Samsung as a company was founded in 1938 in Korea. 46,500 employees are working at six Samsung Electronics facilities in Korea. Although they are at different locations, all share the same goal and that goal is satisfying global customers by producing a quality product.
Here in the U.S. Samsung is a very recognized brand, sitting along side Sony, Panasonic, Phillips, Toshiba, Matsushita and other more know brands of TVs. In South Korea, Samsung was a governmentally subsidized large business until in the 1990's. In the mid 1990's one of the most significant threats to Korean corporations was that their major advantage in low labor cost had been deteriorating against the labor costs in many of the competing Southeast Asian countries.
The average wage of $1,144 a month that Korean workers earned was one of the highest wages paid in Asia outside of Japan. Korea had been the low cost labor supplier until the point at which The Peoples' Republic of China entered the competition for manufacturing of color TVs. The low cost of labor in China would cause Korea's position being the lowest cost provider to be a position that was in danger. The Korean government at this point was discontinuing subsidies and export credits to Korean manufacturers and at this time the Korean products which had been the low end market
In 1995, production of color TV sets in China was starting to hit a high volume. It was estimated that 16 million sets were produced, including two million that were exported to Europe, North America, Africa, and Australia. At the time, the Chinese government felt its production of color TVs were fulfilling their expectations in regards to demand in export and domestic markets. As 1995 ended, the Chinese color TV market was the second largest behind the United States and the third largest behind NAFTA and EU in regards to unit sales.
With the increase in demand of color TVs in China, Samsung China Headquarters (SCH) was born in 1995 in Beijing. SCH began to coordinate more than 16 operations, with each being separately managed by various units of the Samsung Group. The establishment of SCH helps the image of Samsung in China since it already showed commitment to the Chinese market.
In October 1995, Chung Yong, President of SCH, met with the SCH marketing director, Hyun Young-Koo, who was responsible for putting together a marketing strategy for marketing color TVs in China. The following issues were raised during this meeting: Should SCH cover all the marketing segments and product lines? Should SCH focus on the low-end market segment with a limited line of products?
Should SCH target the high-end segment, as most Japanese markets have done in the US and China markets?
In 1994, China had 300 million households, with only 41% of the households holding a color TV sets. However of the 80 million urban households, 80% already owned a color TV, where only 28% of the 220 million rural households owned color TV sets. A SWOT analysis will show the strengths, weaknesses, opportunities, and threats SCH is looking at when they put together their potential marketing strategy in the Chinese economy.
Strengths: China was a market where the first mover enjoyed advantages over late comers. The first image of the product lasted long in the eyes of the consumer and the firstto enter the market could gain the largest market share SCH is committed to enhance its image to the Chinese market as investors SCH was building a wholly owned manufacturing plant in China to show the Chinese the commitment Korea had to the Chinese society. Labor costs in China were less and would defray the cost of producing high-end Samsung has been making color TVs for many years in Korea before moving to the Chinese market.
Weaknesses: SCH must continue to control all costs to maintain success China has a reputation of being a protected market (protectionism) China was a market where the first mover enjoyed advantages over late comers, SCH is trying to overcome the first comer advantage Japan manufacturers have over them by being those first comers Companies such as Sony and Matsushita had built sales and service networks that were favorable to their sales programs in China, while Samsung would have to catch up in that area Samsung is not as experienced in manufacturing high-end TVs for a higher-end market segment
Opportunities: Based on the data that on 28% of the 220 million rural households own a color TV. SCH focus on the domestic China market should be to penetrate the rural household market, which would mean that for those purposes the low-end production of sets in the 13" to 20" range should be produced to appeal to that segment's purchasing ability. Larger more high-end models can be produced to appeal to an urban customer in China, as well as being an export to the U.S. and European higher end customers. With success in the higher-end manufacturing and sales of premium TVs in China; SCH can establish themselves as high-end producers around the world
Threats: SCH faces intense competition in the color TV market A premium-priced product wouldn't sell in large volumes, so pricing can bea problem. Since SCH didn't have an established marketing strategy, issues of how to marketthe product may arise. Loss of profitability because related to over-employment at most facilities Is the per capita income level such that it can support sales of product at any level If SCH fails to be successful in the Chinese market with high-end product it will be known around the world
Entry Modes General analysis of various entry modes into the international market shows that SCH used two entry modes to penetrate the China market. First, SCH had entered into a joint venture with a Hong-Kong firm because of the rigid and difficult diplomatic relations before 1992.
When diplomatic relations between South Korea and China became more secure, China made it known that it wanted the manufacturing business in China, but China also wanted the manufactured items produced by outside companies were to be exported as soon as possible. China did not want the low-end TVs in China's markets which would upset the homegrown China markets.
To determine what entry mode would be most effective it is important to understand different Chinese norms in the political arena and cultural facts. China is a socialist government Within China's socialist government there is local self-interest which create "regional-blockades" that disrupts all business national and global organizations mostly due to resource scarcity Views of social profitability vs. economic profitability
With a socialist government comes over-employment within all manufacturing With regard to loyalty, the Chinese society becomes loyal to the first brand in country. Corporations must show their loyalty to the Chinese as a country and to its people by the heavy investment or wholly owned companies.
It must be understood that has introduced many economic reforms. However, it is still a primarily a centrally planned socialist economy. Also when viewing the socialist government rhetoric of the economic plan and the actual management of such a huge plan, it has been revealed a huge gap between theory and actual successful workability. This gap invites many opportunities for black market activity, smuggling and piracy.
