Value Chain: Samsung Semiconductor Assignment
2008 MBA/ENG 290G
International Competition in Technology
Team 4
Samsung Case
Christian HuthLakshmi Jagannathan Christopher Quek Daisuke TanakaJohn Michael Wyrwas
Options for dealing with the Chinese threat
1. Technological lead Build on know-how of product and process technology to offer high-value
customized products with high reliability at low costs (e.g. flash memory)
Lead over Chinese companies because of their lack of organizational experience, old production processes and tacit knowledge to master design and production technology which is expected to sustain over more than a decade
2. Cooperation Cooperation with non-Chinese competitors can lead to reduction in R&D and
production costs and a technological advantage
3. Chinese (LCC) licensing Licensing technology to Chinese manufacturers and purchase output at low costs
Technology transfer will speed up development process of Chinese manufacturers and transform partners to future competitors (similar to Samsung history)
4. Chinese (LCC) production Starting own production in China, probably with Chinese partner will reduce costs
Problems in company culture which focuses mainly on Korea can arise
Advantages and strategy of Chinese entrants
Ability to attract billions of dollars in outside financing
Government incentives, tax concessions and infrastructure improvements provide cost advantages
Labor costs provide cost advantages
State of the art facilities could be competitive over older technologies
Partnerships to learn from industry incumbants
Patience to endure years of losses while building up market share (lose money now, but make it up on volume)
But... not yet successful At the time of the case, semiconductor sales of $771 million from China in 2003 (4%
of global capacity), versus $25.1 billion in 2004 Korean exports.
Only expected to grow to 9% by 2007
SMIC 2003 DRAM volume < 10% of Samsung’s (68.2 million chips vs. 896.4 million)
Samsung success
Well timed & lucky investments $100M in initial DRAM development during 1983-1985 market downturn
Chose best 1Mbit technology in late 1980s, as a competing technology caused production problems for IBM, Toshiba, and NEC
Increased capital investment as market expanded in late 1990s.
Focus on quality Samsung enjoys both a cost advantage and premium sale price due to product
quality, allowing it to earn much higher margins than its main competitors: Micron, Infineon, Hynix.
Quality is part of company culture instilled by chairman Kun Hee Lee
Cost advantage is primarily due to raw materials cost (<35% of average competitor’s) which is due to higher production yield (35% higher than average competitor). The raw materials are about 1/3 the cost of the final product. Samsung also has a cost advantage in depreciation but no advantage in labor costs.
Production yield is because of better process technology, but Samsung invests similar amounts in R&D as its competitors: R&D work is more productive per dollar spent.
Samsung’s Next Steps
To maintain this differentiation advantage, Samsung should enhance/maintain: Strong Work Ethic/Culture
The ability to have the strong vision and make correct decisions
Strong Management and Employees who have shown their ability to carry out industry transformation very well- flexibility, unity, experimentation, shaping competition within its company, and addressing uncertainty very well
Reliability and quality in products
Ability to innovate new technology and have R&D in-house
Its product mix, differentiating it even further
Retreating from Low-End Product Lines? Focusing only on high end products could free up resources
Not retreating gives them an advantage from the experience curve
Samsung’s Next Steps
Comparing the strengths and weakness, Samsung will be able to withstand the Chinese threat. Moreover, some other factors also affirm this conclusion: In its own entry 20 years ago, the vision of the future of Samsung Group in the
semiconductor industry was a wise decision
Do the Chinese entrants have such a strong vision? Do they have the financial, technical, and manpower ability to do what Samsung did 20 years ago?
Unless the Chinese is able to have the same sort of strong entry that Samsung did, which does not seem likely given the factors discusses, the Chinese entrants are less likely to be a threat
Samsungs Cost Advantage
Samsung is able to be a low cost differentiated producer by:
Manufacturing R&D and Implementation Samsung has all of its manufacturing facilities in a single central location to take
advantage of economies of scale.
R&D facilities are located in the same location and process engineers are encouraged to work closely with design engineers.
The company has continually pushed to manufacture semi-conductors with newer processes to generate higher yields per wafer.
Design R&D and Implementation Samsung is uses a core design in all its products and builds additional logic on top of
that design to make specialized products.
This allows the company to take advantage of economies of scale and offer a broad product range.
HR Management Samsung extensively recruits foreign talent.
Promotes based on merit – “We reward outstanding performance; we do no punish failure.”
Is this advantage sustainable?
�The semi-conductor industry is unique because: Huge cost advantages from economies of scale. Semi-conductor fabs produce
finished units on an order of magnitude greater than other industries.
The ability to leverage a basic core design and effciently modfiy basic chips for specialized use is unique to semi-conductors.
The first mover advantage is greater in semi-conductors because of high capital requirements and quick product development cycles.
Other industries have been successful in creating similar advantages e.g. Auto manufacturers (Toyota)
Services (Ritz)
Chinese Entrants and Samsung
SamsungStrengths:Its major competitors (Elpida, Hynix, etc) are not as strong financially or in the technology front
Has 4 other strong divisions other than semiconductors
Unique R&D facility and human resource capability/structure- Foreign talent, promotion based on merit, etc
Wise choice of entry in the 80’s into a booming industry (semiconductor!)
