63557479 consumer durable industry

8/18/2019 63557479 Consumer Durable Industry

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Introduction:

The Japanese threatened to take over the world twice in the last century: first with their military strength and later with their electronic goods. This century, it is the SouthKoreans' turn - at least so it seems in ndia. The South Korean companies - Samsung

!orp and "# $lectronic !orp - have proved that with their innovative and aggressivestrategies, Korean products, which even until the %&&s were considered low-end mass-manufactured stuff, cannot only rule markets in ndia (ut can also push multinationalsand their ndian competitors a long way (ehind.

n mid-%&&s. ndia had )ust opened to foreign competition, andconsumers were yet to get a taste of relatively high-technology products. The Japanesema)ors were undecided a(out ndia's potential, and other multinationals such as*hirlpool, #$, and $lectrolu+ were yet to get a foothold. ndian (rands, which included", ideocon, Kelvinator and #odre), had the market all to themselves. t was againstthis (ackdrop that the Koreans gra((ed the opportunity ndia's li(erali/ing economy

offered, and they entered the country with a simple message: we mean (usiness and never (efore have ndian consumers (een e+posed to the price performance of the products wehave to offer. 0nd seven years down the track, while the cautious Japanese and 1uite afew foreign (rands in the home dura(les sector are still struggling and some of the ndian (rands - such as " and Kelvinator - are almost going into o(livion, Korean (rands arestorming in and taking over the markets in each of their product categories. Korean products are now all-pervasive in ndian homes2 they are everywhere from cars, Ts,washing machines and microwave ovens to computer accessories and, ultra high-techhome networking products that can ena(le a refrigerator to order supplies over thenternet and control room air-conditioners and even record a 33 movie from a Tthrough a mo(ile phone. Their growth rates are stunning. 4or instance, in five years

5yundai has sold more than 67, cars - nudging the 8, mark - to (ecome thefastest-growing and second-largest car manufacturer in ndia. Samsung and "# clockedthe second and third positions in the home appliances and electronic products market, andright now they are the fastest growing home appliance companies in the country too.

ndia wasn9t e+actly virgin territory for the Koreans entered-consumer electronics. There was a clutch of players, (oth ndian and multinational, that werealready present. ut the Koreans grew and now they are (igger than a whole generationof 4$;09 companies such as #la+o-Smithkline, hillips ndia, !olgate-almolive,!ad(ury, $lectrolu+, hilips?, 0merican >*hirpool? and Japanese >Aatsushita,Sony?- havecollapsed (efore their onslaught and Koreans have emerged as winners.

The timing of their entry into ndia was more propitious. They came after industrial licensing made its e+it. t was after imports controls on inputs and e1uipmenthad largely ended. So they were a(le to produce in ndia what was cheaper to produce


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here, and did not have to follow a preconceived plan of import su(stitution. 0nd cheaper production meant that they had a fighting chance in competition, (oth in ndia anda(road. ut timing was not everything2 the Koreans have also (rought with them certaingifts of great value in the ndian environment. Bne is the way these companies set their o()ectives. ndia is a price sensitive country and they have not neglected that. They have

derived price targets from the local market2 they have aimed to (e competitive, notnecessarily cheap. ut within those price o()ectives they have achieved relia(le 1ualityand sought to (e a step ahead in product technology. Their greatest asset has (een thetrust of consumers they have gained. Their ne+t (iggest advantage is their nim(leness.They have set up su(sidiaries that are large (y our standards2 (ut their speed of reactionto market changes, speed of correction of course, speed of e+ecution of strategicinitiatives are too good. The working conditions in the office are also different from theothers. "ike $uropean and 0nglo-Sa+on model has (een focused on results, their approach to work place has (een reasona(ly laisse/-faire. 4or Koreans, its different. Thework place is pretty hierarchical and seniors are given tremendous respect.

Marketing Strategies:

They studied closely and picked up the salient features of the Japanese

manufacturing and made themselves an e+pert in that. Their planning is very meticulous on the e+ecution of the )o( in hand.

The Koreans never shown any (ias against ndia. The 0mericans and Japanese

took their (rand e1uity for granted. The Koreans did not. 0s a result of this theydidn9t make any value )udgments of the ndian customers and introducedcontemporary products. This way they got their (rand noticed.

oth ".# and Samsung have consistently launched contemporary models-(e it

fu//i logic washing machines, flat screen Ts or microwave ovens-in step withtheir launch glo(ally.

4urther power was added to this strategy of da//ling ndians with glo(al products

was their high advertising spends. ".# spent ;s %% crores in advertising whileSamsung spent ;s C crore in D%. n D6 ".# spent ;s DD7 crores andSamsung ;s % !rores. Such high voltage advertising has made the Koreans the (iggest spenders in their (usinesses, and they outspend competition (y a factor of at least two. These spends have placed the Koreans in the class of some of thehighest spenders in ndia such as !olgate, T!, 3a(ur and 5industan "ever.

They are huge (uyers of advertising so they e+ude through a lot of visi(le (rand

(uilding.

The Koreans have also started making a name for their a(ility to understand whatcustomers want. They practice this shi((oleth with unusual vigor.

They figure out 1uickly and very well what the consumer wants. ut the

important part is they 1uickly adapt their strategies accordingly. Enlike E.S companies following the office marketing strategy the Koreans follow

the principle of 4eet marketing9. That means even the higher officials roam a(outthe market to give (oost to dealers and also to gather the first hand information on


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the current market conditions. This helps in knowing the ground realities (etter which results in a (etter strategy.

