Samsung Electronics Case Summary

Under Kun Hee Lee’s leadership Samsung has risen to become the world’s leading memory producer for all types of PCs, game players, digital cameras and other electronic equipments. In 1987, Samsung was a “bit player”, years behind its key Japanese rivals. In 2003 Samsung’s memory division is bigger than that of Japanese rivals in both size & profits. The memory chip industry was expected to face cyclical downturn in 2005 and Samsung survived two previous downturns still some outside believers believed that the Chinese entry would fundamentally change industry conditions in the years ahead.

There has been a strong growth in economic importance of Semiconductor industry over the previous five decades. Semiconductor products were classified into two categories; Logic chips and memory chips. Logic chips were used for processing information/ control processes whereas Memory chips were further classified into DRAM (Dynamic Random Access Memory), SRAM (Static RAM), & Flash to store information.

The case is focused on Global memory chip industry. DRAMs captured over half of the memory chip market in 2003. DRAMs were previously used in PCs, but their share declined from 80% to 67% between 1990 and 2003. Telecom & consumer electronics were growing consumers of DRAMs in 2003.

Communications products were expected to grow from 3.5% to 7.9% in 2008 while TVs, set-top boxes, game devices such as Play station represented 7% of global market in 2003. In 2003, SRAM, a type of buffer memory which facilitated computer processing & mobile phone functionality, accounted for 10% of the industry sales and Flash memory, used in heavy digital cameras & mobile phones, is a hot growth area and account for 32% of the industry sales. The memory industry contained powerful suppliers and price conscious customers.

Over time technology grew more complex and suppliers became more concentrated. Only 2-3 main players dominated the key segments of equipment market.

Suppliers of memory raw materials provided discounts of up to 5% for high-volume buyers. Customers were more fragmented with no single OEM controlling more than 20% of global PC market. Memory represented 4-12% of total PC material cost and 4-7% of mobile phone material cost. There was an intense competition in market but OEM would pay upwards of 1% average premium for a reliable supplier. In 2005 industry faced fierce rivalry and large-scale entry by Chinese firms. Samsung announced a decline in market prices of its cutting edge technological products in late 2004 but Chinese firms competing in older product lines traded off profit margins for market share. Chinese competitors had an easy access to local finance and talented local engineers but it lacked Organizational skills & used older technology. MAJOR COMPETITORS:

The major competitors of Samsung in 2005 were: Elpida Memory Inc (Japan): Established as a joint venture between NEC and Hitachi. It produced memory products for mobile devices & consumer electronics goods. In 2004, it announced that it would start the construction on its 12 inch water fab production.

Hynix Semiconductor, Inc. (S. Korea): founded in 1983 as Hyundai Electronics. It changed is name to separate itself from financially troubled Hyundai Group. During 1996 cyclical downturn the company dramatically increased its capital expenditure but in 1999 when market began to expand Hyundai had no resource to increase its capital expenditure and it ended up in decreasing its capital expenditure.

In 1999 Hyundai acquired LG Semiconductor which resulted in more debt burden which together with the next cyclical doenturn brought the company at the verge of collapse in 2001-02. A multibillion-dollar bailout allowed the company to survive. It then entered into a joint venture with ST Electronics. Infineon Technologies AG: Germany-based company which spun off from Siemens. In recent years, it entered into the product purchase & capacity agreement with Taiwan-based DRAM manufacturer, Winbond. It also entered into the joint venture with Nanya Technology to build a new plant in Taiwan.

In 2005, it had more than 25 R&D locations around the globe. Micron Technology: It is Idaho-USA based company founded in 1978, Acquired Texas Instruments, plants in Texas, Italy, Japan, &Singapore. It purchased Dominion Semiconductor from Toshiba and is backed by Intel. Nanya Technology Corporation: It is the fifth-largest DRAM, Taiwan based manufacturer. In 1998 it purchased DRAM technology from IBM.

Nanya and Infineon formed a joint venture named Inotera producing 256Mbit DRAM starting in June 2004. Semiconductor Manufacturing International Corp. (SMIC): Established in 2000 and headquartered in Shanghai, China. It took designs from other firms and produced chips based on blueprints. In 2003, SMIC signed agreement with Infineon & and later with Elpida to license technology to SMIC in exchange for purchasing rights to much of the output. It also bought production facility from Motorola. COMPANY OVERVIEW:

In 2005 it was the largest conglomerate (called Chaebol) in South Korea. The total net sales of the group had reached $135 billion in 2004. In 2004 the goup had 337 overseas operations in 58 countries and employed 212,000 people worldwide. Three core business sectors were Electronics, Finance, and Trade & Services. Samsung Electronics was established in 1969 to manufacture black-and-white TV sets.

