Samsung to Follow TSMC in Halting 7nm Supplies to China
According to a report by Taiwan's Economic Daily, following TSMC's decision to halt advanced 7nm and below process foundry services for AI chip companies in Mainland China, recent rumors suggest that Samsung's foundry division has also issued similar notices to its Chinese clients. In response, Samsung stated it does not comment on market rumors.
Earlier this month, Chosun Ilbo reported that, according to sources familiar with the matter, Samsung had shut down more than 30% of its P2 and P3 production lines in Pyeongtaek, South Korea, to reduce wafer fabrication capacity. The company plans to extend the shutdown to 50% by the end of the year, affecting 4nm, 5nm, and 7nm processes. Samsung intends to monitor customer orders while gradually ceasing operations.
Industry experts believe that Samsung's move to temporarily close some foundry lines is driven by cost-cutting efforts. The company's foundry business suffered a significant loss in Q3, potentially reaching 1 trillion Korean won (approximately $724 million), prompting Samsung to take cost-reduction measures, including deactivating some production lines. However, some also speculate that Samsung might have taken action in response to TSMC's "violation" of foundry rules last month, which led to its decision to suspend 7nm and below process services for certain Chinese clients. This could indicate Samsung's plan to extend its process line closures to 50% by year-end.
As TSMC, under pressure from the U.S. government, began halting advanced process services for Chinese AI chip companies, some firms have reportedly reached out to Samsung for alternative foundry services, hoping to replace TSMC's suspended offerings. Currently, only TSMC, Samsung, and Intel are capable of providing 7nm and below advanced process foundry services, but Intel is more restricted due to U.S. regulations, limiting its potential as a viable alternative.
Although the U.S. has yet to formally impose relevant restrictions, Samsung may have received similar notifications from the U.S. Department of Commerce, encouraging the company to follow TSMC's lead. Industry sources, including Reuters, confirm that the U.S. has already sent a letter to TSMC, urging the company to implement export controls on certain 7nm and below AI chips being shipped to Mainland China. Market research firm TrendForce notes that TSMC is revising its customer identification process (KYC) and plans to tighten its screening standards for customer discussions and wafer engagements. This expanded review could include additional chip size and HBM limitations, alongside existing regulations on HPC chips' processing power and transistor density.
TrendForce suggests that TSMC will likely enforce these new restrictions, but the extent of their impact will depend on the U.S. Department of Commerce's updated export control guidelines and whether additional Chinese companies are added to the Entity List.
Looking at TSMC's revenue distribution, advanced processes accounted for about 67% of its income in the first three quarters of this year, with the majority of clients being based in Europe, the U.S., and Taiwan. Although stricter screening may cause some Chinese clients to lose access, the growing demand for AI chips globally could help offset the lost business, limiting the impact on TSMC's advanced process capacity utilization.
In terms of regional revenue, TSMC's earnings from Mainland China accounted for approximately 11-13% of its total revenue in 2023 and the first three quarters of 2024. If the review of 7nm and below processes expands, or if Chinese clients are placed on the U.S. Entity List, TSMC could see a 5-8% drop in quarterly revenue.
In addition to the direct impact on Chinese AI chip designers, other semiconductor-related businesses, including EDA tool vendors, semiconductor IP providers, and third-party design service companies, will likely face negative repercussions. If designs for 7nm and more advanced processes cannot be produced, the need for related EDA tools, IP, and design services will diminish significantly.
