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					  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 skilled
                                        • Related/Supported Industries
engineers, HR policies
                                        LCD, Mobile Phone and PC industries
Government – policies for trade,
education




• 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
Suppliers               • Little brand identity significance
                                                               Customers
• No significant        • Government Policy –e.g. China
                                                               • No significant buyers
   differentiation of                                             by volume
   inputs                   Rivalry                            • Buyers are very price
• Suppliers not             • Small no. of competitors            sensitive
   concentrated
                            • Significant exit barriers        • Price limited by other
• No threat of                                                    memory substitutes
   forward                  • Cyclic Industry growth
                                                               • Little threat of
   integration
                                                                  backward integration?
                        Substitute products
                        • 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




  7

  6

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

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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
                             2

                                                              Infineon
                            1.5
                                                                          Samsung

                             1


                            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 firm

     A variety of internal and 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 with a $500
Technology        million investment from Intel

Nanya Technology Producing 256 Mbit DRAM in a Joint Venture 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 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, 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

				
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