Breakingviews - Samsung's $16.5 bln Tesla coup comes with caveats
First, on an annual basis, it works out to $2.1 billion in sales over the agreement's eight-year span. That's nowhere near enough to turn things around at Samsung's foundry business. Its operating loss topped 5 trillion won ($3.6 billion) in the first quarter and widened in the second quarter, estimates Fitch Ratings' Shelley Zhang.
Granted, Musk also said that the contract, which includes advanced A16 chips, "is just the bare minimum" and demand could end up being "several times higher". But Musk is notorious for over-egging production estimates.
Even if he's right, Tesla's patronage is unlikely to be enough to turn around Samsung's foundry fortunes alone. That'll require Chair Jay Y. Lee finding ways to parlay Musk's leap of faith into a broader contract chip-manufacturing business able to snatch share from the $1 trillion market leader TSMC (2330.TW), opens new tab.
That may not be straightforward. An unusual decision to allow Musk to walk production lines and work with Samsung to 'maximize manufacturing efficiency' could force the company to share crucial know-how. That might put off other potential customers.
Tesla is a risky partner in other ways, too. Last week, Musk said that the company faces a 'few rough quarters' given waning U.S. support for battery power. The electric-vehicle maker is also losing share in China and Europe. Long-term bets, including robotaxis and the Optimus robot, are not necessarily going to fill the gap.
Meanwhile, Samsung is under pressure to show it can execute. Its high bandwidth memory chips failed tests set by another key customer, Nvidia (NVDA.O), opens new tab, due to heat and power consumption problems, Reuters reported last year.
Although it has been able to develop cutting-edge chips like the 2-nanometre device Musk needs, ensuring high yield and quality at scale is tough. Making the chips at an untested U.S. plant adds further uncertainty. Falling short would jeopardise the project's profitability, as well as whether or not Tesla sticks with them.
Lee will welcome Tesla on board, but he'd be wise to buckle up for the ride.
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