Samsung’s chip technologies fall behind in early innings of AI game

Instead, the South Korean technology giant is whiffing on opportunities and falling behind the early winners of the AI era such as Taiwan Semiconductor Manufacturing, known as TSMC, and local rival SK Hynix.

Though it is the world’s top memory-chip maker, Samsung is trailing its competitors in high-bandwidth memory chips, a type integral to AI computing. Its business of manufacturing custom chips for outside customers is losing ground to TSMC’s. And its consumer-electronics business, known to people worldwide for its Galaxy smartphones and appliances, is laying off some workers.

Samsung’s vice chairman and head of its semiconductor business, Jun Young-hyun, apologized in a public letter Tuesday, saying the company was failing to meet expectations.

“We have caused concerns about our technical competitiveness, with some talking about the crisis facing Samsung," Jun said. He said Samsung would improve its technology and revamp its organizational culture where needed.

On Tuesday, Samsung estimated its operating profit for the July-September quarter was the equivalent of about $6.8 billion. That was nearly four times the figure a year ago but still only about half the recent peak in 2021 when the memory-chip market was enjoying a pandemic-era boom. Full quarterly results are coming at the end of the month.

Samsung’s share price has dropped by around 24% since the beginning of this year, while shares of two rival makers of high-bandwidth memory—South Korea’s SK Hynix and Micron Technology of the U.S.—have gained more than 20%. TSMC’s shares have jumped about 70% this year.

AI hardware

The divergence reflects who is dominating AI-related hardware. Training and operating generative AI models such as the one behind the chatbot ChatGPT requires advanced processor chips, most often from Nvidia. Those chips in turn work with high-bandwidth memory chips to enable the type of algorithms powering generative AI systems.

SK Hynix has emerged as the main supplier of high-bandwidth memory chips to Nvidia. While SK Hynix and Micron began supplying the newest generation of these chips to Nvidia this year, Samsung is still in the final stages of passing Nvidia’s quality standards, according to people familiar with the matter.

Samsung on Tuesday acknowledged delays in bringing the latest version of high-bandwidth memory, HBM3E, to major customers.

“AI is the way to go, but Samsung made a lot of mistakes" that “are taking time to rectify," said Sanjeev Rana, a Seoul-based technology analyst at brokerage CLSA.

In May, Samsung replaced the head of its semiconductor business, who had admitted to early missteps in developing the AI memory chips. The company also has a separate chief for the consumer-products business who also serves as CEO, with Executive Chairman Lee Jae-yong presiding overall and setting strategy.

No. 1 in foundry business

In 2019, Samsung laid out its vision to become the No. 1 player not only in memory chips but also in the logic-chip foundry and chip-design businesses by 2030. The foundry business involves making chips on a contract basis for customers such as Nvidia, Qualcomm and Apple that design chips but don’t have their own factories to manufacture them.

Three years ago, the South Korean tech giant doubled down with a $205 billion investment pledge directed largely at semiconductors. It later announced plans to build more foundry facilities in the U.S.

But Samsung’s gap with TSMC has only widened. TrendForce, a research firm, estimates that TSMC’s share of global foundry revenue this year will be about 64%, up from 51% in 2019. Samsung’s share is forecast at 10%, down from 16% over the same period.

In recent months, Samsung’s foundry division has decided to delay installing equipment at facilities in Pyeongtaek, South Korea, and Taylor, Texas, as part of cost-cutting measures, according to people familiar with the matter. The decision comes after the company made slower-than-expected progress with its advanced manufacturing processes and couldn’t get as much business as it hoped with major customers such as Qualcomm, they said.

A Samsung spokesman said there was no change to the construction schedule for both sites.

Samsung’s foundry business offers limited manufacturing capacity relative to TSMC, in part because of low yields on cutting-edge production—broadly referring to the number of chips that can be harvested from a wafer—said Joanne Chiao, an analyst at TrendForce.

While TSMC has focused solely on making chips for customers since its founding, Samsung’s traditional strength lies in memory chips where all steps from design to manufacturing are handled in-house. Intel, with roots as an all-in-one logic chip designer and producer, has similarly struggled to build out its foundry business.

TSMC also maintains a lead over rivals in advanced chip packaging, an area that is rising in importance for improving chip performance.

Chiao said customers wanted to have other foundry options beyond TSMC to mitigate geopolitical and other risks. “Samsung has good opportunities to get more customers, but they need to improve first," she said.

Trimming head count

On the consumer-electronics side, Samsung has been trimming global head count in its overseas subsidiaries including in the U.S. and India, focusing on support staff in roles such as sales and marketing, according to people familiar with the matter.

A Samsung spokesman said some overseas subsidiaries were conducting routine workforce adjustments to improve efficiency. He said the company hasn’t set a target number for any particular positions.

Overall growth in smartphones has slowed down in recent years amid economic uncertainties and lengthier phone-upgrade cycles. In recent years, Samsung has ceded share to Apple in the high-end segment while battling Chinese competitors in less-expensive phones that run the Android operating system. Smartphones with AI capabilities have yet to become a must-have for consumers.

But there was a sign of promise in Tuesday’s earnings report. Samsung said it saw strong sales of its flagship smartphones in the quarter.

Write to Jiyoung Sohn at jiyoung.sohn@wsj.com