The Koreans always think (ig and take risks. That9s why they have infused so

investment, which is now (earing the fruits. layers like *hirpool and $lectrolu+ that made a foray into consumer electronics

around the same time that ".# and Samsung did. They hedged (ets (y (uyinge+isting (rands and capacities here >Kelvinator, Aahara)a, 0llwyn, and the like?while the Koreans (uilt capacity from scratch and gives them an edge over thecompetitors.

The Koreans want to outdo the Japanese. They don9t start on a hunch. Their

planning is meticulous. *hen they take up a )o( they take it very seriously. 0ll Korean managers (ring on (oard a monk like devotion to their task at hand.

This ensures 1uick e+ecution of the work. The Koreans (elieve that manufacturing is a key strength and that9s why they

eschew contract manufacturing and invest in their own manufacturing facilitiesaround the glo(e.

They have culture sensitive workshops to ensure that the Koreans and ndianswork well together.

They (undle one product with another so as to promote the weaker one (acked (y

the esta(lished product. They have well-entrenched the consumers in ndia (y sponsoring a num(er of

premier events like cricket matches and others with a high T; ratings. 0ccording to prof. ;.;.Krishnan at center for $ast 0sian Studies of Jawaharlal


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Industry profile:

OVERVIEW OF THE COS!MER "!R#$%E I"!STR&

"efinition Of T'e Consu(er "ura)le Industry:

!onsumer goods like washing machines, motorcars, T sets, audio-video systems etc,which yield services or utility over time rather than (eing completely used up at themoment of consumption can (e termed as the consumer dura(les. Aost consumer goodsare dura(les to some degree, and the term is often used in a more restricted sense todenote relatively e+pensive, technologically sophisticated goods consumer dura(les9such as the e+amples given a(ove which implies high involvement at the time of purchase.

The consumer dura(les segment can (e segregated into consumer electronics >Ts,!;sF!s and audio systems? and consumer appliances >also known as white goods?

like refrigerators, washing machines, air conditioners >0!s?, microwave ovens, vacuumcleaners and dishwashers.

Bver the years demand for consumer dura(les has increased with the rising level of incomes, dou(le income families, changing lifestyles, availa(ility of credit, increasingconsumer awareness and the introduction of new models (y the ndian as well asmultinational companies. !onsumer dura(le industry was once considered to (e lu+uryitem with targeting the upper-middle class for consumption. *ith increasing competition, price wars, (randing and promotional strategies, the concept has melted down to themasses and has (ecome a part of the household9s necessities even in the lower-middleclass and rural part of the countries.

Aost of the segments in this sector are characteri/ed (y intense competition, emergenceof new companies >especially A!? crossesa threshold limit of GD. n ndia, the ! is low at G6H, though it is e1uivalent toGI on >urchasing ower arity? (asis and e+pected to see a consistent growth of over I= over the ne+t years to come.

0ccording to

middle-income categories will rise rapidly. There will also a(solute reduction in thenum(er of households in the low incomes. This will lift large num(er of households toincome levels at which they can (ecome purchasers of consumer dura(le products.!ontinuous economic growth and higher income levels will drive growth in volumes, anyreduction in the duties will leads to lower down of the values and this will (ring morecustomers for the dura(le products.


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The (iggest attraction for Aappro+. D7 m?.This market is characteri/ed with low penetration levels. A

The ndian middle class market of D7 million is the (iggest attraction for the A

n the future, earnings will (e driven (y rising demand for consumer dura(les in general.0s per the ;s 7, in non-metros is e+pected to rise from DD.H million in %&&7-&I to a huge 7H.Dmillion in D7-I. This will mean that firstly, there will (e a percepti(le shift towards (randed products and secondly, the level of aspiration (uying will increase.

Si*e Of T'e Market:

The total ;s. %77 crore consumer dura(les industry consists of !olour Televisions,lack and *hite Televisions, ;efrigerators, *ashing Aachines, 0ir-conditioners,Aicrowave Bvens, acuum !leaners, 0udio Systems, $lectronic 0ppliances and *ater urifiers. The ta(le (elow shows the $stimated industry si/e9 and the competition in thevarious segments.

$stimated industry si/e:>4igures are in crore ;s.?

Segment 2000-01 2006-07 (E)

!olour Television I7 &%

* Television %D7 7

;efrigerators 6H 78I

*ashing Aachines %7 6D

Air-Conditioners 1000 2100

0udio Systems % D

Aicrowave Bvens, acuum !leaners, $lectronic 0ppliances and

*ater urifiers

77 %

>Source: " annual report D-%?


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The technology used (y the company vi/. state-of-the art technology or and older

version. The a(ility of the company to introduce newer products and newer product features.

The capa(ility of the company to service its products.

The discount schemes and consumer finance facility availa(le.

The market positioning of the product. The cost competitiveness and pricing strategy of the company.

The financial strength of the players.

The competition in the industry has intensified after the li(erali/ation and more and moreA

5owever, the e+port prospects are least or minimal (ecause indigenous manufacturers donot possess ade1uate (rand e1uity or e+cellent product 1uality. There are even constraintslike transportation due to poor infrastructure and relatively under developed markets inthe neigh(oring countries.

C'anges In T'e Strategies:

There is a shift in trend as the emphasis has moved from the manufacturing process tomarketing and advertising strategies. n other words, the marketing game has (ecome avital factor for driving sales as against the manufacturing process of the products in the

past. layers are now concentrating on the creation of (rand image in order to economi/etheir scale of operations and to increase their (rand strength. The advertising e+penses of the companies operating in this segment are going high every year and the returns arediminishing still the (rand will play a ma)or role in selling of the product.

ecause of this, most of the manufacturers like, ideocon and $lectrolu+ are acting asB$A manufacturers for manufacturing refrigerators of Samsung and "#. $ven, playershave increased the percentage of their advertising and marketing costs as a percentage tooperating income over the years2 the ratio for the industry has increased from 8.I= in%&&6 to around H= in D. The (rand (uilding is very critical in the industry andconstant advertising is necessary.

