Samsung Inks $16.5B Deal with Tesla for AI Chips

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1:59Bloomberg Tech is live from coast to coast with Caroline Hyde in New York and Ed Ludlow in San Francisco. This is Bloomberg Tech. Coming up, Samsung will produce AI chips for Tesla in Texas. a new multi-year deal worth$16.5 billion. Plus, the US and EU agree on a deal that will see the bloc face 15 % tariffs on most of its exports, including chips and cars. And what to expect from the big tech earnings coming up with Microsoft, Meta, Apple and Amazon all reporting this week. That is a huge market capitalisation that we watch out for in terms of those mega caps coming with earnings, Ed. We're on tenterhooks ahead of it.

2:45Now, we are fading some of the rally that we've seen in big tech today. We're still clinging on to gains. The Nasdaq 100 at a new record high. We're up a third of a percent. But those rallies that we saw in Europe have faded completely. We're in the red as that 15 % tariff looks ugly on the EU side of things. But you're digging into the micro stories today. Yeah, Tesla and Samsung and this arrangement to make AI chips in Texas is driving markets. Tesla's gains have really accelerated up 3.8, almost 4%. Overnight in Korea, look at Samsung shares. It's for the AI6 chip, the next generation of full self-driving silicon that goes into the vehicle.

3:22Samsung already does quite a lot with Tesla on prior generations. And at the same time, Tesla has some diversifying and some hedge with TSMC. But this is a big one. Elon Musk has been talking about it on X, of course. Funny that. Well, let's get the inside track with Peter Elstrom, who joins us now for more on this. This is a vote of confidence in Samsung's chip manufacturing when it had been losing market share, Peter. Yeah, that's exactly right. Samsung, of course, makes a whole bunch of things, including smartphones. They've really made most of their profits, though, recently out of their semiconductor business.

3:56They're the leading maker of most memory chips out there. But they've been trying to build this foundry business so that they could compete with TSMC, compete for some of that high margin business from the likes of NVIDIA and Apple. And now what they've got is really a marquee customer in Tesla, where they can point to them and say, hey, Tesla is trusting us with the ability to make their high-end chips, these AI6 chips, as Ed was mentioning earlier, which is very important for their self-driving technology, which they hope to really bring on and force next year and the year after. So for Samsung, this is a big step forward.

4:29It is a decent amount of money, as we were talking about. It could increase their growth in the foundry business by about 10%. But probably more importantly than that is the strategic importance of being able to say they have this big marquee customer for the foundry business. Bloomberg broke the story that it was Tesla that was this at that time unnamed marquee customer. And it was interesting because Elon Musk actually gave us a lot of detail on social. $16.5 billion over multiple years. But Musk seems to be indicating it's bigger than that. And also, Peter, he talks about why it's important that it's in Texas.

5:04He seems to be suggesting that his proximity to the fab means that Tesla can be involved in the engineering and the ramp, but that he himself can wander the lines himself. Right. Yeah. How many businesses can Elon Musk get involved in? Now apparently he's going to do semiconductors, too. Yeah, it's quite interesting that he has said he he says that this deal allows him to be able to be personally involved, intimately involved, to be able to walk the lines and help with production. I don't know how much he knows exactly about semiconductor manufacturing, but you can imagine that having such an important customer there on premises is going to put some pressure on them to be able to build out quite quickly.

5:43Now, it's important to kind of step back here. Of course, the U.S. has been trying to rebuild their semiconductor industry for a number of years. We saw the Biden administration come out with the CHIPS Act that offered$39 billion in incentives. is Samsung is one of the big beneficiaries here. And one of the reasons that they're expanding their capacity in Texas is specifically so that they can supply U.S. customers. They're going to skirt their way around the Trump tariffs if they're able to produce within the country. And Elon Musk will be able to go there to Texas to be able to try out some of these things and then use them in this self-driving technology.

6:13So it is a step forward for that CHIPS Act and that effort to kind of rebuild the domestic industry. TSMC and Intel are both also beneficiaries of that effort. It is interesting, though, isn't it? that it is overseas manufacturers building in the U.S. that are able to make big tech win in terms of the chip supply chain. What surprised me was also how integral, of course, Samsung is once again to the KOSPI. I think the KOSPI, the South Korean index, is one of the best performers globally this year. SK Hynix has a lot to thank for it as well, though. Right, yes. SK Hynix has jumped out ahead in the memory chips that are most used for AI, these HPM memory chips.

