You are on page 1of 36

Samsung Electronics

and the Chinese Threat


MBA 290G Fall ‘07 Prof Charles Wu
TEAM 9

Alex Mehr, Bindiya Jadhwani, Kerem Tutuncu,


Lucian Popa, Rodrigo Fonseca, Uttara Parikh
DRAM INDUSTRY
Types of Memory
• Volatile
– DRAM: Dynamic RAM
• Higher density, lower cost, power hungry
– SRAM: Static RAM
• Lower density, higher cost, 2-4X faster than DRAM
– New technologies: ZRAM (Hynix, AMD), TTRAM
(Renesas)

• Non-volatile
– Flash
• High growth market (mobile, digital music and imaging)
• Slow to write, degrades over time
– PCM (PRAM) - Most promising new technology
• Fast, long lasting
• Prototypes by Samsung (512Mb), Intel/STM, Sep 2006

Sources: Introduction to Memory Types http://www.netrino.com/Publications/Glossary/MemoryTypes.php


Samsung Sep 11,2006 Press release and http://www.eweek.com/article2/0,1895,2021822,00.asp
Memory Industry
• Global Memory Chip Industry
– Approx $250 billion in 2006 (10% growth)
– $227.5 billion in 2005 from $213.0 billion in 2004

• Segmentation
– DRAM ( over 50% of this market)
– SRAM (10%)
– Flash (32%)

• Asia-Pacific projected to be the largest and fastest growing


market

• Cyclic industry with massive swings


– 2006 was a good year, prices were rising (revenue had 10%
growth) 1
– 2007 was a bad year, significant price plunge (by 39%) 2

1. http://www.infoworld.com/article/06/05/31/78779_HNchipforecast_1.html
2. http://www.informationweek.com/showArticle.jhtml?articleID=201201654
Cyclic Structure of Semiconductor
Industry
Factors :
– Rapid Technical Progress

– High Sunk Costs and Large Lag Times


• $1.5-2 billion for a fab, ready in 1-2 years

– Steep Learning Curves → higher variations of price

– Large R&D investments

– Periodic Technology Shocks


Global Market Share by
Countries, DRAM Sector

• (Source: Dataquest, May 2001)


• www.american.edu
Products Breakdown
• DRAM :
- Traditionally in PC’s ( 80% of DRAM shipments in
1990,declined to 67% by 2003)

- Telecommunications and consumer electronic markets


are growing consumers : mobile phones, switches,
hubs

- 2008 Prediction: TV’s, set top boxes and game devices


to represent 7% of this DRAM market
Value Chain
• Powerful players
- only 2 or 3 main dominating players

• Price conscious customers


– End user is not aware of DRAM brand
– Customers were fragmented
– No single OEM controlled more than 20% of
the global PC market

• OEMS negotiated high on price


Porter Analyses
Porter’s Diamond Model for
Samsung/Korea
• Factor Conditions
Location – Ports, Major markets
Labor – High concentration of
• Related/Supported
skilled engineers, HR policies
Industries
Government – policies for trade,
LCD, Mobile Phone and PC
education
industries

• Demand Conditions • Strategy and Structure


Korea has early adopters High internal competition – Hynix
Demand in east Asia is high Technology know-how,
experience
Porter’s five forces for DRAM
New entrants
• Guarded by economies of scale
• Significant capital costs
• Learning Curve
• Threat of retaliation
• Little brand identity significance
• Government Policy –e.g. China
Suppliers Customers
• No significant • No significant
differentiation buyers by volume
of inputs Rivalry • Buyers are very
• Suppliers not • Small no. of competitors price sensitive
concentrated • Significant exit barriers • Price limited by
• Cyclic Industry growth other memory
• No threat of
forward substitutes
integration • Little threat of
backward
Substitute products
integration?
• Danger of future substitutes
given rapid changes
• Probable little switch cost
SAMSUNG
Samsung History
• Established in 1969 to manufacture black and white TV sets

• Purchased a Korea Semiconductor Business in 1974

• In 1980 dedicated most of its resources to semiconductor business and


built its first manufacturing facility.

