1. What were the sources of Samsung’s cost advantage in DRAMs in 2003?

Consider the relative importance of productivity and input costs in your answer.
What were the sources of Samsung’s price premium in DRAMs in 2003? Support
your answers regarding both cost advantage and price premium with numbers
and calculations when possible.

Answer: Samsung, as a company, always focuses on constantly developing their products in terms of
quality and affordability. They examine the design and efficiency of their upcomining products and
compare them with their competitors’ products in order to ensure maximum superiority. Samsung soon
used their proficiency too become one of the largest producers of memory devices by 2003.

DRAMs(dynamic random access memory) along with SRAMs and flash memory were a major part of a
memory industry of worth upto $33.7 billion dolars. From the year 1990 to 2003 the demand DRAMs
expanded from the PC manufacturing industry to the telecommunications and other electronics’
industries. The demand and expansion of the industry allowed OEMs like Samsung to make maximum
profit bearing the risk of manufacturing flawless products. They had the responsibility of taking wafers
and perform necessary alterations and steps on them to produce memory chips. Samsung generated
maximum number of chips while minimizing the loss due to defective chips by trying to make constant
design and process improvements. It had the lowest operating and fully loaded costs in the industry at
all times. The company was able to combine low cost production with great operational efficiency, high
premiums and differentiation allowing to gain a cost advantage in 2003.

Samsung proficiency was also effected by their rivals’ strategies and course of production. Elpida, a
Japanese DRAM producer, suffered financial losses in the memory market and also were reluctant to
make further monetory investments for their products’ development. Samsung made most of
opportunities like this to establish a market system where they hold the authority over the price
premium. Another company named Hynix, struggled to maintain a steady investment in the developing
market leading up to 2003. The expansion of the memory market into various electronics meant that
Hynix could no longer keep up with constant, steady investment that Samsung was continuing to make
allowing Samsung to edge past in controlling the market price. The company differentiated itself with
innovation and quality. As a leader in innovative and quality products, it continued to produce the
highest number of 256Mbit, 512Mbit and 1Gbit DRAMs in the industry. Samsung also had the lowest
percentage of low capacity legacy products 16Mbit and 64Mbit DRAMs and the highest percentage of
frontier products 512Mbit and 1Gbit DRAMs among competitors, thus demanding the highest prices for
its products.

2. Based on your answer to question 1, how should Samsung respond to the

threat of Chinese entry? Evaluate the options available to Samsung, and make a
recommendation
Answer: The major problem Samsung is confronting today is uncertainty in the competitive
environment of semiconductor industry. While we have been a leader in DRAM industry for decades,
today we are facing possible changes that could have a crucial impact on the future success of our
business. The strategic and business development team reviewed the current position of
Samsung in the semiconductor and memory chip industry. In spite of having all the economic,
political, technological and social advantages, Samsung was worried about mainland Chinese
companies. They were potential threat with low cost labor, government support and streams of funds
pouring into emerging companies.

As said before the Chinese companies were trying to enter the DRAM market using different
strategies to become strong and compete. Using partnerships to learn from the rest of the
industry incumbents like Infineon and Elpida, attracting billions of dollars to build state of art
production facilities, even willingly sacrificing profits, the Chinese companies are trying to
attract significant market share. This lead Samsung’s managers to think for an active
collaboration with a Chinese partner as China was expected to become the second largest
purchaser of semiconductor after the U.S. Although China had some drawbacks as it lacks in
critical infrastructure to support cutting-edge semiconductor, they have trouble to produce
frontier products because they lack organizational experience and expertise . They needed someone to
teach them and master design and production process. So, there was a risk in working with the
Chinese partners as Samsung’s intellectual property is still not protected which would lead
them to become their rival in the future. Moreover, Samsung is a market leader in terms of low cost
and productivity and by no means should teach Chinese companies how to achieve that advantage.
Samsung could continue its product differentiation strategy, put more efforts into growing high-value
niche products and cede the lower end of the market to the Chinese. So, if they acquire a Chinese
company instead of licensing or forming a joint venture, we would not be at risk of our partner
becoming our rival some day. There is another danger for Samsung in case they decide to acquire a
Chinese firm or form a joint venture. They could potentially compromise their corporate culture. If
Samsung’s competitive advantage has come from their unique corporate culture at the main R&D
production site in Soul, moving production to China could potentially threaten their culture and
business. They might have trouble finding and retaining talent in China. Their management techniques
and western approach might not be suitable for Chinese culture.

However, major producers still hold back from major new investments in China despite the fact that the
overall memory chip industry has been growing modestly over 2004. Samsung could license products to
Chinese companies for a share in their company, acquire a Chinese company or form a joint venture. In
case of an acquisition or a joint venture, we could utilize current Chinese facilities, share technologies or
build a new plant.

An alternative option is staying on their own and increasing their investment in cutting edge memory
products, particularly new niche markets, put their resources into R&D and innovation rather than
pouring funds into Chinese companies. They could give up the lower end of the market to the Chinese
and try to develop high end products themselves.

Recommendation:

My recommendation for the plan of action in this situation is to acquire Chinese, already well
established company SMIC.

The risk of Chinese competitors taking over the market is so high that Samsung should put a lot of effort
in establishing their corporate culture and quality control in Chinese facilities. They would be best able
to achieve full control with acquisition of a Chinese company rather than licensing or forming a joint
venture. Building their own plant in China would be the best solution for this matter, but they would not
be able to take advantage of already established facilities and many incentives from Chinese
government. They would also be losing time in building plants from scratch. Acquiring a company is
expensive, however they are in a great financial standing and would be able to afford acquisition of
SMIC. Not only that, they will not need to pull out funds from R&D, rather stress innovation in Seoul
facilities. By acquiring SMIC they can take advantage of its current facilities, its large inflow of funds from
operations as well as from investors, company’s experience in Chinese market and its distribution
channels. Initially, they can produce legacy products in China and when the quality of production
process is up to bar with their production in Seoul, they can move on to frontier products here as well.

Samsung should slow down the pace of decreasing DRAM production as a percentage of manufacturing
line sharing. The computer industry has matured however it is still growing in Asia-Pacific and other
developing regions. They should keep increasing Flash production. It has a huge potential as growth is
predicted in digital cameras and camera phones. Flash production should be 35% of manufacturing line
sharing within next three years and DRAM production should be 20%. Samsung should also focus on
frontier products, innovation and nanotechnology. This way they will be able to maintain premium
prices and stick with their product differentiation strategy.