$#C+,RO!":

rior to li(eralisation, the !onsumer 3ura(les sector in ndia was restricted to a handfulof domestic players like #odre), 0llwyn, Kelvinator and oltas. Together, they controllednearly &= of the market. They were first superceded (y players like " and ideoconin the early %&&s, who invested in (rand-(uilding and in enhancing distri(ution and


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service channels. Then, with li(erali/ation came a spate of foreign players from "#$lectronics to Sony to 0iwa.

oth rising living standards, especially in ur(an ndia, and easy access toconsumer finance have fuelled the demand for consumer dura(les in the country. 0lso,the entry of a large num(er of foreign players means the consumer is no longer starved

for choice. ut this has also resulted in an over-supply situation in recent times as growthlevels have tapered off.

M#-OR .%#&ERS:

The ma)or players in the consumer dura(les industry, operating in different sectors suchas air conditioners, washing machines, refrigerators television include:

#gra/al ,roup - Aanufactures consumer electronic products2 radios, tape-recorders, car stereos and !3 systems. iew profile.

#nc'or - Aanufactures electrical switches, accessories, lighting luminaries, ! wires,

domestic appliances like electrical irons, mi+ers, grinders, toasters and fans.

$a0a0 International - $+porters of electrical fans, household appliances, lamps,fluorescent tu(elights, light fittings, hoists etc. mports steel and engineering items.

$OSS .orta)le $lenders - Aanufacturer and e+porter of porta(le (lender and homeappliances includes hand held mi+ers, )uice makers, stainless steel (lender and more.

E1.1C Industrial Fans 2 Motors - Aanufacturers $+porters of industrial fans,domestics fans, instrument cooling fans, ca(in fans, electric fans electric motors.

Eureka For)es - 3etails on consumer products include vacuum cleaners, floor caree1uipment, high pressure water )et cleaners and electronic security systems.

,lo)al Wonders - The fastest search engine, directory, map and we( guide forinformation on the most popular we(sites. 4eatures list of wholesaler, retailer along with products list, consumer dura(le and more.

Hots'ine #ppliances 3 !1. - Aanufacturers of gas cookers stoves electricalappliances, product range includes cooking ranges, steam irons, oven toaster and grillers.

+el4in Syste(s - 3ealers for !arrier 0ircon "td >air-conditioning e1uipment?, 5onda>Siel? ower roducts "td >porta(le electric generators?, and $ureka 4or(es "td >vacuumcleaners?.

Mangal Sing' 2 Sons - 3ealers in home appliances, consumer goods and electricalappliances, includes television, refrigerator, audio products, washing machines, vacuumflask, cooking range, oven and dining sets.


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Moni)a - Aanufactures chemical pump, air operated pump, water purifier, health care product, (acteria free water, home appliances and chemical plant machinery.

adi Industrial Fans - Aanufacturers of fans2 product range includes a+ial fans,

centrifugal fans and special fans.

Onida- rovide an online showroon to purchase the entire range of Bnida products.Bffers free delivery.

Orient Fan - Speciali/ed in manufacturing mini motors, delu+e decorative ceiling fans,shaded pole motors, (o+ fans, food (lender, food mi+er, fruit )uicer, vacuum cleaner etc.

.ad(ini #ppliances - Aanufacturers of gas stoves, oven-toaster-griller, )uicer-mi+er-grinder, electric hot plates, washing machines, ceiling fans, water heaters, irons etc.

.'ilips - 3etails for consumer electronics, lighting, domestic appliances, semiconductors, components, ena(ling technologies, multi media pro)ectors etc.

.IC#SSO Ho(e .roducts - Aanufacturer and $+porter of various home appliances likeroti maker, mi+er grinder, sandwich maker, oven toaster griller,


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coolers, home appliances, agricultural and domestic pumpsets, and auto products.

!s'a %e5us - Aakers of home appliances like sandwich toasters, )uicer, mi+er grinders,ovens, ventilating fans, irons and room coolers.

Videocon - Suppliers of home appliances, Ts, refrigerators, 0!s, air conditioners,audios, tape recorder, colour monitors, digital organisers, Kenwood digital hi-fi systems,television sets etc.

Vi0ay Sales - 3ealers in consumer dura(les includes details for their product, customercare, schemes, consumer finance, and more.

Voltas %i(ited - Aakers of room airconditioners and refrigeration e1uipment, watercoolers, cranes, pumps and office furniture2 includes machine tools, industrial chemicalsetc

%1, India 3 3etails of product ranges from colour Ts, hi-fi music systems, video !3s,home theatre systems, 33s, porta(le audio systems, digital cameras, ;A$# products,T. etc. 4eatures wide ranges of products: car audios, handy cams, digital cameras,!3, "3, 33 players, !dma mo(iles, walkman, disc mans, and Televisions.

Sa(sung Electronics India %td - 3etails of product ranges from colour Ts, hi-fi musicsystems, video !3s, home theatre systems, 33s, porta(le audio systems, digitalcameras, ;A$# products,T. etc. 4eatures wide ranges of products: car audios, handycams, digital cameras, !3, "3, 33 players, mo(iles, walkman, disc mans, andTelevisions.

