IBM Taps Samsung for Chip Manufacturing

IBM (NYSE: IBM) was one of the few companies still developing the manufacturing processes to build cutting-edge chips. Then, back in 2015, IBM completed the sale of its chip manufacturing assets to stand-alone chip manufacturer GLOBALFOUNDRIES.

Unfortunately for IBM's chip efforts -- the company still develops POWER processors for servers and Z-series chips for its mainframes -- GLOBALFOUNDRIES ceased development of cutting-edge chip manufacturing technology. This left IBM in need of a new partner to manufacture its chip designs.

Inside an IBM computer room.

Image source: IBM.

A little while back, Nikkei Asian Reviewreported that this new partner would be Taiwan Semiconductor Manufacturing Company (NYSE: TSM) . While GLOBALFOUNDRIES failed to bring its own seven-nanometer manufacturing technology, marketed as 7LP, into mass production, TSMC's own seven-nanometer technology is now in mass production. (If you're reading this on one of the latest iPhones or iPads, you're using a device powered by a TSMC seven-nanometer chip.)

Surprisingly enough, that report was wrong, and it seems IBM is partnering with TSMC's only real competitor in leading-edge semiconductor logic technology: Samsung (NASDAQOTH: SSNLF) .

What's the deal?

On Dec. 20, IBM said that it "announced an agreement with Samsung to manufacture 7-nanometer (nm) microprocessors for IBM Power Systems , IBM Z and LinuxONE, high-performance computing (HPC) systems, and cloud offerings."

In addition, the press release claimed that "[today's] announcement also expands and extends the 15-year strategic process technology R&D partnership between the two companies, which, as part of IBM's Research Alliance, includes many industry firsts such as the first NanoSheet Device innovation for sub 5nm, the production of the industry's first 7nm test chip and the first High-K Metal Gate foundry manufacturing."

What does this mean for IBM and Samsung?

From IBM's perspective, the company now has a viable chip manufacturing partner to support the chips that power its systems. Last quarter, IBM's systems business -- which the company says "includes systems hardware and operating systems software -- generated $1.7 billion in sales, growing 1% year-over-year. That represented just 9% of the company's revenue in the quarter.

Nevertheless, that segment is large enough that IBM is going to want to continue to support it, and having a reliable manufacturing partner to build the microprocessors at the heart of those systems is critical to keeping that business alive.

As far as Samsung is concerned, this is incremental business for its contract chip manufacturing arm. However, this is by no means a game changer for Samsung. IBM's total systems business was $1.7 billion last quarter and just over $5.4 billion during the first three quarters of 2018. If we assume that run rate for the entirety of 2018, it translates into about $7.2 billion in overall system sales.

Samsung is going to be generating revenue only for the manufacture of the main processors in these systems. Not only do those systems include many other components (chassis, power supplies, DRAM, storage, motherboards, and so on), but IBM is, naturally, marking up the raw materials costs of those systems to generate profit.

This deal certainly isn't going to add a billion dollars or more to Samsung's coffers and isn't ultimately going to be a game changer for Samsung or even Samsung's semiconductor business (which is primarily dominated by sales of DRAM and NAND memories), but it should drive incremental revenue and gross profit.

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Ashraf Eassa has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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