Question 1:

Samsung finds itself in an enviable position. Its competitive advantages in memory span all parts of the company and its production process. As seen in the graphs below, Samsung has a low Willingness to Supply (WTS) as measured by its raw materials cost of just $1.18, which is 36% lower than the competitors’ average. Its capital efficiency is superior by roughly 18% with a per unit depreciation cost of only $1.35. This efficiency largely stems from the high yield rates and productivity at Samsung, with average yields reaching 80% while competitors’ levels are in the mid 60% range. Additionally, Samsung’s quality and reliability allow it to achieve a price premium of at least 15% over its rivals. The graphs depict Samsung’s advantages in various components.

To summarize, the significant price premium and the absolute advantages in terms of material sourcing and capital efficiency allow Samsung to enjoy operating margins of 24%(based on 256Mb equiv.) while other firms remain in loss territory.

There are many activities at Samsung that give rise to such dominance in profitability.

1) Pricing: Samsung is able to charge higher prices mainly because of its superior quality and reliability. Typically, a faulty memory chip will cause huge losses for IT manufacturers. This makes them more willing to pay an extra dollar or two for Samsung chips compared with other memory chip makers
2) Depreciation: Samsung is able to cut down per unit depreciation costs by having much more efficient production lines. The yield rate at Samsung of 80% is significantly higher than that of competitors. For the same amount of capital expenditure, Samsung is able to produce more memory chips thereby lowering per unit depreciation costs
3) R&D: Samsung creates fierce internal competitions among its workforce to accelerate research and development. This works, ensuring the company is the first to develop and market the latest designs. In addition to the concentration of R&D workers at one site, Samsung can maximize its R&D efficiencies and shorten the time it takes to produce its latest, cutting edge products. This is vital to maintaining Samsung’s competitiveness since Samsung’s strategy is to be the first firm to introduce advanced products and enjoy premium prices until other memory chip makers catch up.
4) Materials: Because of Samsung’s dominant market share and buying power, it commands significant power in negotiating prices for major components. Typically, its suppliers favor volume sales.
5) Labor: The obvious advantage compared with western companies is the comparative wage differences between countries, which favors Korea. However, apart from wages, Samsung primarily uses a competitive pay system based on productivity and profits which allow employees to earn as much as 50% of their annual income on bonuses. In addition, it also provides adequate company housing and an environment where workers can freely communicate and interact with others on-site. This leads to an improved and motivated workforce.
Ultimately, Samsung employs a strategy of being the “first mover” in the semiconductor industry by being the first to invest in the next generation fabrication lines and it’s willing to take on the risks associated with it. This allows it to maintain its R&D, technical leadership and expertise, commanding higher prices and volume while at the same time maintaining low costs. Considering that prices for memory chips stay high only for a period of six to twelve months, the advantage of being the first mover is significant in terms of profitability.

Moving on to the value stick comparison, we can easily see that Samsung has a dual competitive advantage. This results in both a higher WTP for product lines and a lower cost structure and WTS factor. Samsung’s strengths in effectively managing costs of material goods from suppliers through its high market share and buying power contributes to a low WTS. Furthermore, Samsung’s production efficiency and high yield rates along with internal R&D synergies lead to low operating costs relative to its competitors. At the same time, given Samsung’s high product quality, reliability and customization of its products, customers are willing to pay a premium, increasing WTP.

Question 2:

It took Samsung decades to become the leader in memory chips. Now, it sees the threat from China, an insatiable, growing market already consuming half the world’s memory chips. The Chinese government has a history of setting its sights on a growing industry--such as solar panels--and throwing money and resources until the country’s companies can compete. With this backdrop, Samsung has to decide whether to become a player in China, either on its own or with a local partner. All options have significant risks and potential opportunity costs, which we outline below. In the end, we believe one option has clear advantages.

Option 1: Enter China alone
In this scenario, Samsung would build a factory in China. It would fully control and own its operations, hiring local workers.