Extremely Strong Work Ethic- Hardworking and no complacency
Product Mix within its DRAM products and leverages legacy product premium
Market leader in low cost and productivity: strong focus on reliability and consumer demand
Chinese EntrantsStrengths:Numerous resources from Chinese and foreign investors
Ability to grow their market share at the expense of profitability
Partnerships with Infineon and Elpida to learn new technology
China Inc.: Chinese Government provides cheap credit, abundant land, cheap utilities, engineering talent, tax incentives and other resources for having a Chinese partner
Local demand, on path to become world’s second largest purchaser of semiconductor chips
Weaknesses:Possible threat from Chinese entrants•Focused heavily on DRAM – old format for a maturing market•Lack of international partnerships
Weaknesses:No real design capability and using old process technology
US and Taiwanese laws restrict technology transfer to China and working with Chinese producers means possibly losing IP •Only SMIC produces DRAM – rest are in logic chips•Top 3 chip producers were responsible for 84% of China’s 2003 production
Response to Chinese threat
1. Technological lead Build on know-how of product and process technology to offer high-value customized
products with high reliability at low costs (e.g. flash memory)
Lead over Chinese companies because of their lack of organizational experience, old production processes and tacit knowledge to master design and production technology which is expected to sustain over more than a decade
2. Cooperation Cooperation with non-Chinese competitors can lead to reduction in R&D and production costs and
a technological advantage
3. Chinese (LCC) licensing Licensing technology to Chinese manufacturers and purchase output at low costs
Technology transfer will speed up development process of Chinese manufacturers and transform partners to future competitors (similar to Samsung history)
4. Chinese (LCC) production Starting own production in China, probably with Chinese partner will reduce costs
Problems in company culture which focuses mainly on Korea can arise
Team 7
Team 7KC ChenAnthony GoodrowAndrew LiaoTao ShaPiyapat Tantiwong
SAMSUNG Electronics
Collaborate with a Chinese partner China was expected to become the world’s
second-largest semiconductors market. Major DRAM producers would look to Chinese
partners to expand joint venture. Intellectual property rights were not fully
protected Partner or Rival? The unique company culture was threatened
Increase Samsung’s investment in cutting-edge memory products.
Chinese firm’s low cost and productivity Cede low end of the market to the
Chinese while trying to develop more high-value niche products
Samsung•Pros•New types of cutting-edge memory chips •Over 1200 different variation of DRAM products •Great reliability •Ability to learn new design rules and apply
those rules towards the production of all product type•Ability to customize products to customer
demand •Break the traditional seniority-based promotion
•Cons•Cost•Strategy•2 options
Chinese DRAM Firms•Pros
Low price Plenty resourceEngineering talentGovernment support (cheap credit, abundant land, cheap utilities, tax incentives , etc)Cons•Short-term technology obstacle (Lack critical
infrastructure to support a cutting-edge semiconductor industry)•Older production lines •Few had design capacity•Strategy•Sacrifice profits for market share•Partnership•License technology, designs
1. Low financial costs (easy access to capital)- $1.63 depreciation cost vs. competitors $1.64- Investors still patient? Should improve operating
performance soon2. Cheap and talented local engineers- $0.80 R&D cost vs. competitors $0.623. Government support (cheap land, utilities, tax)- Doing well but marginal contribution may diminish in
longer term4. Partnership with global DRAM makers for technology- Stack or trench for SMIC? transition costs in the future?5. Sacrifice profits for market share- Worldwide capacity from 4% in 2004 to 7% in 20076. Huge domestic semiconductor market- The 2nd largest semi purchaser in the world by 2010
- Cost drives performance more than price premium does
Samsung Competitors' W.A. Samsung's advantageASP $5.68 $4.96 14.5%FL cost $4.31 $5.70 24.4%OP $1.37 -$0.74 NA
- Advanced technology node (12inch+ 0.11um+ 80% yield)
- Flexible capacity allocation - Centralized Fabs/ Economy of scale (saved
avg. 12% on construction costs)- Synergy from integrating R&D and
manufacturing resources (R&D vs. production engineers)
-Product mix-Customize products ( but around a core
design)-Bundling sales-Brand name-Reliability => Higher WTP by customers
- The market leader in Low Cost & Productivity.1. Ex. It was the only company in 256Mbit
DRAM in 2003.2. Leveraged these 2 core competencies to
manufacture reliable new generation products with many applications.
- Capitalize on high profit margins before competitors enter.
- Learning Curve
Samsung is ahead of the learning curve.
- Strong Manufacturing Infrastructure.
Samsung adepts at quickly bring things to market.
1. Samsung low cost advantage cannot resist the Chinese threat.
2. Samsung should retreat from the low-end product lines.
3. Maybe to collaborate with a Chinese partner to expand joint investments.
4. Samsung needs to make sure that the intellectual properties rights be fully protected.
- Focus on R&D to maintain the leading position.
- DO NOT cede the low end market.
- Customization and Great variety of products.
- Reliability and Quality
Team 3
Samsung v. SMIC
Team 3Brian GawaltGonzalo BaezRyan StanleySilvio Junquiera FilhoMBA 290G, Fall 2008
The Memory Industry• Samsung currently leads the industry in
production of memory chips– Lower production costs– Higher selling prices– Massive market share
• Chinese firms, particularly SMIC, want in on the action– Potentially rock-bottom labor costs– Existing excellence in other production of other
integrated circuits– Currently suffer from a knowledge gap. This is most
certainly temporary.
Samsung’s Next Move• Option A: Don’t Beat ‘Em; Join ‘Em
– Teach SMIC (or similar firm) to do all your DRAM fabs at their low-cost facilities
– This presents an IP risk (but if other memory firms are already cooperating….)
• Option B: Always Stay a Step Ahead– Memory pricing starts high with each new chip
design, then drops to marginal cost within six months. Stay six months ahead of them, and you’ll always have the better part of sales.
