Samsung Stock Surges. Why It Needed the Tesla AI Chip Deal So Much.

Construction of Samsung’s semiconductor plant in Taylor, Texas. (Brandon Bell/Getty Images)

Tesla is the first big customer to publicly announce using Samsung Electronics’ new Texas chipmaking factory, and it is an important vote of confidence for the troubled manufacturer.

Tesla CEO Elon Musk took to his X platform late Sunday evening to announce two new generations of advanced chips. The EV maker intends to use Samsung’s coming Taylor, Texas factory, under construction until late 2026, to manufacture the second of the two. The first will be made by Taiwan Semiconductor Manufacturing , the undisputed leader in the industry and Samsung’s chief rival in chip manufacturing.

Samsung’s Korean shares were up nearly 7% Monday on the news, continuing a recovery in the stock price after a 2024 plunge. Tesla shares were up 3.7% midday on Monday.

Samsung slated the Tesla contract at $16.5 billion through 2033. The deal “is not of an overwhelming scale,” CGS International analyst Kyunga Lee told Barron’s. But he pointed to a separate X post in which Musk said that “the $16.5B number is just the bare minimum. Actual output is likely to be several times higher.” This might mean that the deal could extend to chips for Musk’s other companies, as well as Samsung memory.

For Samsung’s chipmaking, the deal is an opportunity to prove that the woes of the past few years are in the rearview mirror. While formerly competitive with Taiwan Semi’s technology, Samsung lost ground year after year, and flagship customers like Qualcomm fled. Though Samsung doesn’t break out chip manufacturing in its financial reporting, it said that first-quarter results were “weak on sluggish seasonal mobile demand, inventory adjustments, and stagnant fab [factory] utilization” in its earnings presentation.

Charges for inventory and underutilization are some of the biggest financial issues for all manufacturing businesses, and indicate that demand has been weak.

Musk is taking a risk. Samsung and Tesla are hoping that the new manufacturing process in Taylor will bring the chip company back to competitiveness with Taiwan Semi. Musk said that he will personally help Samsung build its production line to aid with efficiency and to “accelerate the pace of progress.”

Musk likes to have control of every aspect of his supply chain. Being a part of the Texas facility’s construction has its own benefits that balance the risk Musk is shouldering. However, the challenges in chipmaking are unlike the ones Musk has previously faced with car and rocket manufacturing. He will have to learn quickly.

If Musk is set on moving chip production to the U.S., then the Samsung factory may hold other advantages over Taiwan Semi. Samsung is bringing its most advanced manufacturing to Texas, while Taiwan Semi’s factory in Arizona uses its previous generation, and that may mean Taiwan Semi’s technical advantage is erased in U.S. production.

Moreover, Advanced Micro Devices CEO Lisa Su, a Taiwan Semi customer, said last week that Arizona manufacturing would cost 5% to 20% more than the Taiwanese equivalent because of higher manufacturing expenses in the U.S., which may come to include new tariffs on materials later this year. A cost advantage over Taiwan Semi’s Arizona facility may have also figured into Musk’s decision to go with Samsung.

Musk needs to keep advancing these chips if he hopes to deliver on his longstanding promise to make Tesla vehicles that don’t require a driver’s attention while driving. In 2016 and 2019, Musk claimed that all Tesla vehicles being sold at those times already had powerful enough computing to run a self-driving car. These assurances turned out to be untrue, and Tesla has had to keep putting in new generations of chips to get self-driving over the finish line.

Musk is banking on Samsung to help Tesla do just that.

Write to Adam Levine at adam.levine@barrons.com