Strengths
The biggest threat to the company going into China is the risk to its intellectual property in a country that doesn’t follow the patent rules of developed nations and has a history of blatant copying. In this scenario, Samsung benefits from having operations in China, without having to work too closely with a partner that could adapt Samsung’s IP, quickly becoming a competitor. Operating in China also generates significant cost advantages for Samsung, hiring cheaper workers, and locating operations near top customers. And, compared with a joint venture, Samsung maintains complete management control.

Opportunities
With so many customers in China, there are significant advantages to having a local production facility. Samsung could co-locate with large customers. And, it will reduce distribution costs, duties and tariffs, not having to import from Korea.

Weaknesses:
Local workers may not have the expertise and skills necessary for working on the fabrication lines.

Threats:
Local infrastructure could also be an issue with uneven electricity, poor water quality, and incomplete roadways. Wages in China are rising fast, and increasingly informed workers may try to unionize.

And, operating in China always carries the risk that it could expedite Chinese competition. Proximity can lead to leaks and other unauthorized sharing of expertise with Chinese firms. The Chinese government could always decide to throw considerable resources toward its domestic companies.

Option 2: Joint Venture with China:
Generally, when a company wants to enter an unfamiliar market, it will try a joint venture to test the waters. Local firms know the market conditions, cultural mores, and how to get things done with local regulators. This could be an asset to Samsung, but it also comes with substantial risks.

Strengths:
Having a 50/50 partner in China reduces Samsung’s operational risk considerably. The Chinese company would be the liaison with local and national governments, and reduces Samsung’s potential for strategic misfires as it learns local demands and customs.

Weaknesses:
Samsung would not have full control of its operations, and its partner may have different cultural values and priorities. This would also be a first for Samsung’s memory chip division; it’s never had a joint venture anywhere, let alone one in a developing economy. The Chinese partner is almost assuredly less advanced technologically, and that could be hard to integrate while also maintaining Samsung’s quality standards. It’s not like partnering with Micron or Intel, where you can assume a certain level of reliability.

Opportunities:
The opportunities are the same as with the first scenario, but in a joint venture, Samsung only has 50% of the upside potential.

Threats:
The number one threat to Samsung operating in China is the risk that its highly prized intellectual property would be stolen or copied. A joint venture significantly increases that risk, as Samsung would directly share its plans and blueprints with its partner. That partner could use those documents to increase expertise, eventually transitioning into competitor. And, there’s the risk of leaks and sharing with unauthorized parties, creating yet more competitors.

Option 3: Don’t enter China
Samsung has been incredibly successful operating in its home country, with closely integrated research, development, and production. It’s a tried and true formula for success that has beaten foreign competition before.

Strengths:
There is very little risk to its intellectual property, as it will continue to keep development local.

Weaknesses:
Samsung can continue selling to China from abroad, but it might not understand the country’s market fully without having local operations. It might also lose market share to Chinese competitors who gain favorable treatment at home. With so much of the world’s demand in that one country, the costs to Samsung could be severe

In addition, the Chinese government expects foreign companies that make significant profits in the country to give back by investing in China. This could ultimately force Samsung to enter the market.

Opportunities
This plan continues Samsung’s successful strategy of growing production locally in Korea. It could also choose to focus on other developing markets like nations in Southeast Asia. Samsung has had some success partnering with American firms like Texas Instruments, and could explore similar options in places like the US with strong IP protection.

Threats:
Staying out of China creates one considerable threat. It opens the door to Samsung’s other foreign competitors to move into China first, stealing Samsung’s market share in the second most important market.

Conclusion:
Samsung should go into China alone. The risk of losing control of IP is too big a risk to enter into a joint venture. Staying out of the market completely could eventually shut Samsung out of what could become the biggest buyer of memory chips. There is a more nuanced way to enter China. It doesn’t have to produce its latest, cutting edge chips there. Instead, it should produce the second most recent generation chips: those that have moved beyond their most profitable phase but are still very much in demand and form the mainstream product lines. This makes it unlikely that a Chinese firm could apprehend Samsung’s intellectual property when it matters most to its business. And, the plant could additionally churn out commodity chips, and specialized, high-value versions based on older designs.