– This ignores your profitable-if-small legacy chip business, which you might have to abandon if you can’t drop production costs
Competitive Advantage: SMIC
• Cost Advantage– Already beats Samsung by 50% on labor– Safe assumption they’ll be able to match them
on materials once they scale up their production levels
– Possible handicaps in terms of depreciation and R&D, but SG&A advantages will probably neutralize these
• No real differentiation advantages
Competitive Advantage: Samsung
• Cost Advantage– 8” and 12” wafer fab systems boost product output for
same amount of input– Massive market share creates buy-in-bulk
opportunities for materials• Differentiation Advantage
– Samsung has an impressive yield which will always command a premium price
– Strong innovation culture (“competing” research campuses in Korea and California) keeps them ahead of the curve
Samsung v. SMIC: Costs
• Samsung used to enjoy a cost advantage in labor: That’s gone now
• Chinese entrants may also bid up traditional material cost advantages
• Wildcard A: Depreciation?• Wildcard B: Legacy projects?
Samsung: Cheap but Quality• Their remarkable yield is a two-fer:
– Less waste of materials/labor– Higher price from suppliers
• Memory and ICs in general are particularly fault-prone, especially as sizes drop.– Does your industry produce goods that are defective
0.1%, 1% or 10% of the time?– The higher the defect rate, the greater your odds of
finding a yield advantage– Temper these odds with a recognition of how old your
industry is (and how likely it is to undergo transformation)
Recommendations
• A Chinese Partner Is Too Risky– Keep your yield technology as secret as possible– Don’t dilute a unique and successful management
regime• The low end may be gone
– Keep looking ahead: make smart moves like your 8”/12” fab investments to squeeze more out of your leading edge products
– Things remain bright: even spot SMIC your supply costs, and they still couldn’t beat you on price!
Team 8
Samsung SemiconductorsMBA 290G
Prof. Charles WuTeam 8
Fuat E. CelikGopal ChaudhooryIgnacio ContrerasFrancois GalletCamilo Mendez
How to deal with the Chinese threat?
Compete on cost Develop advanced technology for Memory market Partnership with other niche player for new technology Add new product lines using Memory products and
others made by Samsung Expand to different markets - TV etc
Samsung vs. China
What kind of advantage are the Chinese entrants seeking? Design and Engineering advantage Reduced Cost
How close are they to achieving that advantage? Not far – probably it could take them less than a decade Partnering with incumbents to learn new technologies Investing in building state of the art equipment Resisting losses to gain market share while they learn about the industry
How much of Samsung's performance is based on it's low cost advantage? Low-cost advantage resulted in higher profits Higher profits where invested in R&D and new business developments R&D resulted in higher quality products
What were the sources of Samsung's cost advantage in DRAMs in 2003? Low-wage labor Higher capacity utilization resulting in lower depreciation costs per unit Lower R&D costs based on the localization of R&D unit in a site near production – Unique
culture Lower interest expenses because of reduced financial leverage
What were the sources of Samsung's price premium in DRAMs in 2003? Reliability and Performance Product mix – Served high value niche markets (legacy products)
Does Samsung Stand a Chance? Cost Advantage
Samsung will probably lose on absolute cost – but can build on their strong current position to emphasize value over cost with clever marketing
Design Chinese competitors are behind in design of chips and processing, for now.
Samsung’s best chance is to profit from that gap by selling its designs and knowledge
Product Mix New entrants will compete for “frontier products” but Samsung’s “legacy” and
“specialty” products are less likely to be affected. However, Chinese producers could reach next key technology first and could overtake the specialty market too
What to do? Samsung enjoys such a huge advantage, it will be last to be forced out of the low-
end product market. More likely it will share that market with only Chinese competitors
Samsung must continue to emphasize the quality of its products, even over their absolute costs, and position itself to be a major supplier to PC manufacturers who will pay a premium for quality, while looking to increase strength in a wider range of products – such as creating “specialty” game console chips
Low-Cost and Differentiation
Samsung has taken advantage of cost-saving design and production techniques
Samsung also placed product quality at the highest importance Samsung was willing to sacrifice a little on cost to develop a culture
and reputation for quality In this way, they can be seen as providing superior products at
almost the lowest price, well worth the difference to some customers such as PCs
RAM chips are a unique industry where defects in the product are difficult to detect, but have a huge effect on the value of the final product, the PC
Samsung’s success can only be mimicked in an industry where a small component (in terms of cost) of a larger product can have a huge impact on its value
Dear Chairman Lee:
Invest in cutting-edge products Recruit best talent Explore new areas in memory like solid state memory
Collaborate with companies and don’t allow Chinese companies to get access to new technology
Focus on developing high-value niche products Keep the prices low as compared to Chinese companies Acquire start-ups with new technology which has potential
to be big
Team 1
Samsung Electronics:Case Analysis
Team 1Franck Formis Robert Kong Vincent Ng Jameson Slattery Chuohao Yeo
Dealing with Chinese threats Collaborate actively with a Chinese partner
Get a share in the growing market Risk: Intellectual property rights not protected
Partner becoming rival
Risk: Moving production to china might threaten Samsung’s culture
Increase investment in cutting-edge memory products Cede the lower end market to the Chinese Develop high-value niche products
Brand advantage
Chinese entrants Chinese companies are trying to gain market share
At the cost of losses (Low selling price) Vast amount of outside investment to support long term
losses Invest to compete in emerging generations of chips
To gain advantage in long term Other countries are trying to hinder Chinese growth
Use partnerships to learn from industry incumbents Chinese government actively supporting the growth of
industry
A low cost advantage?1Q00 1Q01 1Q02 1Q03 1Q04
Average Selling Price ($) 39.08 20.82 9.31 5.76 6.15SamsungOperating Cost ($) 16.95 12.36 5.72 4.77 3.92
Operating Margin 57% 41% 39% 17% 36%Average Selling Price ($) 32.49 12.59 5.01 5.10 4.51
MicronOperating Cost ($) 34.75 15.81 8.28 7.96 4.75Operating Margin -7% -26% -65% -56% -5%Average Selling Price ($) 26.62 10.58 8.90 4.89 4.95
InfineonOperating Cost ($) 18.11 13.46 9.80 5.62 4.75Operating Margin 32% -27% -10% -15% 4%Average Selling Price ($) 28.72 12.42 8.56 4.57 5.16
HynixOperating Cost ($) 22.21 11.82 6.08 6.16 3.89Operating Margin 23% 5% 29% -35% 25%Average Selling Price ($) 36.00 14.30 8.58 5.12 5.06
ComparisonPrice premium of Samsung / (Competitors Avg) 33% 75% 24% 19% 26%Operating Margin of(Samsung - Competitors Avg) 41% 57% 54% 53% 28%
DRAM sources of cost advantage:
-5% from supplier lower raw materials -12% PPE costs low depreciation
In 2003 Samsung Micron Infineon Hynix SMICComp.
