Samsung is making strides to "make a comeback" and is narrowing the gap in the "race" to catch up with NVIDIA in AI chip supply

According to the financial news app Zhitong Finance, Samsung Electronics (SSNLF.US) has made progress in narrowing the gap with its competitor SK Hynix in developing storage chips crucial to the artificial intelligence market after facing a series of setbacks. Insider sources revealed that this includes obtaining approval for a long-awaited high-bandwidth storage chip called HBM3 from the artificial intelligence giant NVIDIA (NVDA.US). Additionally, the company is expected to receive approval for the next generation HBM3E within two to four months.

After several months of setbacks, Samsung has finally made progress. Previously, the giant had experienced development errors, allowing the smaller scale SK Hynix to emerge in the industry and take a significant lead. Historically, Samsung, South Korea's largest company, has been a leader in the memory chip market due to its scale and engineering expertise, but unusually, SK Hynix caught up with them. Furthermore, facing difficulties in the HBM field, Samsung took the unusual step of replacing the head of its semiconductor division in May.

Tirias Research analyst Jim McGregor stated, "We have never seen Samsung in this situation before. The industry and NVIDIA need Samsung more than anyone else, but they need Samsung to go all out."

Samsung declined to comment on specific partners but stated that overall, the company is closely collaborating with customers, and current testing progress is smooth.

The achievements made by Samsung this time are likely to capitalize on the demand for artificial intelligence products. According to Morgan Stanley, the HBM market is expected to increase from $4 billion last year to $71 billion by 2027. The sooner Samsung gains support from the artificial intelligence accelerator leader NVIDIA, the more revenue it can generate from this trend.

Morgan Stanley analysts Shawn Kim and Duan Liu wrote in a research report this month, "Investor sentiment towards Samsung may change soon, as the situation is rapidly improving."

These two analysts have listed Samsung as their top pick stock. They believe that by 2025, Samsung's market share in the HBM market will increase by at least 10%, with revenue increasing by about $4 billion. Although it will still lag behind SK Hynix in this field, this progress may change investor sentiment and boost the stock price.

Samsung will announce its second-quarter financial report this Wednesday, at which time its HBM strategy may face scrutiny. It is currently unclear how much detail the company will provide.

However, while Samsung seems poised to receive approval from NVIDIA by November, the company is still working to address certain issues. Given the complexity of artificial intelligence chips, the outcome is unpredictable. Insiders say that their timeline could slip to 2025.

Samsung's lag behind its peers comes at an unusual time for the company. Chairman Jay Y.Lee spent years battling prosecutors over bribery and corruption charges, while the company's top management did not prioritize HBM. In fact, before the launch of ChatGPT by OpenAI at the end of 2022, sparking a frenzy for NVIDIA chips to train AI models, the market was in a period of great uncertainty Although SK Hynix is ready to meet the surging demand, Samsung is still working on solving the complex engineering issues of new chips. HBM is composed of a stack of DRAM chips, with the latest generation being 8 layers (each layer generates a large amount of heat), which are then integrated into NVIDIA's Graphics Processing Units (GPUs). The GPU itself can reach 100 degrees Celsius, and without proper heat dissipation and cooling materials, the entire stack faces the risk of melting.

Bloomberg Intelligence analyst Jake Silverman stated, "As the number of layers increases, developing reasonable yields will become more difficult. The issue lies in heat dissipation: the heat generated is because it is stacked DRAM, which is very close to the GPU, and the GPU operates at a higher temperature."

An anonymous source familiar with the matter mentioned that Samsung has encountered trouble in addressing this so-called thermal coupling issue. In May of this year, the company took dramatic action by announcing that the head of the semiconductor division, Kyung Kye-hyun, would step down and be replaced by Jun Young-hyun.

Jun joined Samsung in 2000 and helped develop DRAM and flash memory chips. At the age of 63, he held a series of meetings to discuss technical details and focused on finding the root cause of the problem. According to an insider, during a meeting that lasted for several hours without interruption, he lamented that HBM might be part of a broader issue.

However, not only does Samsung face risks of lagging behind in memory chip technology, but there is also a possibility of falling behind in the urgency of innovation. To foster collaboration, the company restructured the team focusing on HBM and appointed a new leader.

Samsung uses a thermal compression non-conductive film (TC-NCF) thermal management strategy to isolate each layer of DRAM. In contrast, SK Hynix has pioneered alternative solutions to improve heat dissipation and yield.

Nevertheless, Samsung chose to persist with TC-NCF and improve it, without opting for other methods. A company spokesperson stated that TC-NCF is a "validated technology" that will be used in future products.

Insiders mentioned that ultimately, the company modified the design of HBM to address heat and power consumption issues. This led to HBM3 receiving approval from NVIDIA.

Samsung stated that Jun has always prioritized a culture of collective deliberation and perseverance in problem-solving since taking office. The company added, "Our HBM products do not have issues related to heat and power consumption," and there have been no "design changes for specific customers."

Samsung's "lifeline" may lie in the fact that most of the growth in artificial intelligence is in the future. Tech giants such as Microsoft, Alphabet (Google's parent company), Amazon, Apple, and Meta Platforms are all investing heavily to develop their capabilities.

According to details from Samsung's quarterly report, the company began producing HBM3 chips from the second half of last year. Companies like Google, which design their own chip functions, are expected to continue using HBM3 for most of this year Samsung has started supplying HBM3 to NVIDIA for its H20 chip, which is a product customized for China to comply with US export controls.

As for HBM3E, NVIDIA is pairing SK Hynix chips with its own H200 chip, with this technology entering the market for the first time this year. Analysts at Sanford C. Bernstein stated in a report in July that by 2025, almost all of NVIDIA's products will continue to use HBM3E, while its chip competitors will also continue to use it even in 2026.

Analysts led by Mark Li wrote, "Samsung is late to the game, but the window for HBM3E will still be reserved for Samsung, which is striving to catch up."

Micron Technology (MU.US) announced earlier this year that NVIDIA has approved the use of its HBM3E chip for the company's artificial intelligence devices. Micron, which has historically lagged behind its Korean competitors in scale, now claims to be leading in some areas of memory manufacturing and product launches, further indicating that Samsung's dominant position is being eroded.

However, a significant advantage that Samsung possesses is its financial resources and production capacity. Once meeting NVIDIA's approval standards, Samsung can quickly ramp up production to address shortages faced by NVIDIA and other AI advocates.

Silverman from Bloomberg Intelligence stated, "Micron and Hynix do not yet have the capacity to support the entire market," adding that NVIDIA CEO Jensen Huang "wants to encourage them" as NVIDIA needs more supply.

SK Hynix has not given up and has even managed to steal the spotlight from its more well-known competitors. Since early 2023, the company's stock price has surged by over 150%, more than triple the performance of Samsung's stock.

SK Hynix announced last week that it is currently accelerating the production of HBM3E products, aiming for over 300% growth. The company also mentioned plans to mass produce the next generation 12-layer HBM3E chip this quarter and start supplying to a customer in the fourth quarter, which may indicate NVIDIA's certification is imminent.

Meanwhile, under Jun's leadership, Samsung is making progress. It has developed its own 12-layer HBM3E technology and is working to obtain approval from NVIDIA for this generation of chips as well as the 8-layer HBM3E. This is also a sign of future market prospects.

Analysts at Morgan Stanley wrote, "By our estimates, by 2027, this will be a $71 billion revenue opportunity, and it is continuously growing, which did not exist two years ago. The key debate for Samsung is whether it can become a strong second supplier after NVIDIA."