Tesla and Samsung Strike $16.5 Billion Chip Deal

Boosting Samsung’s Chip Production Amid Industry Challenges

Tesla CEO Elon Musk recently announced a significant $16.5 billion agreement between the U.S. automaker and Samsung Electronics. This deal is expected to enhance Samsung’s struggling contract manufacturing operations.

Following the revelation of the deal, Samsung’s stock surged nearly 7%, reflecting investor optimism. The move comes at a critical time for Samsung, which is facing increasing competition in the race to develop artificial intelligence (AI) chips, lagging behind rivals like TSMC and SK Hynix.

AI6 Chip Production in Focus

Musk revealed that Samsung’s new chip factory in Taylor, Texas, will be responsible for producing Tesla’s next-generation AI6 chip. This project aims to reinvigorate efforts that have been delayed due to Samsung’s challenges in attracting and retaining key clients.

In a post on X, Musk stated, “Samsung agreed to allow Tesla to assist in maximizing manufacturing efficiency. This is a critical point, as I will walk the line personally to accelerate the pace of progress. And the fab is conveniently located not far from my house.”

He also indicated that the $16.5 billion figure is only the starting point, suggesting that actual production output could be significantly higher.

Market Reactions and Analyst Insights

Samsungs shares rallied by 6.8%, hitting their highest levels since September of the previous year. Conversely, Tesla’s stock rose by 1.9% in U.S. pre-market trading.

Ryu Young-ho, a senior analyst at NH Investment & Securities, emphasized that the Taylor fab had attracted “virtually no customers” prior to this deal. He noted that while the agreement is meaningful, it may still represent a relatively small portion of Samsung’s annual revenue from logic chips.

Delays in Samsung’s Production Timeline

In October, it was reported by Reuters that Samsung postponed the delivery of ASML chipmaking equipment for its Texas factory, having yet to secure major clients for the project. The operational start date for the facility has also been pushed back to 2026.

It remains uncertain if the Samsung-Tesla agreement is influenced by ongoing trade talks between South Korea and the U.S. Seoul is actively pursuing partnerships in chips and shipbuilding to mitigate potential 25% tariffs from the U.S.

Looking Ahead: Production Timelines

While specific timelines for AI6 chip production were not disclosed, Musk previously mentioned that AI5 chips are projected to be produced by the end of 2026, indicating that AI6 could follow a similar timeframe.

Analyst Lee Dong-ju from SK Securities predicts that production might be possible in 2027 or 2028, though Tesla has a track record of missed targets in chip production.

Samsung’s Role in Tesla’s Chip Production

Currently, Samsung is producing the AI4 chips that power Tesla’s Full Self-Driving driver assistant system. TSMC is set to manufacture the AI5 chips, which will initially be produced in Taiwan before moving to Arizona, as confirmed by Musk.

Samsung is not only renowned as the world’s leading memory chip maker but also engages in producing logic chips designed by customers through its foundry business.

Strategic Expansion for Samsung

The Texas project is crucial for Samsung Chairman Jay Y. Lee’s strategy to diversify from traditional memory chip production into contract chip manufacturing. As it stands, Samsung holds merely 8% of the global foundry market, significantly trailing behind TSMC’s 67% market share, according to data from Trendforce.

Previous to this announcement, Samsung had acknowledged the $16.5 billion deal without revealing the client’s identity, citing a confidentiality request. However, three sources informed Reuters that Tesla was indeed the customer.

Challenges and Opportunities for Samsung’s Foundry Business

The partnership with Tesla comes as Samsung grapples with pressure in its quest to manufacture AI chips. This challenge has made a noticeable impact on the company’s profits and share prices.

Earlier this month, Samsung projected a 56% drop in operating profit for the second quarter, partly fueled by losses in its foundry sector.

Analyst Pak Yuak from Kiwoom Securities suggested that the Tesla deal could alleviate some of the financial burdens on Samsung’s foundry business, which he estimates suffered losses exceeding 5 trillion won (approximately $3.6 billion) in the first half of the year.

Many analysts point out that Samsung has struggled to keep significant clients, many of whom have shifted to TSMC for advanced chips. This emphasizes the technological hurdles Samsung must overcome to maintain relevance in this capital-intensive industry.