Within the government agencies overseeing these large areas of employment and manufacturing there are also regional self-interest activities. Local governments realize the shortage of resources and opportunities and of course, the local governments want to economics and opportunities to come to and remain in their area. They like capitalist know the value of markets and the advantage of being a market producer, so the local governments compete to protect their local assets and productivity.
Therefore, dealing with these factions will be difficult for international companies. They may not be able to secure the support or supplies they need to meet the requirements of their manufacturing plans. An international manufacturer may be required to set up more than one manufacturing facility one in the north and one in the south to offset the effects of the local protectionism.
With having a socialist economic mindset, international corporations must be able to understand that the emphasis is placed on social profitability rather than economic profitability as it is a capitalistic market.
Capitalistic projects look for ROI as a driving force. To a socialistic economy the focus of a major project is evaluated not on ROI, but on "social factors", such as the construction of new buildings, the training of workers, how many workers could be employed and the prestige of having a new facility located in a province or city. Therefore, to be a partner or in a joint venture with the Chinese it is important to have the correct mindset to accomplish the project.
Along those same lines of social profitability, it is important to understand that the problem of over-employment will probably face any global company that manages a business or project in China. Foreign manager visiting the factories of China will note the vast amount of workers at any given facility that have no productive function. For the most part they are standing around. It is not uncommon for a joint venture company to inherit approximately 50% more workers on payrolls than they need. These workers can not be laid off or fired.
The company by China's governmental policies would be in a political difficulty and could not release any of the workers which would affect the economic advantage of any project.
Competition in China is fierce. All corporations know China is a huge market. Their economy is beginning to boom. The labor is very cheep. China and the Chinese government trust very few countries or corporations. Japan enjoys the most open markets and infiltration of the Chinese market and manufacturing ventures. For that reason other corporation such as the U.S., European, and now Korea were forced to enter into joint ventures with Japanese firm to gain entry into the closed society of China. In the TV industry China had about 20 companies of their own that enjoyed success in the low-end TV market that was Korea's specialty.
Samsung had made successes in the joint-ventures with a Hong-Kong firm; however, they want to penetrate China's market and decided to move into the arena with a wholly owned manufacturing facilities in China. Now Samsung were investors in the future of China with 13 manufacturing facilities. Now Samsung had to broaden its multinational company and develop its global vision.
Organizational Structure SCH at this time already had a $4 billion in sales in China by either joint ventures or wholly owned manufacturing facilities. Now it had been announced to Beijing that Samsung was ready to additionally invest another $4 billon in China by the year 2000. Samsung had previously made the decision to decentralize and put a headquarters in China to make the image of SCH's loyalty to the China. However, Samsungs Central Headquarters was still in Korea.
Had SCH been a centralized corporation, the Korean Headquarters would be making all the major decisions and passing those decisions to the Chinese locations to follow instructions. This was not the case. The SCH was making all business decisions in China, but when the idea of introducing high-end product in China appeared, the Headquarters decided it was time to intervene. In Seoul Samsung Headquarter felt that it was not wise to enter a high-end product into a market with an annual per capita income level of US$353, and sighted that the low-end market was the fastest growing market segment in China.
If Samsung been a centrally controlled corporation that would have been the end of the discussion. However, this was not the case and Mr. Chung, who was responsible for coordinating Samsung's business in China, was proposing that the high-end market was the place to be in order to cement the vision in the minds of the Chinese of Samsung as a premium producer. He argued to solidify a premium brand image was following the commitment of SCH to China. It was also argued that this would give SCH a competitive edge against the Japanese TV manufacturers of high-end TVs and that was where the largest demand existed.
It was also argues that producing the high-end TVs in China would defray the high cost of trying to produce them in Korea where labor costs were higher. Decentralizing the Samsung China operation meant that the people on the ground in China were better able to know the pulse of the business in China much better than they could read it from Korea and therefore would be able to make better business decisions. This was yet to be proven.
In view of the Organizational Chart below it shows the size of the internal organization that exists for Samsung just in China and why an organization of this size would need a free hand for decision making apart from the world headquarters.
Strategic Alliances SCH had been in a joint venture with a Japanese electronics company early on to penetrate the then closed markets of China to South Korea until relations between China and South Korea had been normalized. Mr. Chung now thinks it is time to move away from that relationship and for Samsung to build a corporate image of its own.
This is Mr. Chung's thoughts, "if we do not build up a brand image equivalent to that of Japanese firms, we can not compete in China or in North America in the near future." Mr. Chung is also looking at how fast the Chinese society is evolving and has concluded that the Chinese market is not going to stay in the low-end market. Therefore, the strategic Alliance that was previously a great help to SCH is no longer a help to SCH. Samsung must become a wholly owned corporation with a home in China.
Recommendations & Next Steps Mr. Chung and his division of Samsung, SCH, has been in the Chinese market for some time and have a good read on the society and the current trends in the political, economic, and social events in China. Their recommendations for moving into the high-end market should be followed. There should be close monitoring from the Samsung Seoul Headquarters of all the sales and manufacturing data to determine if all benchmarks and targets are being realized. If the trends have not been read by Mr. Chung's divisions correctly and the transactional data is showing a negative impact by losing market share;
Samsung should pull back quickly and revert to the market they know best which is low-end to medium-end product. But Mr. Chung should be given reasonable time to prove his market. SCH should continue to manufacture the low-end to medium-sized TVs to also capture the market group in the 220 million rural households where only 28% have color TVs. That market segment will soon grow in per capita income and the first TVs they will purchase will be low-end or medium sized.