"EM#"6S!..%&:

The colour television >!T? segment of the consumer dura(les industry has (een hit (ystagnant demand in recent times. !T manufacturers like " and ideocon haveeffected price cuts while others have lowered production levels in the face of risinginventories. They have also initiated drives to clear old stocks.

The results are mi+ed. 4or instance, demand for %8-inch !Ts was hit (y the reduction inthe prices of D-inch !Ts. 3emand for larger sets >D7 D& inch? has also slowed (ecause of the price factor. So companies like "# and Samsung are now e+pected toreduce prices in the premium categories.

0s for the other segments, air conditioner demand was up in recent months. n the case of refrigerators, a chunk of the sales are still in the direct cool segment as against the frost-free one, ut replacement (uyers tend to go for technologically improved models. 5ence,sales of frost-free refrigerators have grown steadily over a period of time.


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The washing machine market consists of two (road segments - semi-automatic and fullyautomatic. The first accounts for a chunk of the market. n terms of loading type, toploading machines sell in greater num(ers than front-loading ones.

O!T%OO+

!ompanies like "# $lectronics are e+ploring the online route to grow their (usiness. t plans to connect around %,H direct dealers and distri(utors to its recently launched D portal, www.lgdealernet.com as part of its drive to (ecome an integrated online (usinessundertaking (y the end of D6. n the !T segment, a num(er of new and innovative products are (eing launched. Technological upgradation and pricing are the key drivers inthis highly competitive market.

$ven in the case of washing machines and refrigerators, new models are (eingdeveloped. n refrigerators, companies like $lectrolu+ >which has four esta(lished (randsin $lectrolu+, Kelvinator, oltas and 0llwyn? are specially targeting high-end consumers.

The demand for fully automatic washing machines is e+pected to increase over semi-automatic ones. 0lso, second-time (uyers are likely to go in for larger machines.

;esearch and development is e+pected to (e a key issue in future as players try tokeep pace with changing consumer preferences and e+pectations as well as the ever-growing competition.

IM.#CT: COS!MER "!R#$%ES

ME#S!RES

• ;eduction in customs duty on colour televisions, refrigerators, air-conditioners

and washing machines.• ;eduction in customs duty on colour picture tu(es and compressors is also

e+pected to (enefit the sector.

IM.#CT

The consumer dura(les industry in ndia is a ;s C crore industry and the

measures announced in the Aini-udget D8 is e+pected to have a favora(leimpact on the sector.

;eduction in customs duty on colour picture tu(es and compressors is also

e+pected to (enefit the sector.

0lthough there is no ma)or impact on account of reduction in customs duty on

dura(le goods, !T makers are likely to (enefit from reduction in picture tu(e prices.

;efrigerator players focused on the higher capacity refrigerator segment will also

(enefit, as these are largely imported.


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;efrigerator and 0! players will (enefit from the reduction in the customs duty

on compressors, a key input in the manufacture of these products.

O!T%OO+

enetration levels in the sector are dependent on income levels, power andlifestyle. 5owever, the largest growth rates last year were seen in categorieswhere the penetration is (elow 6 per cent. !Ts, *ashing machines, Ai+ers,;efrigerators and !;s fall under this category.

!urrent levels of competition in the industry is very high and threat of imports is

another worry. n terms of production num(ers, the highest num(er of units produced were seen in refrigerators followed (y Ts, *ashing machines and airconditioners.

The !T market has grown at a !0#; of D7 per cent in the last five years. #oing

forward, the western and northern regions are e+pected to account for the (ulk of

the demand in the category.

The sector is e+pected to grow at a !0#; of %C per cent for the ne+t three years

with !T, ;efrigerators and 0-!s (eing the outperforming segments.

0s #3 growth increases, analysts feel that (etter disposa(le income would lead

to a demand upsurge and higher consumer discretion in the sector.

The listed players in the sector currently trade at average earnings discounting of

8.D+, compared to the current Sense+ discounting of around %C+.

I(pact 3 .ositi4e

S#MTE%

The company is ndia9s largest manufacturer of !olor icture Tu(es >!T? with itsmanufacturing facility located in #ha/ia(ad near 3elhi. The company9s e+ports currentlyconstitute a(out H per cent of its sales. ;eduction in customs duty on !olour ictureTu(es is e+pected to help the company reduce its raw material costs. $+cept for Sony, allma)or domestic !olor T manufacturers like Samsung, "#, ideocon source theirre1uirements from Samtel !olor. The company9s capacity utilisation has increased from7.7 per cent in D6-8 to HD.6 per cent in DD-6 and sector analysts e+pect higherutilisation in the future.

MIRC E%ECTROICS

A;! has not only survived the onslaught of A


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from the present 7 per cent. The interest component has come down dramatically overtime and the management e+pects the company to (e de(t free (y the middle of D8.

$%!E ST#R

lue Star9s central air-conditioning (usiness is the core to the operations and remains the

growth engine. ;eduction in customs duty on compressors would (e a strong case for thecompany to reduce its manufacturing costs, lowering prices and stimulating demand,specially in the window and split air conditioner segments. lue Star is the largest singlesource for air-conditioning e1uipment in ndia. 0nalysts say that the demand from sunrisesectors such as software, retail (anking, and other service industries are e+pected tocontinue to grow rapidly in the ne+t five years at least, providing enough growthopportunities for lue Star. The company also provides turnkey customi/ed coolingsolutions.


