Samsung Case Analysis

The Strategy and Business Development team has reviewed the current position of Samsung in the semiconductor and memory chip industry. In spite of our current success, we are concerned that Chinese companies are going to begin attacking us in the same way we had went after Japan 20 years ago. We are facing new competition from Chinese companies who are trying to enter the DRAM market.

They are using partnerships to learn from the rest of the industry, attracting billions of dollars to build state of art facilities and willing to sacrifice profits for market share. The question is how to response to this imminent change to the structure of the global semiconductor market which may impact the future of the company. One option we have is to collaborate actively with a Chinese partner.

The risk in working with Chinese partners is that our intellectual property rights are still not protected fully and could lead to a Chinese partner become a rival some day. In addition, moving our production site from Seoul to China is not aligned with our unique company culture. An alternative option for us is to increase our investments in products for niche markets and let the Chinese control the lower end market while focusing on to develop more high value products. As seen in this document, our team has conducted an extensive analysis to react to the threat of Chinese competition. External Analysis

The global memory chip industry accounted for $33.7 billion in sales in 2003. Memory chips are classified into three categories: DRAM, SRAM and Flash. DRAM accounted for about half of the memory chip market and SRAM and Flash accounted for 10% and 32% respectively. DRAM was traditionally used mainly in PCs, but the share of DRAMs going to PCs declined from 80% to 67% between 1990 and 2003.

Flash memory and SRAM market is growing by extensive use of memories in telecommunications and consumer electronics. Competitive rivalry within industry: in 2005, the industry is experiencing intense rivalry with an increase in industry capacity and partly to a normal cyclical downturn. Samsung has five major competitors with the memory chip industry which are presented in Appendix A.

Bargaining power of suppliers: the industry contains powerful suppliers. With the growth of industry, suppliers become more concentrated. Only two or three dominating players dominated key segments of the equipment market and would offer discounts of up to 5% for high-volume purchase. Bargaining power of customers: Buyers are not very powerful. They are fragmented, with no single OEM controlling more than 20% of the global PC market in 2005. OEMs negotiate high on price for three reasons: memory represents 4-12% of PC cost and 4-7% of mobile phone cost, intense rivalry between PC producers, and the fact that end-customers are price conscious.

OEMs would pay 1% premium for a reliable supplier since defective memory was hard to detect. There is little threat of backward integration due to high cost of required capital. Threat of Substitutes: Up to now, there are no effective substitutes that could even challenge DRAMs or Flash memory. Threat of new entrants: New entrants are facing many challenges to enter; they need high capital investment, complex technology, learning curve, brand identity significance and economies of scale. In addition, threat of retaliation is significant.

However, Chinese entrants with help of joint venture and agreements are in position to obtain license and technology for manufacturing. Extreme support from government in terms of cheap credit, abundant land and other essential resources is now available to attract anyone who wants to build a cutting-edge semiconductor facility with a Chinese partner. Opportunities and Threats: One main opportunity is the significant increase in electronic consumer market in a near future and consequently growth of memory chip market. The other opportunity is strong demand of customers for innovative products and value-added features such as flash drive which is expected to have a significant growth for a number of years.

Threats are mainly China’s low cost production of memory chips eroding profitability, developing new nanotechnology which may replace Samsung’s DRAM technological advantages in future and maturity stage of computer market. Growth in computer market has slowed and has caused increased competition as the large consumers in the market try to lower costs to increase profitability. Internal Analysis

Samsung semiconductors have been an extremely healthy division of Samsung Electronics Corporation that has helped to keep the entire Samsung Electronic Company a profitable corporation. From 1999 to 2003, Samsung’s revenue grew 59.6% from $22.8 billion to $36.4 billion and net income increased by 79.9% (Exhibit 1 in the textbook). The revenue growth comes as a result of the successful strategic investment during the rapid growth stage of the DRAM industry.

Samsung is the market leader in memory chip technology. Unlike competitors, Samsung tries to create new markets by developing new applications of memory and cutting edge technology that are unavailable to its competitors. Samsung has launched new DRAM products with product-specific applications in laptops and personal game players. Samsung, because of a variety of internal and external factors, has successfully integrated low-cost and differentiated products strategy to maximize profits. Samsung is able to achieve its low cost advantages due to different reasons:

• Collocation of fab and R&D facilities: The Company has always emphasized on process and production efficiency. The company places all its fabs and R&D facility at a single site, so that all engineering from different departments can resolve technical problems together as soon as possible. Samsung benefited 12% construction costs saving by the collocation.

• Lowest fully loaded costs: As seen in exhibits 7a-k in the textbook, Samsung is able to keep its fully loaded costs below that of competitors. The company has lowest raw materials cost and depreciation. Lower raw material costs are probably due to better relationships with suppliers. • Customize products around a core design: Samsung has always designed and produced DRAMs around a core design. This enables Samsung to save cost since it does not have to invest additional capital for every new product that it develops.

• Technology lead: Lastly, as other competitors were reluctant to invest in larger wafers for DRAM production, Samsung were ahead to develop and master the new technology and has stayed as a leader ever since. As seen in exhibit 3 in the textbook, this has allowed Samsung to take the benefits of the learning curve that comes early in the product life cycle, lowering DRAM production cost over time. In product differentiation strategy, Samsung has the highest product reliability advantage thanks to heavy investment on R&D and constantly achieving design innovation.