6:52They've actually gotten quite a bit ahead of Samsung on that front, which is a bit of a blow to Samsung. But Samsung is making some progress, kind of climbing its way back, trying to get authorization to be able to sell those HBM chips to NVIDIA, which is the most important partner at this point. But your broader point, yes, it's really TSMC has been leading the way in advanced chip manufacturing. It gets that high margin business from NVIDIA and Apple right now and many other customers. There were many hopes within Washington that the next competitor in that foundry business would be Intel. They have not made that progress.

7:25We saw that last week in the earnings report and Lit Boutin's questions about whether maybe he's going to pursue that foundry business. But we're seeing that Samsung is emerging as probably the strongest alternative to TSMC. Everybody in the industry wants some competition in that market. They don't want to just have TSMC making the most advanced chips in the industry. They want to have some alternatives, whether it's Samsung, whether it's Intel, whether it's somebody else. Got a lot of questions about those alternatives. Bloomberg's Peter Aylstrom. Thank you very much. Let's dive into all of this with Michael Green, chief investment strategist and portfolio manager at Simplify Asset Management, which has over$8 billion in assets under management.

8:01And it's interesting. I want to take advantage of the timing, Michael. Last time you were on, we were talking about Elon Musk alienating himself from both political parties, if you remember. Now, this is an example of a leading American company, an individual, Elon Musk, doing a big, big deal over multiple years with a foreign technology company to onshore industry in this country. What do you make of that and the economic opportunity it presents? Well, I think this is actually the tension that exists, right? Onshoring into America, particularly bringing back high value added tech manufacturing like chips, that's not going to overly stress the labor force that has relatively low employment levels, but a large fiscal impact and a large economic impact.

8:48This is fantastic. And it's exactly what we would hope to see under a Trump administration, raising the costs of companies doing business abroad and shipping stuff to the United States. How successful it's going to be, as was alluded to earlier, these are two companies that are both kind of struggling in their respective fields that have announced a major investment. Is it enough to bring both companies significantly higher? Clearly, the stock market thinks that it's helpful. I don't see how it's not. But it still is something that remains to be seen in terms of its long-term impact. Of the contract manufacturers, we mentioned Samsung, TSMC, and Intel.

9:27Which do you like and why? Well, the quick answer is that I'm a strategist. I don't spend as much time on the individual securities. It's very hard to argue with TSMC's overall technical lead in the space. They have managed to build an extraordinary business that has slowly taken out competitors like Intel and, for that matter, Samsung. They're all extremely capable. This is an industry with tremendous growth. But if you're putting bets on change, you have to look at companies like Samsung, et cetera, to undercut or Tesla. The whole story effectively is the increased competition is coming for both TSMC and NVIDIA.

10:06I think that's probably the biggest takeaway on this. Give us the broader context here then as a strategist as well, Michael, as to how overexposed investors are writ large on the semiconductor space, semiconductor equipment, more broadly. I'm looking at how Goldman at the moment is saying the U.S. prime book is really heavily weighted and overexposed to that. And we've seen hedge funds in particular dial back ahead of earnings. Yeah, you definitely have seen that. And one of the factors that we've seen in this rally as it has extended off of the April lows has been extraordinary retail participation and dramatic increase in the quantity of margin that is being utilized and equally important, a dramatic decline in the quantity of short interest.

10:48That's really what's hitting the hedge fund positioning because they tend to have that bias of being long, the more quality-oriented names, short, the shorted names. That's causing distress in the hedge fund space that I think is causing them to take all exposures down as compared to isolating to particular risk for those leading companies. I think most people anticipate that this earnings report, this earnings season, is going to be relatively favorable if for no other reason than the stocks are near all-time highs. That lowers the incentive to introduce special charges or anything else that you would classify.

11:23So I think most people are actually expecting a pretty good earnings season. It's just the market conditions are extraordinarily difficult for hedge funds right now. They've got to be pretty perfect, these earnings, for us to live up to the hype in a way, Michael. But what's also so clear is that hedge funds have been underexposed to software, services. Does that change in the near term? Well, I think ultimately that hedge funds are going to follow whatever is working. So if we continue to see underperformance in the high quality hardware space or the impressive performance that we're seeing from cyclicals right now versus defensives, you will see hedge funds ultimately rotate because they are more interested in making money than they are in being right.

12:05Oh, there's always the quandary. Michael Green from Simplify Asset Management, putting it straight on where the focus has to lie for hedge funds right now. Coming up, we thank him and we move over to Victoria Espinel of the Business Software Alliance, just talking about how software has been a bit unloved. But where are we going to be seeing the differences in regulations across the globe? How is that impacting software companies and the approach to AI? This is Bloomberg Tech.