Wght. AvgSamsung - Comp.
Wght. AvgFully loaded costs 4.31 6.61 5.02 5.33 4.84 5.70 -1.39Raw materials 1.18 1.93 1.58 1.93 1.84 1.83 -0.65Labor 0.54 0.94 0.76 0.51 0.23 0.74 -0.19Depreciation 1.35 1.88 1.50 1.48 1.63 1.64 -0.29R&D 0.60 0.57 0.71 0.58 0.80 0.62 -0.02SG&A 0.65 1.28 0.46 0.83 0.34 0.87 -0.22Operating Profit 1.37 -1.68 0.02 -0.36 -0.41 -0.74
Operating Margin 24.10% -34.10% 0.50% -7.30% -9.30% -15.00%Equiv. Prod. Volume (*) 896.4 672.8 535.3 521.5 68.2Operating profit in $M 1224.3 -1129.5 12.9 -188.1 -28.1
Samsung competitive costs advantage
DRAM sources of price premium:In 2003 Samsung Micron Infineon Hynix SMIC
Comp.Wght. Avg
DRAM(256Mb)
$5.08 $4.48 $4.73 $4.58 $4.43 $4.57Avg selling price$0.51 -$0.09 $0.16 $0.01 -$0.14 - Price premium$0.94 -$2.04 -$0.11 -$0.85 -$0.41 -$1.04Operating profit
54.26% - Price premium / Oper. profit
SDRAM(256Mb)
$4.95 $4.56 $5.00 $4.58 - $4.67Avg selling price$0.28 -$0.11 $0.33 -$0.09 - - Price premium$0.79 -$2.06 $0.03 -$0.95 - -$1.28Operating profit
35.44% 1100.00% - - Price premium / Oper. profit
DDR SDRAM(256Mb)
$4.72 $4.45 $4.65 $4.57 $4.43 $4.55Avg selling price$0.17 -$0.10 $0.10 $0.02 -$0.12 - Price premium$0.66 -$2.03 -$0.16 -$0.82 -$0.41 -$0.96Operating profit
25.76% - Price premium / Oper. profit
DDR2 SDRAM(256Mb)
$8.83 - $8.67 - - $8.67Avg selling price$0.16 - $0.00 - - - Price premium$3.90 - $2.95 - - $2.95Operating profit4.10% - 0.00% - - - Price premium / Oper. profit
Rambus DRAM(256Mb)
$9.21 - $8.45 - - $8.45Avg selling price$0.76 - $0.00 - - - Price premium$4.32 - $2.86 - - $2.86Operating profit
17.59% - 0.00% - - - Price premium / Oper. profit
Low cost advantage withstand Chinese threat? Yes, only if Samsung partner up with Chinese firm
Its competitors, like Elpida, Infineon and Motorola are already partnering with SMIC to gain cost advantage
Advantage of Chinese firm mainly come from cost advantage through government support. This is very difficult to emulate unless the Korean government does the same
SMIC is already getting technology through Samsung’s competitors, Samsung can’t prevent the rise of these Chinese firms by staying away from them
May also consider building a fab in other low cost countries
Retreat from low-end product line? No, can just do it in China
Can partner up with Chinese firms to gain cost advantage, just like its competitors do
This partnership only risk diverging Samsung low end technology to China, which China already possess from partnership with Samsung’s competitors
The cost advantage that Chinese firms enjoy is only evolutionary, not revolutionary. Samsung can follow this strategy without much cost, so should definitely do the same thing
Can produce high end products in Korea while only producing low-end product in China
Gain differentiation advantage? Invest in both high-end products and low-end
products Produce high-end product in Korea, better control of
intellectual property. Produce low-end product in China, reap cost benefits
initiated by Chinese government, while reducing risk of losing sensitive IP
Samsung can pursue both strategies since it is in a strong financial position
Samsung is low-cost and differentiated Lower fully loaded cost vs rivals
12%-31% overall cost advantage Significant cost advantage (>10%) in raw materials,
labor, depreciation and SG&A A player in wide range of memory products
Over 1200 variations of DRAM products Memory sizes RAM architectures DRAM, SRAM, SDRAM, NAND flash
Achieving low-cost and differentiation Internal competition / debates Production engineering innovations
Willing to invest in new technologies High incentives to engineers to reward productivity gains Multiple architectures on each production line
Centralized R&D and fabs Manufacturing problems quickly solved
High customizability R&D and manufacturing in support of customers
Economy of scale Tie memory products to high-growth consumer products Actively create new demand
Difficulties in execution Cash flow
New fabs are expensive Substantial R&D overhead
Restriction in flow of technology U.S. and Taiwanese government restrict flow of advanced
semiconductor technology and equipment Management discipline
Far-sighted leadership Samsung practices strict meritocracy in promotion Technology know-how is institutionalized Quality control needs to be emphasized
Economy of scale Raw materials supplier provide volume discount
Recommendations Partner with a Chinese firm for low-end products
Gain access to local market Take advantage of lower labor costs
Keep high-end memory production in Korea IP protection Alignment with Samsung culture
Invest in next-generation R&D What will replace DRAM and Flash? R&D and chip design as key value drivers
Team 10
SAMSUNG SEMICONDUCTOR
Anirban Sen Elihu Luna-Thomas Raluca Scarlat Yilun Hu
Options to Deal with Chinese Threat Collaborate actively with the Chinese partner. (If you
can’t beat them, join them).
