How Samsung became the world’s No. 2 advanced chipmaker and set the stage for a U.S. manufacturing boom

Samsung's brand is everywhere. From Galaxy phones and smart TVs to washing machines and refrigerators, the company says its products can be found in nearly three-quarters of U.S. households. 

But Samsung is much more than gadgets and appliances, and there's another reason why it's one of the world's most valuable companies. It's the second-biggest maker of chips that are powering so many popular devices.

For more than three decades, Samsung has been a leader in memory chips, which are used for digital data storage. But that's been a market in turmoil. Over the last year, prices for memory chips have taken a dive, and they're expected to fall up to 23% more in the current quarter. In April, Samsung reported dismal earnings for the first quarter, with profit plunging to its lowest level since 2009.

Samsung responded by cutting production of memory chips. Elsewhere in the industry, smaller rival Micron said recently that it expects to slash 15% of its workforce.

Amid the wreckage, the giant company has found growth in another corner of the semiconductor market, doubling down on its foundry business, the side that makes custom chips for massive customers like Qualcomm, Tesla, Intel and Sony, as well as thousands of smaller players.

Samsung is building a $17 billion chip fabrication plant, or fab, in Taylor, Texas, where it's promised to start the first U.S. production of advanced chips next year. In February, applications opened for companies like Samsung to get their cut of the $52.7 billion CHIPS and Science Act, passed by lawmakers last year with the aim of bringing chip manufacturing to the U.S. after 30 years of market share losses to Asia.

Samsung is also adding capacity in its home country of South Korea, spending $228 billion on a mega cluster of five new fabs that are scheduled to come online by 2042.

"They're spending and spending and spending," said Dylan Patel of research and consulting firm SemiAnalysis. "And why is that? So they can catch up on technology, so they can continue to maintain their leadership position."

Samsung is one of only three companies that manufacture the world's most advanced chips, ranking second behind Taiwan Semiconductor Manufacturing Company and ahead of Intel.

Now Samsung is setting its sights on catching TSMC.

"We do not settle to be No. 2," said Jon Taylor, Samsung's corporate vice president of fab engineering, in an interview. "Samsung is never satisfied with No. 2 as a business, as a company. We're very aggressive."

The company announced an ambitious new road map in October, pursuing a goal to triple capacity of leading-edge manufacturing, and to make industry-leading 2-nanometer chips by 2025 and get them down to 1.4-nanometer by 2027.

"If Samsung hits their targets, they'll leapfrog ahead of TSMC, but that's a big if," Patel said. "TSMC is the only one that the industry trusts to hit their road map."

CNBC recently went inside Samsung's Austin chip fab, for the first in-depth tour given on camera to a U.S. journalist. While there, we got a rare interview with the head of Samsung's U.S. chip business, Jinman Han.

A 34-year veteran of the company, Han's U.S. oversight includes the foundry operations and the memory chips business.

"We really want to be a bedrock for U.S. industry," Han told CNBC.

Samsung got its start 85 years ago, when founder Lee Byung-chull created it as a trading company for exporting fruit, vegetables and fish in Korea. 

"His vision was for our company to be eternal, strong and powerful," Han said. "So, he chose the name Samsung, which literally means three stars."

To survive two major wars, the company diversified into industries like textiles and retail. Samsung Electronics was established in 1969, the first Samsung TV came out in 1972, and two years after that Samsung bought Hankook Semiconductor in a bold effort to establish the vertically integrated consumer electronics giant the company is today.

Samsung opened its first U.S. offices in New Jersey in 1978. By 1983, it was making 64KB dynamic random-access memory (DRAM) chips, which were commonly used in computers, and the company had a new U.S. office in Silicon Valley.

Lee Kun-hee took over after his father's death in 1987, and Samsung's first mobile phone came a year later. And now Samsung is the world's biggest smartphone provider, going head-to-head with Apple.

Just a decade after making its first memory chip, Samsung was coming to market with a version that had 1,000 times the capacity. It gained international acclaim in 1992 with the world's first 64MB DRAM chip, placing the company squarely in first place in memory, where it remains today.

"Its presence is so ubiquitous in South Korea that they call their country the Republic of Samsung," said Geoffrey Cain, author of the book "Samsung Rising," published in 2020.

Samsung started making chips in the U.S. with its fab in Austin, Texas, which broke ground in 1996. It opened a second fab in the Texas capital city in 2007. Today, Samsung's Austin operation is entirely devoted to foundry.