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S#MS!, 7,%O$#%8

.rofile:

4ounded: %&6C!hairman >since %&CH?: Kun-hee "ee4ounder: yung-!hull "ee >%&%-%&CH?5ead1uarters: Seoul, South Korea#lo(al Bperations:DC7 offices, 4inance, and Trade and Services


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ncreased overseas production has (een a ma)or component of Korea's strategic response.Korean production networks in 0sia now e+tend (eyond the 0S$0< region to !hina andndia. The ratio of overseas production to total production has increased sharply in recentyears, from %& to DH= for !Ts and from %I to %H= for !;s during the period %&&D-%&&8. 5owever, those of their Japanese electronics counterparts increased even faster,

from IH= to CI= for !Ts and from 6I to H%= for !;s during the same period >seeTa(le %?, keeping competition intense in the cost-driven struggle for low-end markets.

Table 1Overseas Production Ratio Of The Korean And Japanese Electronics Industries

;


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capa(ilities. articular attention will (e placed on the networks connecting its offshoreaffiliates in $ast 0sia.

The firms involved are all part of the Samsung #roup, a highly diversified conglomerate.The core electronics producer is Samsung $lectronics !o. >S$!? and its affiliated firms

are Samsung $lectron-3evices !o. >S$3?, Samsung $lectro-Aechanics !o. >S$A? andSamsung !orning !o. >S!?. The sources for this study are primarily internal Samsung pu(lications, including monthly (ulletins relating to international production,technological development, and organi/ational processes, as well as interviews that wereconducted at Samsung in Seoul during


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(uyers and overseastraining

"evel oftechnologicalcapa(ilities

!apa(ilities in mass production >Ts?

roader product range>!;, A*B, 3;0A,

components?, (ut veryweak in a(ility tointroduce a ma)orchange of product.

!ontinued weakness in product development

nternational production

and scope ofinteraction

ES $! for low-endmarkets >limitedsuccess?.

!entrali/ed intra-firm

interaction.

nternational productionof low-end items in peripheral regions.

Aoving towarddecentrali/ed intra- and

inter-firm interaction.

The fourth section e+amines Samsung's 0sian production networks in detail. nitialinvestments were for consumer goods for (oth e+port and local markets. The networkswere promptly integrated (ackwards and linked to the networks of other producers in theregion. 0 final section provides a (rief summary of the findings a(out Samsung's production networks, along with an analysis of the directions the firm must go in if it is toremain competitive in a rapidly changing environment.

Sa(sung in t'e ;


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of operation, and Samsung developed know-how through learning-(y-doing for morethan a decade (efore it entered the electronics industry. Secondly, its (usiness started withimported foreign technology, having a close relationship with Japanese electronics firms.5aving (een educated in Japan, "ee yung !hull was a(le to esta(lish informal contacts.Briginally Samsung had considered cooperation with 0merican firms, (ut it finally chose

Sanyo and S$! %&C&?. Thirdly, Samsung entered theKorean electronics industry as a market follower. 0nother Korean firm, #oldstar$lectrical, had started assem(ling vacuum tu(e radios for a ES firm in %&7& and had (uiltup e+port capa(ilities for ten years (efore Samsung entered the industry. 4inally,Samsung en)oyed government support for its e+pansion into electronics. n %&IC, theKorean government introduced the $lectronics ndustry romotion "aw, marking the (eginning of official support for the industry.

Samsung9s initial strategy was nothing more >or less? than the mimicking of its Japaneserivals. ts aim was to (ecome a vertically integrated electronics firm: ...from materials to

components to end-products, including consumer and industrial electronics >S$! %&C&?.5owever, entry (arriers were so strong that the government set a condition for Samsungthat all products should (e e+ported >S$! %&C&?.

#iven its lack of previous e+perience in electronics, Samsung had no choice (ut to (esimultaneously involved in learning a num(er of different technologies. To accomplishthis, it turned to foreign sources of technology in management, production and marketing.t created several )oint venture companies with foreign technology suppliers such as B$A? (uyers, who provided it with design and engineering support as well as with an

international market. nvestment in design and international marketing remained limitedwhile Samsung concentrated on improving its production capa(ility through suchmeasures as the training of technicians in Japan.

0 series of )oint ventures allowed Samsung to rapidly achieve its goal of (ecoming avertically integrated producer of television sets.

n 3ecem(er %&I&, the recently-esta(lished S$! esta(lished one )oint venture firm,Samsung-Sanyo, with Sanyo >8=? and Sumitomo Trading >%=?, and in January %&Hanother )oint venture company, Samsung-%=?. 0ccording to the two )oint venture agreements, Samsung alone had local marketsales rights, while Sanyo and S$A? originated, was set up. ts shareholders were Samsung-Sanyo, S$! and Sanyo. Thiscompany was to produce parts for televisions, including tuners, deflection yokes,


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transformers and condensers. n 3ecem(er %&H6, Samsung formed another 7:7 )ointventure company, with !orning #lass *orks of the E.S. in order to produce glass (ul(sfor the production of cathode ray tu(es >!;Ts?. 4oreign linkages thus permitted Samsungto achieve a high level of vertical integration in the production of televisions in aremarka(ly short time. 4urthermore, apart from the first three years of the venture with

!orning, all ventures were under Samsung's management control >S! %&&8?.

ts )oint venture partners provided significant training to Samsung's employees. 0n earlye+ample is although far lessthan its Japanese counterparts?, particularly in low-end products. S$!9s e+ports weresignificantly concentrated on the ES market. ES0 >HH=?, !anada >H=?, $urope >6=?,South 0merica >6=? and others >%=?. The products e+ported were (lack and white Tsets >86=?, color T sets >88 =? and audio products >&.I=?.