• By early 1990’s, was amongst the industry’s top contenders

• Brand value rank grew from 43rd in the world ($ 5.2 billion) in 2000 to
21st in the world ( $12.6 billion) in 2004 and 20th in 2006 (16.1 billion)

• Ahead of many brands such as Pepsi, Google, and Siemens

• Total net revenue in 2004 was $78.5 billion, and $78.7 billion in 2006
Samsung Structure
• Spans 58 countries
• Samsung Electronics has 5 business
divisions :
– Semiconductor
– Digital Media
– Telecommunications
– LCD
– Digital Appliances
Samsung DRAM Facts
• 2nd Largest chipmaker worldwide (2006) 1

• Market leader in DRAM ‘92 - ’07 2

– Total DRAM Volume 896.4M units (2003)


– Over 1200 DRAM products
– “Frontier” to legacy products
– Specialty and customized products
– Versus competitors (1Q00-1Q04):
– Average price premium: 34%
– Average operating margin difference: +53%

1. www.dailytech.com
2. Samsung 2006 Annual Report
DRAM Operating Profits

5
SG&A
R&D
4
Depreciation
Labor
3
Raw Materials
Price
2

0
IC
g

on

ix
n

ro

yn

SM
su

e
ic

fin

H
m

In
Sa
Samsung Performance
• Cost Advantages
– Lowest raw materials cost (volume)
– Lowest depreciation
– Labor and SG&A not high
– Shared core designs
– Lower cost fabs (12%)
– Flexible production lines
– Higher yields (because of process quality)
• Highest Price
– Highest reliability in industry: >$1 premium
Cost of Materials
DRAM Cost of Materials vs Volume
(2003)
2.5
Cost of Raw Materials ($)

SMIC Hynix Micron


2

Infineon
1.5
Samsung

0.5

0
0 200 400 600 800 1000

Prod. Volume 256Mbit equiv (M Units)


Kun-Hee Lee
Chairman & CEO

SAMSUNG STRATEGY
Generic Competitive
Strategies
• Two dimensions of competitive strategy
– Competitive advantage - low cost vs.
differentiated play
– Target Market - broad vs. niche play

• Samsung, because of the unique ecosystem


created around it, has successfully spread its
product line across both of these dimensions
Generic Competitive
Strategies
Lower Cost Differentiation

Overall Low-Cost Broad


Broad
Provider Differentiation
Range of Strategy Strategy
Target Market

Buyers (Commodity DRAM) (Cutting Edge DRAM)

Best-Cost Provider
Strategy
(Samsung’s Strategy)
Narrow Focused Focused
Buyer Low-Cost Differentiation
Segment Strategy Strategy
or Niche (Low cost flash memory) (Rambus DRAM)
Combined low-
cost/differentiated strategy is
difficult to achieve
• Difficult to implement
• Firms aiming to do this are often
stuck in the middle
• Firm’s products are too costly to
compete with low costs provider’s
product, and too undifferentiated to
command the price premium gained
by the differentiated
A variety of internal andfirm
external factors
have helped Samsung achieve this
desirable position
Samsung’s Combined Low-
cost/Differentiated Strategy
Samsung’s success has been due to a
variety of factors:
– Successfully customize products around a
core design
– Large product portfolio (occupy the entire
spectrum for a broad market play)
– Collocation of fab and R&D facilities
(internal conversation among engineers to
decrease time to market)
Samsung’s Combined Low-
cost/Differentiated Strategy
(cont’d)
– Easy access to Asian market
– Combination of educated guessing and pure
luck (e.g. stack design vs trench design)
– Talent pool strategy: Access to local talents,
sponsoring employees for PhD and MBA
education)
– Availability of capital: E.g. from 1983 to 1985
during recession of semiconductor industry,
Samsung allocated significant capital to build
capacity
CHINESE THREAT
Emerging Competitors
Elpida Japan’s only remaining DRAM producer