Samsung's expansion has brought with it some legal conflict.

In 2018, the company finally ended a seven-year legal battle with Apple over whether Samsung copied the iPhone. Terms weren't disclosed.

"Apple got a payment from Samsung, so Apple technically won," Cain said. "But when you add up all the legal costs, all the fighting, all those years, it was just a neutral zero on zero for both sides."

Challenges haven't been limited to the courtroom.

In South Korea, protests have erupted around Jay Y. Lee, the third generation of Samsung's founding family to take the helm. He served time in prison for bribery before being pardoned in August and becoming executive chairman in October.

And during the pandemic, Samsung was hurt by the global chip shortage as demand peaked and the supply chain was disrupted.    

"It was really painful," Han said. "When you look at your customers asking for more chips, but there's no way you can provide that, it was so painful."

That dynamic is changing. As consumers rein in their spending in the face of rising inflation, demand for memory chips has weakened sharply. Han said Samsung's internal data analysis shows "the market will rebound possibly by end of this year."

Investors have already been coming back. The stock dropped almost 30% last year, alongside a broader decline in the global tech industry. The shares are up 28% this year and hit a 52-week high on June 5, on the Korea Stock Exchange. Morgan Stanley recently named it a top pick.

Part of the rally may reflect the latest chapter in the geopolitical chip war between China and the U.S.

In May, China banned products from U.S. memory maker Micron, which led to a stock pop for Samsung. The U.S. also granted Samsung a one-year waiver to operate its two chip fabs in China, despite new rules in October that stop many chip companies from exporting their most advanced technology to the world's second-biggest economy.

Samsung says it's adding capacity in Taylor, Texas, which is northeast of Austin, because of U.S. demand. More than 90% of advanced chips are currently made in Taiwan.

"Bringing Taylor on board is just going to increase their ability to source their chips domestically and not have to go into areas of the world where they may have some discomfort," said Samsung's Jon Taylor.

Over the last three decades, the U.S. share of global chip production has plummeted from 37% to just 12%. That's largely because estimates show it costs at least 20% more to build and operate a new fab in the U.S. than in Asia, where labor is cheaper, the supply chain is more accessible and government incentives are far greater.

For Samsung's Texas expansion, environmental concerns are big and growing.

The highest-price pieces of equipment Samsung will bring into Taylor are probably the $200 million EUV lithography machines made by ASML. They are the only devices in the world that can etch with enough precision for the most advanced chips. 

Each EUV machine is rated to consume about 1 megawatt of electricity, which is 10% more than the previous generation. One study found Samsung used more than 20% of South Korea's entire solar and wind power capacity in 2020.

"Electricity is the lifeblood of a semiconductor fab in a sense," said Patel of SemiAnalysis. "There have been multiple instances where electricity has gone out and companies have had to scrap months of production."

Texas' energy grid is largely cut off from its neighbors, limiting its borrowing power across state lines. In 2021, that grid failed during an extreme winter storm, leaving millions of Texans without power and causing at least 57 deaths.

"I already signed 12 laws to make the power grid more reliable, more resilient and more secure," Texas Republican Gov. Greg Abbott told CNBC in April. "And so we can definitely assure any business moving here they will have access to the power they need, but also at a low cost."

Water is another major need for chip fabs. In 2021, Samsung used about 38 billion gallons of water to make its chips. Roughly 80% of Texas remains stricken by drought.

"We have the Texas Water Board that's working on that and legislation that we're working on this session to make sure that with a growing population in Texas, we will be able to provide for the water needs, not just of businesses, but also for our growing population," Abbott said.

Samsung told CNBC its goal in Austin is to reuse more than 1 billion gallons of water in 2023. At the new Taylor fab, it aims to reclaim more than 75% of the water used.

Of late, all the hype in technology has been around artificial intelligence models to power services like OpenAI's ChatGPT. Those applications require even more powerful processors, made primarily as of now by Nvidia.

"There are more and more people around the world who can make memory chips," Cain said. "To stay ahead of the game, you've got to get into the newer logic technologies."

Cain said he sees Samsung "diving deeper into the logic chip segment. So, [that's] the AI chips, the future applications for semiconductor technology."

When asked about what's next, Samsung's Taylor said the company eventually plans to add more chip manufacturing capacity at its 1,200-acre site in Texas.

"We currently just have one fab announced there," he said. "But plenty of room for more."

Watch the video to go behind the scenes at Samsung's Austin chip fab and the building project in Taylor, Texas.