Increase investment in cutting-edge memory products,
particularly for new niche markets.
Cede the lower end of the market to the Chinese while
trying to develop high-value niche products.
Chinese competitive advantage The Chinese entrants into the semiconductor market are
seeking a large percentage of the market share in older and well established product lines.
China is expected to become the second largest producer of semiconductors in the world (after the US) within the next 2 years.
Samsung’s performance is only partially based on its low cost advantage. Sources of their advantage were the variety of products ranging from frontier to legacy and specialty products. Also, their fabrication facilities are located centrally while their competitors’ facilities are scattered worldwide.
Samsung’s price premiums in DRAMS come from the creation of specialty products for specific customers as well as the conversion of some legacy products after market to niche products
How to deal with Chinese competitive advantage. Samsung’s low cost advantage from its centrally
located fabrication facilities will not last long as the Chinese are building similar facilities and will soon be able to compete.
Samsung should partner with the Chinese semiconductor manufacturers on low end product lines.
Samsung should also invest heavily in Flash memory and other niche market and high-end chip research and development. This is an area that the Chinese firms have not yet been able to capture.
Samsung: low cost but differentiated The DRAM market is not completely commoditized,
reliability is still a factor of differentiation Samsung could achieved this differentiation at low cost
because:a) Quality is ingrained in its cultureb) Creates huge scale economies c) Encourage innovation and leverage breakthroughs in
several types for product (capitalization of core designs)d) Operations are designed to minimize costs without
sacrificing outcome (e.g. centralized location - competitive benefits)
e) Centralized knowledge to improve products and diminish time to market
Samsung: the Chinese competence Have resources and are able to sacrifice short term profits Have no knowledge of DRAM manufacturing No current infrastructure, but government commitment Samsung cannot be outside of one of the largest RAM markets, but at
the same time cannot risk IP in a country that offer no guaranties Recommendation:
1. Samsung still have the most reliable chips, so even though IP from competitors (e.g. Micron) might be disclosed and Chinese manufacturers pop-up, they will take long time to catch up Samsung’s expertise
2. Set a foot in China (to be the second largest market for RAM) partnering with distributors and possibly a manufacturer to produce previous- generation chips while giving time to the country to improve IP protection (not releasing core innovation)
3. Samsung core values are difficult to imitate and internalize in the short term 4. For the long term, consider in acquiring a manufacturer in China to function as
Samsung b-brand, and help it to keep large scale to dilute innovation costs
Team 9
Group 9
James An
Zishan Khan
James Su
Boaz Ur
Continue with driving more superior products
Chinese competitors lack R&D investments and experience. There is a strong beliefthat to succeed in this industry both R&D and manufacturing need to be highlyintegrated to produce continually superior products.
Collaborate with Chinese Partner
Samsung could maximise efficiencies by outsourcing manufacturing to a Chinesepartner thus being able to maximise profits and opportunities from a risingcompetitor.
Produce more value add services
The source of Chinese companies advantage is with the labour force, they lackdesign and software in the semi-conductor space. Samsung should provide bundledpackages thus giving them a competitive advantage.
Key Advantages Chinese firms are targeting?
•Self sufficient semiconductor industry
•Leading edge semiconductor designs
•Leading edge semiconductor manufacturing
How close are they to achieving this?
• Currently lacking core semi-conductor technology, experience and leadingengineering talent.
• Multiple fab plants now complete through Government and foreign investment
• 600 design houses established but with limited experience
• Production of basic versions of semiconductors is available at discount prices.
• Semiconductors are sold at 34% average premium over competitors.
• Semiconductors are sold at 53% average operating margin than competitors.
• Key cost advantage is in “Raw Materials” based on economies of scale.
• Able to charge a higher price as they have a superior product (lower errorrate, thin wafer with higher density of chips)
• Samsung low-cost advantage can withstand the Chinese threat for the nearfuture where they have advantage in Yield and Wafer size.
• Samsung should retreat from the low-end product lines only when they willlose significant market share and the price drives them down to marginal loss.They should continue to charge a premium while they can.
• Samsung should build on their high quality reputation as well as theirposition as the cutting edge producer. They can also differentiate withcustomer service.
• Samsung can do both because it enjoys both economies of scale and scope.
•The scope enables them to build factories for premium high end products andthen as the products become older offer them at low cost, because they havepaid for the associated fixed costs (R&D & Manufacturing lines) with the highend products.
