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 PCs ( 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: TVs, 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
Factor Conditions
Location Ports, Major markets
Labor High concentration of skilled
engineers, HR policies
Government policies for trade,
education
Strategy and Structure
High internal competition Hynix
Technology know-how, experience
Demand Conditions
Korea has early adopters
Demand in east Asia is high

Porters Diamond Model for
Samsung/Korea
Related/Supported Industries
LCD, Mobile Phone and PC industries
Porters five forces for DRAM
Substitute products
Danger of future substitutes
given rapid changes
Probable little switch cost
Rivalry
Small no. of competitors
Significant exit barriers
Cyclic Industry growth
New entrants
Guarded by economies of scale
Significant capital costs
Learning Curve
Threat of retaliation
Little brand identity significance
Government Policy e.g. China
Customers
No significant buyers
by volume
Buyers are very price
sensitive
Price limited by other
memory substitutes
Little threat of
backward integration?
Suppliers
No significant
differentiation of
inputs
Suppliers not
concentrated
No threat of
forward
integration
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 1990s, was amongst the industrys top contenders

Brand value rank grew from 43
rd
in the world ($ 5.2 billion) in 2000 to 21
st
in
the world ( $12.6 billion) in 2004 and 20
th
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
0
1
2
3
4
5
6
7
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SG&A
R&D
Depreciation
Labor
Raw Materials
Price
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)
0
0.5
1
1.5
2
2.5
0 200 400 600 800 1000
Prod. Volume 256Mbit equiv (M Units)
C
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(
$
)

SMIC
Samsung
Micron Hynix
Infineon
SAMSUNG STRATEGY
Kun-Hee Lee
Chairman & CEO
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
T
a
r
g
e
t

M
a
r
k
e
t

Overall Low-Cost
Provider
Strategy
(Commodity DRAM)
Broad
Differentiation
Strategy
(Cutting Edge DRAM)
Focused
Low-Cost
Strategy
(Low cost flash memory)
Focused
Differentiation
Strategy
(Rambus DRAM)
Best-Cost Provider
Strategy
(Samsungs Strategy)
Lower Cost Differentiation
Broad
Range of
Buyers
Narrow
Buyer
Segment
or Niche
Combined low-cost/differentiated
strategy is difficult to achieve
Difficult to implement
Firms aiming to do this are often stuck in the
middle
Firms products are too costly to compete with
low costs providers product, and too
undifferentiated to command the price
premium gained by the differentiated firm
A variety of internal and external factors have
helped Samsung achieve this desirable position
Samsungs Combined Low-
cost/Differentiated Strategy
Samsungs 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)
Samsungs Combined Low-
cost/Differentiated Strategy (contd)
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 Japans only remaining DRAM producer
Hynix Has many financial problems
Infineon Major DRAM player with 25 R&D locations all over the globe
Micron
Technology
Investing in next generation DRAM technology with a $500
million investment from Intel
Nanya Technology Producing 256 Mbit DRAM in a Joint Venture with Infineon
SMIC The only Chinese DRAM manufacturer. It is Chinas 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 activities
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, 2
nd
(+11%,+2B)
Hynix, 8
th
,first time among
top 10 (+32%, +1.8B)
Qimonda AG, newly
created Infineon memory
division spin off, 12
th

Micron, 13
th
(+10.8%,
+.5B)
Elpida 20
th
(+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