12:46So I just want to congratulate you. I think it's great that we made a deal today instead of playing games and maybe not making a deal at all. I think it's, I'm going to let you say, but I think it's the biggest deal ever made. There was President Trump there speaking in Scotland. Many of the details from the U.S.-EU trade deal are still to be announced. The semiconductor industry, though, rallying on the news that it will not face a separate tariff rate. Instead, it will be included in the 15 percent rate applied to all EU goods exported to the United States. Want to get out to Washington, D.C.

13:23and Bloomberg's Cayley Lines. Give us the details of what we do know, what was agreed. And the president saying there it's the best deal he's ever done. Yeah, the biggest deal ever made, to use the president's words, Ed, I'll leave that up to determination as to whether or not that is actually true. But, of course, this is a big win for Europe, which was facing the threat of a 30 percent tariff come Friday, August 1st, if this deal was not struck. 15 percent, obviously, a much lower rate than that. And key here is really the fact that they got that 15 percent rate to apply to sectors in particular, not just automobiles, but as you mentioned, also semiconductors and pharmaceutical tariffs, tariffs, which of course there is a section 232 investigation underway into both of those sectors already in which the end result could be that other non-EU countries face a higher tariff rate than that on those specific materials.

14:12Europe was able to secure a 15 % rate that will be applicable effectively across the board with the exception still of steel and aluminum, which of course faces a 50 % tariff. Key to doing so, we understand, though no details are yet on paper. We haven't actually gotten a formal readout or full list of what this deal actually will entail beyond what we've been told and what officials familiar have told Bloomberg. But the key, according to sources familiar with the matter, was the fact that Europe has also agreed to make more investment into the United States as part of this deal, including$600 billion in investments into the U.S.

14:44and$750 billion of purchases of American energy over the course of the next several years, in addition to what President Trump described as vast purchases of U.S. military equipment. So all of that is what we understand this deal to essentially look like in the broadest of terms, but we're still waiting for that granular detail. And of course, we assume and understand that there's a carve out for chip equipment in particular, where they face a zero tariffs and one of the ASML is on the higher side, Kayleigh. What's really interesting is pushing us forward is what this 15 percent number means for the China negotiations.

15:17That's actually happening in Sweden, Randstad. Yeah, they're underway in Sweden right now. It'll be two days of talks spearheaded by Chinese Premier Hylifeng, as well as the Treasury Secretary, Scott Besson. They are underway. China, of course, already is facing a higher tariff rate than most. 20 % is the level specifically applied in retaliation for the trade of fentanyl. That is going to be something specifically that we understand is one of the focuses of the U.S. at these talks. They're going to be talking about whether or not China is actually able to tamp down on the flow of fentanyl out of the country, though China obviously disputes that, saying it's a U.S.

15:52domestic problem. But in addition to trying to get that tariff rate lower, which there may or may not be progress on, the real crux of these talks, as has been for the previous iterations of this, as we've seen multiple rounds in the last several months, is going to be around export controls. On the U.S. side, of course, that includes export controls of critical technology, including semiconductor and equipment for the manufacturing of that. We've already seen some easing of that with the allowance of H20 chips from NVIDIA to start flowing back into China for export. But on the Chinese side, it's really about rare earths and critical minerals that, of course, they have a chokehold on at this time.

16:23And it has been the easing of the flow of that, allowing American importers to get the licenses to actually bring those critical minerals in that has been critical for advancing this at least detente, shall we say, forward, which is also going to be one of the key pushes for these talks. The Treasury Secretary Scott Besson indicating one of the primary outcomes they're looking for here is an extension of the current truce that is in place beyond the deadline that currently stands of August 12th. It's been important for NVIDIA's H20s as well to get back into China. Bloomberg's Kayleigh Lyons, brilliant wrap-up of all things trade.

16:55But let's get more on how these deals and indeed developing global regulations for artificial intelligence are really impacting developers. Victoria Espinel is with us, CEO of the Business Software Alliance. And the context here, Victoria, is one of the AI action plan announced by the U.S. government really to take on China and the AI race that the U.S. wants to win. From a regulatory perspective, how do you think the U.S. is winning or not? So I think there's a lot of good that's in the AI action plan, but here is one part. There's a lot of conversation about who's going to win the AI race, and a lot of that focus is on who's going to be at the cutting edge of innovation, and that is obviously important.