•They introduce advanced manufacturing processes like larger wafers thatlower costs substantially.
•They have scale in terms of sourcing materials as well.
•Their Chinese counterparts on the other hand, develop processes and enterthe market where the prices have already gone down.
• Samsung should continue to invest in improving production and processes. Inthe past this has given them a significant advantage over their competitors.
• Samsung should consider reducing the selling price of their low end chipswhen the benefits of adding a premium no longer outweigh the loss in marketshare.
• Samsung should invest in R&D of high end chips.
Team 6
Facing Chinese Rivals-Samsung
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Oct. 15th, 2008
Team 6
What are the options for dealing with the Chinese threat?
• Price war with Chinese rivals to maintain market share▫ Memory industry is a capital intense industry, maintain sales
volume helps declines in loss and market share.▫ Set up production line in China to gain more cost advantages
• Keep premium price and expand in niche market▫ Keep invest in R&D to gain the most advanced technology so that it
could charge premium price.▫ Maintain its excellent quality control to provide the best quality
• Combination of the two
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What advantages are Chinese Entrants Seeking?• Market Share. High production capacity at low margins, allowing them to crush
competition as Samsung did in the '80s.▫ Low-cost labor makes Chinese semiconductor manufacturers like SMIC
unbeatable at low-end memory chips▫ Chinese willing to sacrifice profits for market share▫ they are willing to wait while they develop expertise
• Intellectual Property (of others)▫ Chinese seek to trade their low production cost for product and
manufacturing IP
• R&D Capability. To design new-generation DRAM and high-end products that yield higher profit margins.▫ Develop R&D capability in product development and manufacturing▫ Move up the value chain to “Frontier” DRAM products.
• How close are they to achieving that advantage? ▫ In 2005, lacked organizational expertise and tacit knowledge in design
and production.▫ Easy access to financing and engineering talent may allow them to reach
goals by 2015
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Samsung’s Low Cost Advantage
• Cost advantages-DRAMs▫ About 35 % of Samsung’s favorable operating margin in DRAMs relative to
competition is due to its low cost advantage. Competitors costs were, on average 132.2% higher than Samsung’s.
Raw materials: competitors’ cost was 155.1% higher Labor: competitors’ cost was 137.0% higher Depreciation: competitors’ cost was 121.5% higher R&D: competitors’ cost was 103.3% higher SG&A: competitors’ cost was 133.8% higher
• Price premium in DRAMs: Advantage across the board
64Mb 128Mb 256Mb 512Mb
Samsung $8.63 $6.45 $5.08 $14.21
Competitors $8.00 $5.66 $4.57 $12.62
Premium 1.08% 1.14% 1.11% 1.12%
75
Can Samsung low cost advantage withstand the Chinese threat? What should Samsung do?
• Samsung competitive advantages in low cost materials may goes away▫ Chinese companies bigger and buy more▫ Eventually not able to compete on price
• Samsung must innovate ahead of Chinese companies▫ Protect manufacturing IP as well▫ Outsource to China only low-margin products▫ Maintain highly valuable culture of innovation
76
How Samsung became both low-cost and differentiated?
• Cost advantages▫ Originally low labor cost of Korea▫ Aggressive investment into new DRAM▫ Abundant cash flow by ensuring market share▫ Positive interaction between market share and investment
• Differentiation▫ Learned outside technologies (i.e. US and Japan)▫ Collocation of R&D and production engineering▫ Created an unusual internal competition across global R&D sites▫ Aggressively invested into new technology (i.e. 8 inch mass production)▫ Ability to produce 1200 different varieties
77
Can other companies do both?
• Need to take great risks in investment▫ Samsung is managed by founder’s family▫ Strong leadership of Chariman, Kun Hee Lee▫ Hierarchical culture of Korean organization
• Need to have abundant resource▫ Focused resources on the area with strength –semi conductor-▫ Positive relationship between market share and investment
• Need to be supported by nations’ characteristics▫ Lower labor costs than developed countries▫ Rapid growth of Korean macro economy▫ Abundant labor forces
I
78
Recommendations to Chairman Lee facing the threat of large-scale Chinese entry
• Setting up manufacturing subsidiary in China or sub-contracting the same to a Chinese manufacturer to take the important cost advantage.
• Continue to invest in R&D to get better designs▫ $1B investment in 8-inch mass production early. Its competitors
would not be able to invest in such technologies.▫ Chinese producers act as third party manufacturers; they do not
have any R&D activity, and hence can never challenge Samsung in terms of design (which they take from companies like Infineon & Elpida, much smaller in size from Samsung).
• Partner with Chinese manufacturers▫ Most of the future demand was expected to be generated from
China itself. This could give exposure to the market, and help in building relationships.
79
Team 2
Team 2
Semiconductor
Team 2Yanpei Chen
David Exposito CossioEmrehan Kirimli
Rachel Vera SimonJon Wiesner
Team 2
Options to deal with Chinese ThreatOption 1-Collaboration with Chinese partners. Pros and Cons:
- Easier access to a huge market (to become 2nd largest in the world).- Easier access to some of the Chinese factor conditions: cheap skilled labor force, large number of supporting industries, tax incentives, good infrastructure, clusters of supporting industries, increasingly sophisticated customers
- Decentralization of the currently most efficient manufacturing process. - Reaction of Korean labor force highly devoted to Samsung’s mission. - No protection of its IP rights in the manufacturing process, which is currently giving Samsung its competitive advantage.