Aost sales were through B$A channels. B$A (uyers provided Samsung with productdesign, 1uality control and engineering support, leaving Samsung to increase itsmanufacturing capa(ility through the intensive training of employees, particularly shop-level technicians.

0part from the


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n addition to assem(led products, Samsung also engaged in the direct sale ofcomponents to other firms. 0s S$!9s 1uantity of production increased, its demand forcore components produced (y its affiliated part suppliers such as S$3, S$A and S!increased accordingly.5owever, S$! was not a(le to purchase all the components produced (y the affiliates, who were o(liged to find non-Samsung customers in Korea or

Japan.

Samsung e+panded its B$A channels and capa(ilities (y adding two new products L!;s and microwave ovens. Samsung tried to get access to technology for the two products in the mid-%&Hs, (ut gaining foreign licensing was more difficult than fortelevision sets. Therefore, Samsung had no choice (ut to get it through reverseengineering >S$! %&C&: D8C- D7?. n %&HI, S$! formed a product development teamwhich (egan to dismantle a anasonic microwave oven. The pro)ect was successfullycompleted in %&HC. n %&H&, Samsung succeeded in developing its own !; throughreverse engineering. 0ccording to Jun and 5an >%&&8: 6%H? Samsung still showed noimprovement in creative development unless a similar sample or manual was availa(le as

the (asis.

Samsung further diversified its (usiness line into the telecommunications sector througha %&HH )oint venture with #T$ of the E.S.

ut even as its product engineering and assem(ly capa(ilities improved, the Samsunggroup's development of market knowledge was stymied (y its internal organi/ation,further stunting the creation of original product designs. Samsung !orporation, the groupaffiliate involved in general overseas trading, distri(uted the electronics productsmanufactured (y S$! through international (ranch offices >!ho %&C6?. 0ccording to aninterview, S$!9s e+pansion into foreign marketing had (een (locked (y Samsung

!orporation, whose priority was the increase of e+port performance in order to meet thee+port-led industriali/ation policy. t was not until %&HC that S$! was actively engaged inoverseas marketing through its own sales affiliate esta(lished in the E.S.

Met, intra-firm interaction (etween the ES-(ased sales affiliate and Korea-(ased production site was not effective. The affiliate (elonged to the department handlinge+port marketing, not to the production department. Bnce again, S$! was not a(le torecom(ine knowledge of the E.S. market with that accumulated in Korea. n short, therewas no organi/ational support for links (etween production and international marketing.

Bne cause may (e the profit-center system that was introduced in %&H7 to stem the lossesincurred for the first five years of operation >S$! %&C&?. $ach affiliate operatedindependently in its own interests, and the same was true for each (usiness division.0utonomy was limited (y the central control of the !hairman9s Secretariat.

The profit-center system led to at least two negative effects. 4irst, the strategic directionof each affiliate put much more importance on the short-term than the mid- and long-term. The system was reinforced (y an employee evaluation system which focused onshort-term performance which remained in place up to the early %&&s >Samsung %&&6?.


20/65

Secondly, the system generated unproductive competition rather than cooperation (etween affiliated organi/ations within the group, and (etween organi/ations within afirm.

3espite the organi/ational difficulties it e+perienced, Samsung made considera(le

progress during its first decade in the electronics (usiness. ut the ne+t decade would seeSamsung's electronics operation reach new levels of sophistication.

Sa(sung in t'e ;


21/65

$Ns- - - - .8 .7 %.I

Keyphones- .C .D 7.D %6.D ID. 8C.8

40Ns- - - - - - D.D

!omputers- - .D .C H.& DD.7 I&.7

*atch chipsC.% H.H %D.C %6.% DH.7 D%.% D%.&

"inear !s 8.I 7.& %.& %7.C DD. 6H.6 87.I

Transistors%.D %.D H.I %6.H %H.C 6C.C 7.

I8K 3;0A- - 7.7 %D.8 66.D D%.H HI.&

D7IK 3;0As- - - DH. 7.6 %68.D D76.8

% A 3;0As- - - - - I. DD%.6

%&C&:%6D, %6I, %76, %7H,%IH?

Interated "ircuits

Samsung's vertical integration strategy was e+tended 1uite early to em(racesemiconductor technology, which was to (e S$!'s key focus in the %&C's. n %&H8,Samsung ac1uired Korea Semiconductor !o. >KS!?, a )oint venture (etween Korea$ngineering Aanufacturing !o. and ntegrated !ircuit nternational, a E.S. firm whichmanufactured simple integrated circuits >chips? for electronic watches. This time,Samsung acted well ahead of its rival, #oldstar, which entered the market (y ac1uiring3aehan Semiconductors in %&H&.


22/65

The firm hoped that internali/ation of core components technology would reduce itsheavy dependence on Japanese suppliers >S$! %&C&?. S$! suffered from the outside purchase of core components (ecause its production 1uantity of !Ts and !;s werelimited (y component availa(ility. n the late %&Hs, Kim Kwang-5o >currently !$B ofthe $lectronics division?, who had worked for the T production department, was

transferred to the semiconductor sector. t seems that his primary mission was to developcore !s such as the chroma ! that were then imported from Japan. The mission wasaccomplished in 3;0As?, which re1uire themost advanced manufacturing technologies and huge capital outlays. 0s for its initialentry into electronics, government support was a factor, with a semiconductor promotionlaw enacted in %&C6. To the e+tent that the company was known to (e naturally verycautious on entering new (usiness ventures >Jun and 5an %&&8?, the entry decision wouldnot have (een made without nearly a decade of successful chip manufacturinge+perience.

