Competitive Strategy Samsung Electronics Samsung has a clear cost advantage over its competitors
We have identified the following key sources of cost advantages: Economies of learning, production techniques, input costs and residual efficiency. Economies of learning Samsung has demonstrated economies of learning. While in the 80’s Samsung had to acquire outside technology to begin production, Samsung soon lead industry with important breakthroughs such as “stacking” technique or successes in implementing the 8- and 12-inch wafer mass production. 12-inch wafer versus its predecessor yields a 10% lower cost per chip (Exhibit 10a) thanks to a greater output per step of production. Production Techniques The latter goes in hand with production techniques that ensure better yield rates. Minimizing defective chips brings down scrap and re-processing costs. In Exhibit 10c we can see that Samsung has 20% better yield than its closest competitor in this regards. Moreover, Samsung is able to keep producing legacy products (older than 1 year since launch) efficiently. By 2003, for example, Samsung was producing 16.40 million units of 64Mbit (merely 1.8% of its total production) while keeping fully loaded costs 27% lower than the weighted average cost of its competitors for this particular product (Exhibit 7b). Input Cost Large production volumes trigger high-volume purchases that results in discounts from suppliers. For example, raw materials represent on average 27% of the cost per unit for Samsung, for Micron 29%, for Infineon 32% (exhibits 7a to 7e). Moreover Samsung competes with low average labor cost: it has an average salary of $44k, versus $54k and $72.4k of Micron and Infineon respectively. Residual Efficiency Samsung has built a culture of innovation and quality. Evidence of this are initiatives such as campaigns for employees’ awareness in terms of the cost of low-quality, searching for talent by recruiting locally or internationally with thorough recruiting processes, or defining a meritocracy with promotions/bonus linked to results. We have not included economies of scales as a source of advantage because we do not know actual capacity of current fabs. Nevertheless, we do consider than any capacity that Samsung might be losing because of its flexible production line might be compensated with the savings of concentrating plants (the case states 12% of fab’s construction costs).

Samsung is also able to charge a price premium

The company’s ability to charge a price premium driven by 3 factor: technologically advanced products, high product reliability and availability. In the period 1Q00 to 1Q04, this price premium was 34% on average, and varied between 11% (3Q03) and was as high as 75% (1Q01).

Samsung Price Premium over competitors (%)
80% 60% 40% 20% 0% 1Q00 2Q00 3Q00 4Q00 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q04 Figure 1: Samsung ASP vs competitors ($)

High-Tech Products Figure 1 shows two trends regarding Samsung’s price premium relative to competitors. Firstly, the price premium follows a downward trend. This is mainly due to a declining market for SDRAM starting in 1999 due to the rise of flash memory, and competitors, such as Micron Technology (SDRAM represented 96% of sales) increasingly focusing on the SDRAM segment. Secondly, the price premium varies within the years. Although the information provided does not state exact dates of new generation product launches, case exhibit 6 shows that 2001 and 2003 mark the launch of the 512 and 1Gbit SDRAM chips respectively. According to figure 1, Samsung was able to increase its price premium in both those years which suggest that it was at the forefront of these new technological launches. High Product Reliability Samsung is known for its high product reliability and quality, and OEM’s are willing to pay upwards of a 1% average price premium for a reliable supplier which might explain a portion of the average price premium of 34%. Moreover, Samsung actively sought to customize its products around a core design, which allows it to better adapt to changing product requirements from emerging application such as personal game players. Suppliers might value this ability to customize products, and for lack of substitutes, be willing to pay a premium. This ability is enabled by Samsung’s highly trained R&D engineers who are collocated with the production engineers to maximize knowledge sharing problem solving skills. High Product Availability Samsung offers 1200 product; given that SDRAM products were conventionally thought of as commodities, the ability to produce 1200 different varieties was unprecedented. As the bulk of the industry’s production capacity focuses on the mainstream SDRAM chip (256Mbit), the ability to provide a large variety of memory products might also explain an increased willingness to pay.

Low cost and high prices translate into higher than average profit margins

% Operating Margin (avg 1Q2000-1Q2004)
Hynix Infineon -13% Micron Samsung 44% 6% 6%

Figure 2: Samsung's Operating Margin vs Competitors

The expected rise of Chinese players will change the industry equilibrium
With the Chinese threat, the SDRAM industry equilibrium is disrupted because there will be more capacity in the market due to new entrants. In the short term, we have to take into account that China has several cost advantages: low labor cost, government subsidies to finance new factories and access to cheap credit. In the long term, China is becoming a knowledge-based economy with the rise of good universities and a growing supply of local engineering talent. Although the required learning curve is difficult to develop and the yield rate is difficult to achieve, current cooperation between Chinese and established chip manufacturers pose a threat. Indeed, cooperation relationships between SMIC (from Shanghai) and Infineon (from Germany) or SMIC and Elpida (from Japan), induce a knowledge transfer to China. Finally, China is expected to be the world’s second largest purchaser of semiconductors. Knowledge of local customers, suppliers, regulations and financial and human resource might be a competitive advantage for Chinese entrants.

Based on an understanding of Samsung’s competitive advantage and the expected changes in the industry, we recommend the following
   Continue investing in R&D to remain at the forefront of technological developments and reinforce capability to deliver customized products. Focus on recruiting, people development and knowledge sharing to maintain a maintain industry leadership in terms of engineering capabilities. Prepare for the substitutes, flash and nanotechnology by identifying applications, product and manufacturing requirements and prioritizing R&D efforts.

Appendix: Porter’s 5 forces

Buyer Power (Medium to Bad)
 Price-sensitive; memory chips account for 4 to 12% of OEMs’ material costs Reliability and Quality (up to 1% premium on price) Fragmented; no single OEM controlled more than 20% Change: increased price sensitivity with Chinese low cost producer

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Threat of new entrants (Good) Threat of substitutes (Medium)
  Flash accounts 32% of industry sales and tied to growth of digital cameras and camera phones Nanotechnology based memory is still not ready   

Industry Competition
 Price Reliability Technology and Innovation Customization   $3b for new fab Learning curve difficult to develop Yield rate difficult to achieve Complicated manufacturing process.

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Dynamics within the industry

Micron (US), Infineon (GR), Hynix (KO) and SMIC (CH). As of now Samsung is the clear market leader.

Flexibility in adapting processes to new Supplier Power (Bad) products generation

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Consolidation of suppliers PCs’ chips lose share versus mobile devices

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 Change: lower Few Vendors (two or three barriers to main players) entry (government subsidies, etc.) Up to 5% discount for large buyers

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Change: More production capacity, pressure on prices and margins