Option 2-Focus on high end products. Pros and Cons:
- Higher margins- Already market leader thanks to its reputation in quality- Growing segment (PC memory market share is declining)- OEMs are willing to pay premium for reliability.- Continue to be market innovators which can give them advantage in new memory technologies.
- Leaves highest portion of the market to Chinese companies (PC accounts for 67%)- Risk of Chinese companies going to high end memories at some point in the future and continue losing market share.
Team 2
Options to deal with Chinese ThreatOption 3 – Status Quo. Pros and Cons
- Still compete in all markets head to head with Chinese companies.- Samsung has a highly centralized and efficient manufacturing and design process that provides them competitive advantage. It’s not sure Chinese companies can develop the same efficiency in the near future (Korean factor conditions can be more favorable). - Samsung already has a brand and reputation for quality
- Price war might lead to low margins.- Trying to compete in both fronts (low and high end products) may make Samsung lose focus.
Team 2
Advantages of Chinese entrants seeking and Samsung
Chinese entrants seek price advantage – use lower prices to buy market share.
They have already achieved the advantage in low-end products.
Still some years until they achieve the advantage in high-end products.
Chinese entrants also get discount land/utilities from government.
Samsung’s performance is based on low cost and high quality.
Sources of Samsung cost advantage (in 2003) include High yield Larger wafer Concentrated production and R&D
Samsung can charge small premium based on increased product reliability.
Team 2
Market Attractiveness Matrix
Flash
Rambus DRAM128 DDR2 SDRAM
64/128mbit DRAM512mbit DRAM
256mbit DRAMSDRAM
256 DDR2 SDRAM
High Medium Low
Low
Med
ium
Hig
h
Market Attractiveness
Com
petit
ive
Posi
tion
Team 2
Market Attractiveness
Source of Market Attractiveness•Market Growth Potential•Operating Margin
Source of Competitive Position Advantage•Cost advantage•Price advantage•Differentiation
Samsung Advantages•Stage of R&D development•Raw materials costs (may be temporary)•Product differentiation based on multiple product lines•Price premium based on quality•High growth flash memory
Chinese Firms Advantages•Labor costs•Factor conditions•Weak IP protections•Foreign direct investment
Reco
mm
enda
tion:
M
ove
Up
Mar
ket
Team 2
How does Samsung do both low-cost and differentiated ?
Team 2
Porter’s Competitive Strategies
BroadDifferentiation
Strategy
FocusedDifferentiation
Strategy
FocusedLow-CostStrategy
Overall Low-Cost
LeadershipStrategy
Mar
ket
Targ
et
Lower Cost Differentiation
Broad Range of Buyers
Narrow Buyer
Segmentor Niche
Type of Advantage
Team 2
Porter’s Competitive Strategies
FocusedDifferentiation
Strategy
FocusedLow-CostStrategy
Overall Low-Cost
LeadershipStrategy
Mar
ket
Targ
et
Lower Cost Differentiation
Broad Range of Buyers
Narrow Buyer
Segmentor Niche
Type of Advantage
Samsung’s Strategy
BroadDifferentiation
Strategy
Team 2
Samsung’s Strategy Factors• Commitment to development
– Heavy investing, even during recession– First mover on manufacturing technology (larger wafer mass production)– Developing multiple solutions for same technology (internal competition)
• Strategic decision making– Investing– Single site for fab lines and R&D: scale & collocation collaboration – Technological choices (stacking instead of trenching)
• High volume economies of scale for raw materials• Diversification across products, DRAM density & product lines• Talent/labor
– Hiring/promotions based on aptitude (not background or seniority)– Work force dedicated to rapid development, long work weeks– Investment in employee development: sponsoring foreign MBA/ph.D– International recruitment– Benefits, profit sharing & incentives
• Geographic proximity to asian manufacturers and market• Access to capital
Team 2
Attempts at best-cost strategy often results in being stuck in the middle
FocusedDifferentiation
Strategy
FocusedLow-CostStrategy
Overall Low-Cost
LeadershipStrategy
Mar
ket
Targ
et
Lower Cost Differentiation
Broad Range of Buyers
Narrow Buyer
Segmentor Niche
Type of Advantage
Aiming for Samsung’s Strategy
BroadDifferentiation
Strategy
Firms providing products at lower cost
Firm’s offering premium products & services at premium prices
Firms more specialized better serving well-defined buyers
Firms with higher volumes & more supplier bargaining power
Team 2
Recommendation
• Emphasize R&D, increase the investment for high quality products– the only way to stay as the leader of technology in DRAM
• Do not work with Chinese producers for now– against to the company culture which is a big competitive advantage for Samsung– a potential threat to decrease quality standards– expensive to open a factory and train Chinese workers if you look at the current
conditions
– Consider to work with Chinese only if the price war would be getting stronger which might yield a high revenue decrease
• Reduce the price for low-end products – To prevent SMIC to make a profit and this will probably kill the company– also affect Micron and Infineon
• A good idea might be to increase the production capacity for flash memory– Flash memory market was expected to grow at a double digit rate as the DRAM
market was becoming mature
Team 5
Value Chain:Semiconductor
Group 5
Varun BoriahSonya Fereres-Rapoport
Dilip Joseph Brendan Quinn
Ada Zheng
What made the Korean electronics industry so successful?