Samsung was a(le to shorten its learning process (y a variety of interactions with foreigntechnology sources.

n June %&C6, Samsung licensed a 3;0A design from Aicron Technology, a medium-si/ed 0merican producer. Samsung claims that it was the only source of 3;0A designafter contact with various firms including Te+as nstruments, 0dvanced ABS, Aotorola,


23/65

technology sources were significantly (eneficial during the development of the 8A3;0A.

ut inter-personal networks were insufficient to develop capa(ilities in a demanding fieldwhere Korea was so far from the center of activity, necessitating the glo(ali/ation of

Samsung's technology development.

Soon after its entry in the 3;0A market, Samsung set up a research institute SamsungSemiconductor nc. >SS? in Silicon alley 1 SS9s first o()ective was to develop I8Kand D7IK 3;0As. The office (egan producing silicon wafers in %&C7 with 6engineers and was e+panded in %&CH to study ! applications in computers, office andtelecommunications e1uipment. That same year, S$! opened its Tokyo 3esign !entre for !s.

SS (ecame an important platform for collecting information a(out up-to-date technologyand markets as well as a training post for Korean engineers. Samsung was also a(le to

recruit several Korean 3;0A e+perts educated in the ES who would play an importantrole in helping Samsung to develop and commerciali/e 3;0As.

The company adopted a dual strategy for development of the D7IK 3;0A generation,following e+tensive reverse engineering of Aicron's design >$rnst %&&8(: C%?. Twoteams, one in Silicon alley and the other in Korea, simultaneously started the samework. n Bcto(er %&C8, the Korea-(ased team developed a D7IK 3;0A sample. n early%&C7 the Silicon alley team developed one, and this was the sample adopted for mass production >$rnst %&&8(?.

The 3;0A case provides one of the most important e+amples of Samsung's practice of

creating new capa(ility (y 1uickly com(ining new knowledge and information fromforeign sources with its accumulated current skill (ase. 0s it developed su(se1uentgenerationsL% A 3;0A >July %&CI?, 8A 3;0A >4e(. %&CC?, %IA 3;0A >Sep. %&&? LSamsung mastered the necessary capa(ilities (ringing it ever closer to the frontier ofinnovation. n the early %&&'s it (ecame the world's largest producer of 3;0As, andwas one of the first companies to ship engineering samples of the I8A generation in%&&7.

4oreign linkages have continued to (e important. Samsung's development of the I8A andD7IA generations was undertaken in close cooperation with 0Ns?, and facsimile machines. Similarly, S$! could produce a total ofthirty-seven kinds of !s for use in its !;s >S&& Jan %&CH?. 0s a result, it was freedfrom dependency on Japanese suppliers for these core components.


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The mastery of integrated circuit technology meant not only the internali/ation of supply (ut also the development of new capa(ilities to (e deployed in new and e+isting products.n %&CC S$! developed D-micron (i-polar process, which com(ined with other (reakthroughs leading to its development of !; motor control !s, which improved the1uality of the picture and sound of its !;s >S&& Aar %&C&?. Samsung developed voice

synthesis !s in %&C& for use in ro(ots, automo(iles, microwave ovens, refrigerators,washing machines and electronic toys.

5owever, the success in 3;0A came at a price. The com(ination of long-terminvestment commitments and cyclical demand from downstream users meant that3;0SA prices were unrelia(le. 0 sustained price drop in the mid-C's lead to hugelosses, reducing the cash flow to other group affiliates.

The OE% Trap

ecause of the drain on resources inflicted (y the integrated circuit operation during

much of the %&C's, other divisions and affiliates had few strategic options e+cept that ofe+ploiting the company's previously-developed strength in production. $+cept for short-term investments generating immediate cash, most other investments were strictlycontrolled (y the !hairman9s Secretariat. ;elatively little effort was spent on productdevelopment or strategic marketing, and Samsung's emphasis remained on the mass production of relatively low-end products. 0nother important characteristic of the group'soperation in the %&C's was the internal production of core components. S$3 (ecame oneof the world's largest producers of !;Ts. The strategy was e+tended to newer productssuch as !;s and microwave ovens, for which Samsung produced most of its ownmagnetrons.

The development of product design capa(ilities was undermined (y the company's ma)orcommitment to integrated circuits. Bf course, S$! had a minor change capa(ility thatre1uired a(ility for doing reverse engineering9, (ut was very weak in ma)or changecapa(ility. 0s a result, it continued to use foreign sources of technology even for its maine+port products, which were seen mainly as a means of generating cash to support the ! pro)ect.

S0T? was created tointer-link several affiliates, (ut, at least initially, it was una(le to transcend the demandfor pro)ects which were commercially e+ploita(le in the short-term >Koh, %&&D?. Second,Samsung esta(lished foreign-(ased ;3 centres which could provide it with newtechnologies, up-to-date information, and training for Korean ;3 personnel. Thesewere used mainly for integrated circuits and, starting in the late %&Cs, for computer-related technologies.The third form of effort was continued colla(oration (etween S$!and its affiliated components suppliers.


25/65

The a(ility to use ;3 to (uild new capa(ilities was constrained (y accounting perspectives. ;esearch pro)ects were held to e+tremely short-term o()ectives, preventingthe development of know-how (eyond what was needed for simple adaptation to mass production re1uirements. Ta(le 8 shows a typical e+ample of how the company evaluatedthe impact of ;3 on sales and profits, placing a strong emphasis on immediate sales

growth.

Table / Samsun Electronics "orporation

%easures of R0 E'penditure And Its Effect +1()*1()$.+million 3on.