In addition, the company organizes competing product development teams to create healthy competition which contribute to the production of premium products in terms of quality and design. Samsung values its human resources and follows global talent pool strategy. It invests heavily on its employees, set reward policies, acquires local and global talents and sponsors employees for PhD and MBA education.

In returns, employees are engaged and committed to productivity ad innovation. Lastly, Samsung is able to customize its products to customer demands. This unique ability to bridge technical knowledge with consumer experience combined with the highest product reliability have enabled Samsung to have an average 34% price premium over its competitors (Exhibit 3 in the textbook) Strategic Initiatives and Planning

Samsung’ leadership team needs to decide if Samsung is able to continue its integrated cost and product differentiation advantages with the threat of Chinese entrants which are planning to license technology and sell at low prices to gain market share. Appendix B describes the potential contribution of Chinese environment in development of semi-conductor industry in China. We have identified two options that Samsung could pursue in response to the threat of Chinese entrants into the DRAM market.

The options are as follows: Option A) Do not cooperate with the Chinese market: In this case, Samsung will save the current ecosystem in Korea. Samsung should focus only on cutting edge high-ending products. The growth in DRAM market, which is the threat market of the Chinese, is starting to slow down. The profits gained from low-end DRAM products are lower than customized “especially products” such as the DDR2 SDRAM and Rambus (Exhibits 7b-k and 9 in the textbook).

Therefore, Samsung should start cutting back on their production of low-end DRAM memory chips and strategically move in the direction of producing the “specially products” with the new technology that bring higher profit margin. In addition, Samsung should focus its resources on new sectors of the industry, i.e. Flash memory market that is experiencing double-digit growth and is in this initial stage of the technology in order to capture the high-end and niche markets.

However, there is a danger in the future that Chinese might be able to develop new technology and overtake as they gain experience and master the manufacturing in the memory chip industry. Hence, Samsung should take advantage of its head start and continue extensive investments into R&D and evaluate niche markets that remain unknown by competitors. Option B) Collaborate with a Chinese partner: It could be done by providing technology or by building fab thorough joints investments in China. This strategy would enable Samsung to benefit the long term cost reduction in salaries and administrative expenses as well as access to local Chinese market.

However, there is risk of copyright infringement and losses of technology secrets with sharing of blueprints and technology with China since intellectual property (IP) laws are still not as developed in China. Furthermore, collaborating with a Chinese partner may potentially decline Samsung’s long-standing premium branding in their product quality. Lastly, Samsung will create future competition by sharing its technological information. Recommendation

We recommend option A for Samsung; do not cooperate with the Chinese market. Samsung should leave low-end of the market for Chinese. Low-end memory chip products are a sector of the industry that is expected to have negative growth in prices in next years. Samsung should focus on its core competencies and continued innovation in all market segments of memory not just DRAM. Samsung should concentrate on R&D activities to maintain technology lead and take advantage of relatively uncrowned high-end of the memory chip market which some of its competitors (i.e. Elpida memory) have suffered past financial difficulties in this segment. Implementation Plan

Step 1) Transfer a large portion of resources and investments to R&D in order to investigate, innovate and design new products. As financial results show (exhibit 1 in the textbook), Samsung has had strong financial standing with large amount of net profits over the last 5 years, which should be shifted to R&D investments.

In addition, Samsung should expand its customer’s network and make a strong relationship with high-end electronics manufactures such as cell phone conglomerates and digital camera producers which are interested in purchasing the higher-end products that Samsung will be developing. This phase should be completed within 15-20 months. Step 2) Once Samsung successfully has developed a series of new products; it should use one of its fabs in full capacity to produce new products. The second fab should continue to manufacture legacy products including DRAM, so that Samsung maintain its market share on legacy products.

Simultaneously, additional human recourses are required to develop supply chains to support new products and to educate market on the new product offerings. This stage should not take longer than 6 months to ensure that Samsung hold its position as market leader to deliver new products ahead of time. Lastly, Samsung should strive to maintain its culture of cooperative employees that significantly help the company to achieve its speed of new product development and reproduction for product reliability.

Appendix A: Major Memory Competitors in 2005 |Elpida Memory, Inc. |Japan’s only remaining Dram producer | | |Past financial losses | | |Has started construction on its second 12-inch wafer fab | |Hynix Semiconductor, Inc. |Faces many financial problems | |Infineon Technologies AG |Strategic alliance with other industry competitors | | | | | |Major DRAM player with more than 25 R&D centers worldwide | |Micron Technology |

The sole U.S. producer remaining in DRAM industry | | | | | |Investing in next generation DRAM technology with a $500 million | | |investment from Intel | |Nanya Technology Corporation |Producing 256 Mbit Dram in a joint venture with Infineon | |Semiconductor Manufacturing International Corp. (SMIC) |The only Chinese DRAM manufacturer, China’s most advanced producer | | |and a new entrant threat for Samsung |

Appendix B: Chinese incentive environment |Technology |Using partnership to learn from industry incumbents | | | | | |China lacks the critical infrastructure necessary to support a cutting edge semi-conductor | | |industry | | | | | |The U.S and Taiwan governments have forbidden shipment of cutting edge production technology to | | |China; so, Chinese producers simply went to other countries | |Alliances |Chinese government provided cheap credit, abundant land, cheap utilities, engineering talent, | | |tax incentives to anyone who was willing to partner with a Chinese company | |Labor |China has comparative advantage in labor intensive activities |