulties are not limited to HBM3E. Persistent yield issues have reportedly disrupted production foundry operations, leading potential customers like AMD and Apple to rely on TSMC instead. Samsung's next-generation technologies, including its 3nm Gate-All-Around (GAA) process, were initially delayed and have underperformed, allowing TSMC to maintain its lead with reliable output and the confidence of major trade consumers which also include Intel and Nvidia.

Samsung's 3nm GAA technology was intended to be a breakthrough that would close the gap with TSMC. GAA, with its advanced transistor structure, promised better power efficiency and performance compared to older FinFET technology.

Meanwhile, TSMC has successfully shipped 3nm chips to customers including Apple for its latest iPhones. Samsung's ongoing production issues hinder its ability to compete effectively with TSMC.

• Samsung apologizes for bad financial performance
• Samsung chairman debunks foundry, chip biz spinoff rumors
• Samsung fined just $8K for exposing chip fab workers to X-ray radiation
• SK hynix begins mass production of 36 GB 12-layer HBM3E

Collectively, these problems represent notable obstacles for Samsung's semiconductor division. Nvidia's decision to work with SK hynix not only signifies a lost opportunity but also highlights to industry that Samsung may no longer be the reliable memory supplier it once was. While SK hynix and Micron are meeting market demands with high-bandwidth memory chips, Samsung continues to grapple with technical issues and delays. Concurrently, TSMC is outperforming Samsung in the foundry business, consistently delivering 3nm chips to customers while Samsung deals with production hiccups.

For things to change, the tech giant must address the following areas:

Fix HBM3E promptly: Samsung needs to resolve the thermal and power consumption issues affecting its HBM3E memory as soon as possible. Additionally, the company must invest in research and development to ensure that future products, such as HBM4, are developed without repeating past mistakes. Staying ahead of market trends is crucial for regaining a competitive edge.

Improve 3nm production yields: Rectifying the yield issues in its 3nm GAA process is essential. Stabilizing production and achieving competitive yields are necessary to attract major customers like AMD and Apple. Without reliable manufacturing processes, Samsung's ambitions in the foundry market will remain unfulfilled.

Rebuild customer trust: Regaining the confidence of major industry players requires consistent and reliable performance. Samsung may need to adopt a strategy of under-promising and over-delivering, focusing on meeting commitments rather than making bold claims.

Can Samsung overcome these woes? Possibly, but the path forward is arduous. Competitors have secured strong positions in key markets. However, the semiconductor industry is dynamic, and with the right strategies and flawless execution, Samsung can work toward reclaiming its leadership role.

Failure to effectively address its current shortcomings risks relegating Samsung to a secondary position in a market it once dominated. ®