17:36But a conversation that is just starting to happen that I think will potentially have an even bigger impact is who is going to win the race on AI adoption. By that I mean which are the countries that are going to figure out how to use AI best. Because it is those countries that are going to see the biggest economic benefit from AI. That is the race. And that is largely up for grabs right now. I think the United States has an advantage there. And I think the AI action plan has a number of aspects that are focused on adoption. But that race is up for grabs. And I think that is going to be a big indicator of where we see the biggest economic benefit over the next decade.

18:19So enough focus, therefore, from your perspective on AI adoption, on training talent to ensure that in enterprise, we're actually getting bang for our buck. Productivity actually goes up and to the right. So there are a few aspects that I think are critical to AI adoption. And actually at BSA we released an agenda just before the AI action plan came out earlier last week that focuses on three aspects. One is talent and workforce. And that is critical. I think there's no aspect more essential. The second is infrastructure and data. And the third is the governance framework and making sure that we get that right.

18:54And those three elements are things that the United States, But governments around the world need to be figuring out right now if they are going to win the race on AI adoption. Victoria, last week on the program, Michael Kratios, who leads the Office of Science and Tech at the White House, came on. And he talked about packages, that he sees America being a net exporter of everything in the stack from hardware through to the models themselves. You were talking about adoption a moment ago. How does America as an exporter of AI fit into that? I think that's a critical piece. So a lot of the innovation is happening here in the United States.

19:33For governments to be able to adopt AI, to have their private sector using AI in a way that they get the most economic benefit, a big piece of that is going to be AI exportation from the United States. And there was a conversation last week about the data centers and the chips, but obviously an important element of that is the software and the cloud services, because it is literally not possible to adopt AI unless you have cutting-edge cloud services, unless you have cutting-edge software. And a lot of that's going to be coming from right here in the United States. There was also a discussion about copyright, and the president talked about this during his address.

20:12Given that you kind of represent more the software side of the stack, how did you think about that? You know, Cara and I, it increasingly comes up in the show as a point of priority, particularly for the frontier model or just model makers generally. It's a big issue. It's an issue here in the United States and in other markets as well. So as you know, in the AI action plan that was released last week, there's not a lot of discussion of the copyright issue specifically. But the president, in his public remarks, spoke to it quite forcefully in terms of the importance of training data and for the AI LLM builders to be able to get that training data and use it with relative ease.

20:52So he was very, very clear on that aspect, and that's something that we are anticipating seeing the White House say more about in the next year or so. But the president was very clear in terms of his opinion on the importance of training data and how important that is for the United States to stay ahead of the AI race with respect to China. Briefly, Victoria, today's the day we focus on the EU. It's smarting today in terms of competitiveness. They're worried about a 15 % tariff. How much should they be worried about their own EU AI act on competitiveness? So again, I think the EU has huge potential opportunity to benefit from AI if it starts focusing on adoption.

21:32And part of that is addressing some of the digital sovereignty barriers that the EU has put up. There are aspects of the trade deal. As you know, the details of the trade deal are not yet fully public. But Ambassador Greer was talking just this morning about looking at things like mutual recognition of cybersecurity, of streamlining regulations, of steps that Europe can take. And those steps are important not just for U.S. software providers but for the EU if they are going to be able to adopt and use AI effectively. Victoria Espinel, CEO of the Business Software Alliance, thank you very much.

22:07We have some breaking news crossing the Bloomberg terminal. Figma is boosting the pricing of its IPO to$30 to$32 a share. Previously seen the IPO at$25 to$28 per share. Remember, Figma is trying to raise just above a billion dollars. And they had this kind of auction style process where they went to prospective investors and said, how many shares do you want and how would you price them? The logic being, Caro, that they want to try and get near to that 20 billion dollar valuation that Adobe had valued the company at when it tried to buy it. Now the IPO, which we think will price on Wednesday, to recap, pricing between 30 and 32 dollars a share.

22:45We'll keep a close eye on it throughout the week. And that previously marketed range had it at a market cap of about$16 billion at the top end. So we do the math. Coming up, AI competition sees the rapid releases of free, open-source models. More on that next. This is Bloomberg Tech.

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24:29It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects. Get started at ChatGPT.com by selecting Work Mode, available on Plus and Pro plans. Hi, I'm Carol Masser with a helpful tip to keep you plugged in throughout the market day. Subscribe to the Stock Movers Report from Bloomberg. These are short audio episodes, five minutes or less, delivered right to your podcast feed.