SuccessFactors
• Government • Chaebols(Conglomerates)
• Human Capital • Foreign versus Domestic capabilities• Well-educated workforce
• Focus on science and technology• Hard work• Loyalty• Teamwork
Creativity
• Engagement in joint ventures• Exchange with overseas universities• Overseas recruitment• OEM agreements
Dependence on foreign suppliers
• Prominence of Samsung Chaebol • Success based on foreign trade• Electronics as profitable exports• Adaptation to specific markets
Importance of SME’s
• Legislative basis• Promotion of R&D• Support of Education• Funding of Infrastructure• Promotion of “Technoculture”• Role as synchronizer
Samsung’s cost advantage in DRAM (2003)Low cost of raw materials Cost of raw materials much lower than that of competitors due to
supplier discounts for high-volume buyers (upto 5%) Samsung was largest producer of all types of RAM chipsEg: 896m 256Mbit units versus 672m by Micron
Low labor costs compared to industry average
Korea is cheaper than US, Japan and EuropeTalented engineers availableHowever, Chinese companies like SMIC have ½ labor costs
Lower capex Main R&D and all fab lines in single locationLocated in mountains with clean dust-free airAverage 12% savings on fab construction costs (12% of $4b is huge!)
Efficient operations Co-location of R&D and fabs enables close interaction between R&D and production engineersDeveloped ability to use same production line for different products, based on dynamic demand conditionsLearned and widely applied new design rules quickly
Motivated Work Force Caring companyMeritocracy, success highly rewarded
Easy access to capital Easy access to capital as part of huge Samsung conglomerate
Good R&D bets $1b investment in risky large wafer (8in) production paid off
Samsung’s price premium (2003)
High quality & reliability Industry leader in quality & reliabilityRoutinely won key reliability awardsSupplier of choice for main OEMsReliability of memory critical for OEM’s products and hence pay >1% price premium for reliable supplier
Customization Customized memory for different applications and customer requirements
Laptops, game consoles, mobile phonesCollaborated with design firms like Rambus to create new apps
Large selection Offered an unprecedented number (1200) of types of DRAMLegacy products transformed into niche products that commanded price premium
Low-cost & Differentiation
• Samsung has mastered ability to use same production lines for multiple products– Others lack organizational abilities, design capabilities and tacit
knowledge to achieve this
• Different products based on same core design– Others lack such design capabilities
• As world’s largest producer of DRAM, Samsung incurs lower raw material costs– Others have lower bargaining power with suppliers due to their far lower
volumes
• Samsung’s co-location of fabs and R&D leads to efficient operations– Others have R&D fabs distributed across the world or have no in-house
R&D
Advantages for entrants• Attack Samsung in same way Samsung attacked Japanese
companies in 1980s• Use partnership and licensing with industry incumbents to learn
technology– Partnerships with IBM, Micron, Infineon, Elpida and Motorola– Still lacks design capability and organization experience for frontier
products• Leverage easy internal & external access to capital and government
subsidies to construct fabs– Multiple new fabs built– However, most use old 1-2 generation old process technology
• Labor costs much lower than Korea– Talented engineers available
• Gain market share even at expense of profits• Leverage large volume to drive down raw material costs
– Currently very low volumes (Samsung > 10x SMIC)• Gain foothold in market by selling inexpensive products using older
technology in expected 2005 industry downturn
Withstanding the Chinese ThreatOptions Recommendations for Samsung
Cede lower-end products to Chinese companies
• Samsung already has efficient product lines that can produce multiple products• Keeping volumes high by including low-end products reduces raw material costs• Do not allow Chinese companies to gain foothold into market• Low-end products needed in emerging economies and during the impending cyclical downturn.• Do not allow Chinese companies to reduce raw material costs by producing large volumes of low-end products.
Increased R&D • Maintain large existing tech lead over Chinese competitors• Diversify into FLASH to capture rapidly increasing digicam and music player markets.
Joint-ventures with Chinese companies
• Low intellectual property protection in China• Do not train your future rivals
Maintain quality & build brand image
• Use brand and high reliability as differentiators and core competitive advantages
Enter Chinese market • China predicted to be 2nd largest market by 2010• Very low cost labor and manufacturing facilities available• Use subsidiaries and maintain tight control• Risk of IP theft exists• Opposition from Chinese government & trade restrictions
Enter emerging markets
• Huge market opportunity• Gain foothold and establish brand image before Chinese flood the market• Use China as low-cost manufacturing base
Help from Korean govt. • Attempt to gain subsidies similar to those offered by Chinese govt.
Chinese market strategy
2
1
Adopt a two-way sales strategy
Export of products made in China directed by the head office in Korea
3
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3
4
3
4
Increase production facilities:19 in 1999 -28 in 2006 R&D, establish related R&D centers including communication research facilities) when building factories Secure high-quality human resources under the initiative of the head office in Korea
3
Domestic sales in China conducted mainly by local sales subsidies.4
2
3
4
Increase production facilities, operate R&D centers, and secure excellent human resource2
3
4
1
2
Implement a strategy that emphasizes brand (image) in order to differentiate the company’s products from others
3
4
Advanced into the global market more aggressively utilizing China as a production center.
1
2
3
4
Samsung's Market Position in China(2005)
Items market share (%) turn-over (million $)
1st rankedCRT monitor 31.70% 458LCD monitor 29.20% 256
2nd ranked:
multi functional printer 25.70% 66refrigerator with two doors 35.90% 30
MP3 14.00% 54mobile phone 16.30% 1.95
3rd ranked: PDP TV 9.20% 77
•
•
Overview
The Korean electronics industry has witnessed in the past a rapid expansion in terms of
– Size and capacity of facilities
– Technological expertise
– Income earned and impact on the world market
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Source: http://www.wtec.org/loyola/kei/welcome.htm (accessed on March 9, 2008)