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

SRAM: Static RAM

Higher density, lower cost, power hungry Lower density, higher cost, 2-4X faster than DRAM

New technologies: ZRAM (Hynix, AMD), TTRAM (Renesas)

Non-volatile
Flash PCM (PRAM) - Most promising new technology
High growth market (mobile, digital music and imaging) Slow to write, degrades over time 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. 2.

http://www.infoworld.com/article/06/05/31/78779_HNchipforecast_1.html 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

Porters Diamond Model for Samsung/Korea

Factor Conditions Location Ports, Major markets Labor High concentration of skilled engineers, HR policies Government policies for trade, education Related/Supported Industries LCD, Mobile Phone and PC industries

Demand Conditions Korea has early adopters Demand in east Asia is high

Strategy and Structure High internal competition Hynix Technology know-how, experience

Porters 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 Rivalry Small no. of competitors Significant exit barriers Cyclic Industry growth Substitute products Danger of future substitutes given rapid changes Probable little switch cost

Suppliers No significant differentiation of inputs Suppliers not concentrated No threat of forward integration

Customers No significant buyers by volume Buyers are very price sensitive Price limited by other memory substitutes Little threat of backward 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 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. 2. www.dailytech.com Samsung 2006 Annual Report

DRAM Operating Profits

7 6 5 4 3 2 1 0 SG&A R&D Depreciation Labor Raw Materials Price

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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 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
Overall Low-Cost Provider Strategy (Commodity DRAM)

Differentiation
Broad Differentiation Strategy (Cutting Edge DRAM)

Target Market

Broad Range of Buyers

Best-Cost Provider Strategy (Samsungs Strategy)

Narrow Buyer Segment or Niche

Focused Low-Cost Strategy (Low cost flash memory)

Focused Differentiation Strategy (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 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 Lowcost/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 Lowcost/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 Infineon Has many financial problems 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 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 Chinese government provided cheap credit, abundant land, cheap utilities, engineering talent, tax incentives to anyone who was willing to partner with a Chinese company China still enjoys an advantage in labor intensive activities

Technology

Alliances

Labor

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
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 Danger in the future that Chinese might learn and overtake (just as Samsung did in the past) Will it appear in time?

A. Try to suppress the Chinese firms

B. Focus only on cutting edge high-end products

C. Search for a new technology

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