At the end of 2004 the company had $78.5 billion net sales, $66 billion in assets, 113,000 employees. The company brand value increased from $5.2 billion in 2000 to $12.6 billion in 2004. In 2005 Samsung consisted of five business divisions: 1) Digital Media – TV, AV, Computers; 2) Telecom; 3) HDTV; 4) Digital Appliances and 5) Semiconductor Business. DEVELOPMENT OF MEMORY BUSINESS

Korea’s semiconductor industry started its wafer production in 1974. Kun Hee Lee, third son of Samsung Group’s founder Byung Chull Lee, bought Korea Semiconductor Company, using his own personal savings. Samsung Electronics was a producer of low-end consumer electronics goods.

Kun Hee Lee merged the two companies to create global powerhouse. First semiconductor produced was the “watch chip,” used in wristwatches. From 1983 to 1985, even as global semiconductor market went into a recession & Intel left the DRAM business, Samsung allocated more than $100 million to DRAM development. At that time cost to produce 64K DRAM was $1.30, market price below $1.00. in mid 1980s Samsung built its first large manufacturing facility.

To accomplish fast-paced construction, a target was set to build 4-kilometer road in 1 day to receive production equipment. Kun Hee Lee was made Chairman when father retired. Since 1992, semiconductors had been South Korea’s largest export. In 2004, exports totaled to $25.1 billion that is 10.4% of the country’s export volume. Samsung Group exported 22% of Korea’s exports. Samsung Group represented 23% of total market value at the Korea Stock Exchange. TECHNOLOGY DEVELOPMENT:

To design its first 64K DRAMs in 1980s with outside help the company found Micron in the US which accepted cash payment in exchange for teaching Samsung how to produce 64K DRAMs. To develop ‘frontier’ technology for next generation DRAM, Samsung used internal competition across global R&D sites. The company hired one team composed primarily of Korean-Americans with experience in semiconductor industry and located that team in California. A similar Korean-Americans team was located in S. Korea it was required to compete & collaborate and come up with its own solution.

California team won competition for designing 256K DRAM while Korean team won competition for next generation 1Mbit technology. Due to market situations Hitachi took the lead and Samsung came to second Hitachi in the market. Early 1990s, Samsung decided to increase the size of wafers used to cut the DRAM chips to eight inches to become number 1 again and they were first to do so. They invested $1 billion towards mastering the new technology and became number 1 again in 1992 and retained leadership for 13 years. PRODUT MIX:

In 2003, Samsung offered 1,200 different variations of DRAM products. Products ranged from “frontier products” (512Mbit DRAM) at the cutting edge of technology to “legacy products” (64Mbit DRAM). Within each product generation there were “specialty products” as well. Prices for new-generation products were high for a few quarters before plunging rapidly. “Legacy” products became high-value niche products.

In 2004, Samsung also sought to create some advantages in Flash memory for digital cameras & camera phones. Because market expected to grow at double-digit for another five years in Flash memory while DRAMs would experience a single digit growth and Flash price were high relative to that of the DRAM. DESIGN AND PRODUCTION:

Unlike its competitors, Samsung created new uses for DRAMs. It launched new DRAM products with “product-specific” applications, for laptops, personal game players etc. Many of them shared a common core design. Even two seemingly different architectures, DDR DRAM & Rambus DRAM shared the same core design. Samsung main R&D facility and fab lines were located at a single site near Seoul whereas, competitors’ facilities were scattered across the globe.

The benefit was of collocation and scale of fab which saved them an average of 12% of construction cost. At Samsung’s primary campus, R&D engineers & production engineers lived in the same company-provided housing. Samsung prided itself on the reliability of its products & ability to customize products. But in 1980s & 1990, Samsung was producing poor quality products.

Thus in 1994, Lee wrote a book that was delivered to all employees and explained how the Group had lost sight of quality & argued that employees must now think of quality first. The result of this effort was that by the late 1990s, Samsung was routinely winning key industry competitions for reliability and performance. Samsung developed new Flash memory chip for Sony Ericsson & chip customized for Nokia. HUMAN RESOURCE POLICIES:

It was considered taboo at Samsung to ask a coworker about his or her university or place of origin. Prospective employees were given aptitude test covering language skills, mathematical knowledge, reasoning, & space perception. As a result of more meritocratic evaluation system, younger, high-potential, English-speaking managers were quickly promoted up the hierarchy. Samsung also place programs to invest in employees’ global business skills. Samsung claimed to have invested more in its employees that any other competitors in this industry.

They also hired westerners & other foreign talents. According to the Chairman of the company, “At Samsung, we reward outstanding performance; we do not punish failure. This is my personal philosophy and belief.” STRATEGIC CHALLENGES:

In 2005, company faced new challenges from Chinese entrants who were attacking the DRAM market in the way Samsung did 20 years ago. These Companies were using partnerships with Infineon & Elpida with billions of dollars in outside financing to build state-of-art production facilities. Chinese producers have patience to endure years of losses to gain significant market share. China lacked critical infrastructure for cutting-edge semiconductor industry but the Government s firmly committed to subsidizing all infrastructure needs around Shanghai and Beijing.