Hynix Has many financial problems

Infineon Major DRAM player with 25 R&D locations all


over the globe

Micron Investing in next generation DRAM technology


Technology with a $500 million investment from Intel

Nanya Producing 256 Mbit DRAM in a Joint Venture


Technology with Infineon

SMIC The only Chinese DRAM manufacturer. It is


China’s most advanced producer and a major
competitor for Samsung
Chinese Environment
Regulatory A zero tariff rate for importing semi-conductors
Tax rebates to domestically produced
semiconductors (avail in 2003 but stopped since
April 2004)
Other preferential policies although not
announced in detail, are in the pipeline to
encourage investment in semiconductors
Market Access issues still exist
Technology China lacks the critical infrastructure necessary to
support a cutting –edge semi-conductor industry
The US and Taiwan governments have forbidden
shipment of cutting edge production technology
to China. So China went to other countries

Alliances Chinese government provided cheap credit,


abundant land, cheap utilities, engineering talent,
tax incentives to anyone who was willing to
partner with a Chinese company
Labor China still enjoys an advantage in labor intensive
Chinese Advantages
• Ample access to capital
• Low cost of labor and administration
• Government incentives
– Cheap credit, land, utilities
– Tax incentives
• Engineering talent
• Strategy
– Licence technology, designs
– Sell at low prices to gain market share,
increase volume
RECOMMENDATIONS
Options (1)
1. Do not cooperate with the Chinese
• Save the current ecosystem in Korea
– A. Try to suppress the Chinese firms
• Cost reduction on low end DRAM: reduce from a margin
of 24% close to zero with the extra benefit of reliability
incurring significant losses to Chinese companies
(already at -9%)
• For how long can both sustain the war? Chinese gain in
workforce and capital whereas Samsung in volume
– B. Focus only on cutting edge high-end products
• Danger in the future that Chinese might learn and
overtake (just as Samsung did in the past)
– C. Search for a new technology
• Will it appear in time?
Options (2)
2. Collaborate with Chinese firms
• Lose the local ecosystem and increase some costs
• Lose perhaps on quality, i.e. reliability
• Easier to penetrate the Chinese Market
– A. Build a fab in China
• Benefit the long term cost reduction in salaries and SG&A
• Keep under control the Chinese firms
• Pay an initial potentially large cost of entry
• A large part needs to be controlled by Chinese local partner
• Could also lose sensitive information, helping competition
– B. Cooperate as Infineon by providing technology
• Not clear what the benefit is since they currently produce at a lower cost
and by partnering could create a future competitor
Recommendation
• Do not Open a fab in China for now
– Currently, it is not yet viable to move to China
• current prices are higher; extra cost of a new fab; potential
decrease in quality might even affect other Samsung products;
– If future prices of the Chinese products will be lower, consider
building a fab there with the low-end Samsung technology
• Focus on R&D to maintain technological lead
• Try to suppress the Chinese companies by price
reduction on low end DRAMs
– Do not allow them to gain market share
– Also affect Infineon and Micron which provide them with the
initial design
– Samsung is a large company that can afford to have lower
margins in one segment (lower end DRAM)
– Not even the Chinese can afford to lose a lot of money on
long term
BACKUP SLIDES
Largest Chip Manufacturers
2006
DRAM Competitors
• Samsung, 2nd (+11%,
+2B)
• Hynix, 8th,first time
among top 10
(+32%, +1.8B)
• Qimonda AG, newly
created Infineon
memory division spin
off, 12th
• Micron, 13th (+10.8%,
+.5B)
• Elpida 20th (+89%,
+1.6B)
What makes DRAM special?
• Type of RAM that stores each bit of data in a
separate capacitor within an integrated circuit

• Since real capacitors leak charge, the information


eventually fades unless the capacitor charge is
refreshed periodically.

• Because of this refresh requirement, it is a dynamic


memory as opposed to SRAM and other static
memory.

• Its advantage over SRAM is its structural simplicity

• This allows DRAM to reach very high density


Major Players
• Samsung is the market leader, ahead of
Japanese rivals in both size and profits

• In 2005, large scale entry by Chinese firms


– Easy access to money from local and
international forces
– Were willing to sacrifice profits for market share.

• In 2004 – Samsung announced sharp drop


in market prices due to increase in industry
capacity and partly due to cyclic downturn

You might also like