%&C %&C% %&CD %&C6

;3 e+penditure >0? HIC %,6D6 D,&D D,8%H

0ttri(uted salesincrease

D,&& 6I,%6H DD,DC %66,8I

rofit >? DHH I&% D,%%I DC,&HI

0-? - 8&% - I6D D8 DI,77&

0ccumulated?

- 8&% - %,%D6 %,&& D7,8I

Source: S$! >%&C&: DC8?

0nother victim of Samsung's concentration on integrated circuits may have (een itsinternational marketing capa(ilities, which remained weak. Samsung started distri(utionof its own-(rand products, making minor changes from models it had (uilt from designs provided (y the ES and Japanese customers, (ut success was limited. S$! graduallyesta(lished a network of foreign sales affiliates. t would typically set up a foreign (ranchoffice, and then the office turned into a sales su(sidiary when it had accumulated acertain degree of foreign market knowledge. 5owever, the hierarchically integrated

organi/ation structure restricted the interaction of its own foreign sales channels withKorea-(ased production sites, limiting feed(ack from customers to factories.0ccordingly, B$A channels remained dominant in the company's sales >Ta(le 7?.


26/65

Table 4 Samsun Electronics "orporation E'ports

+,S-million .

%&C8 %&C7 %&CI %&CH %&CC

B$A e+port >0? 886 8C6 C%6 %,%6 %,D7

Total e+port >? II& H86 %,%8I %,HDH %,C8

B$A ratio>0F?

II.D= I7= H.&= I7.8= I7.7=

Source: S$! >%&C&: %6H?

Samsung maintained close relationships with B$A (uyers such as J! enny, Sears;oe(uck, #T$, Toshi(a, A, 5ewlett-ackard, ;!0, and !rown !orporation.5owever, its clients were generally not providing Samsung with leading-edge productdesign, and Samsung did little to upgrade its internal capa(ilities in this area, confiningitself to low-end market segments.

n the early %&Cs, the E.S. market was (y far the most important for Samsung, (ut (ythe end of the decade it had greatly increased the geographic diversity of its distri(utionchannels, particularly in $urope and Southeast 0sia >see Ta(le I?.

Table 5 Samsun Electronics "orporation E'ports 67 Reion +8.

%&CD %&C8 %&CI %&CC


27/65

Aiddle $astF 0frica %%.% 6.8 6.8 C.I

Source: S$! >%&C&: %6I?

n the early %&Cs, !Ts imported from Japan, Korea and Taiwan (ecame a controversialtrade issue in the ES and $urope >ellance %&CH?, and Korean firms faced anti-dumpingduties on their !T e+ports. S$! had no alternatives (ut to protect e+isting e+portmarkets mostly in the ES and $!.

n order to protect its access to the E.S. market >Jun, %&CH?, S$! set up an affiliate producing !Ts in the Enited States in %&C8 >two years after its domestic rival, #oldstar,had made a similar move, transferring production capa(ility accumulated at home.

The e+perience proved unsuccessful and the firm started to divest from the Enited Statesin %&C& and shift to Ae+ico as part of a low-cost strategy. There were two main reasons

for the retreat: the E.S. production organi/ation failed (oth to develop high-end productsfor the 0merican market and to link with local components suppliers, continuing to relyon components from its Korean factories.

n general, the E.S. affiliate failed to upgrade overall capa(ilities in strategic marketing.There was no effective interaction (etween the marketing and production departments.This case is totally different from that of its Japanese rivals who had superiortechnological capa(ilities2 they succeeded in providing high-end products and linked wellwith local component suppliers. n short, S$!9s failure was due to the fact that S$! wasforced (y trade issues to set up an international production platform in the ES without the prior accumulation of capa(ilities in product design and development.

Sa(sung In t'e ;


28/65

Bne aspect of this decline is a series of changes that have occurred in the marketsSamsung serves. 4irst, Samsung's ma)or e+port markets for consumer electronics in theES and $urope have (ecome saturated. The reduced growth in demand has severelyincreased price competition, and has increased the importance of smaller markets withspeciali/ed demandLturning Samsung's marketing weakness into a ma)or pro(lem >$rnst

and B9!onnor %&&D?. Second, Korea's domestic electronics market, which had long (een protected from foreign competition, has (een li(erali/ed as Korea prepares to )oin theranks of industriali/ed nations, eroding an important source of profits.

"i(erali/ation of imports (y the Korean government has led glo(al players to enter theKorean domestic market, which had long (een protected from foreign electronics products. n %&C&, import 1uotas on consumer electronics goods were removed. 4romJuly %&&%, foreign retail distri(ution outlets were allowed to possess up to ten stores withless than %, s1. ft. in si/e >Jun %&&D? far (igger than the %-%6 s1. ft. that localKorean outlets usually occupied >SE&& 0pr %&&%?. y %&&6 there was a plan to cut theaverage tariff rate to (elow %= for all imported electronics goods >loom %&&D?.

Samsung conducted an internal analysis of Taiwan9s market li(erali/ation >SE&& 0pr%&&%?. t found that Taiwanese producers lost huge market shares when faced withcompetition from Japanese (rand products. The market share of Japanese goods (etween%&CI and %&& rose from %C.7= to HH.7= for !Ts2 from 86.6= to CI= !;s2 from67.7= to ID.D= for refrigerators2 from 8C.H= to HD.%= for washing machines?2 and fromD%.I= to 8.H= for air-conditioners.

n %&&%, imported electronics goods accounted for 7= of the Korean market, (ut thatfigure was e+pected to increase to %7= >SE&& 0pr %&&%?. This was a threat to Koreanelectronics firms, considering that Samsung, #oldstar and 3aewoo were fighting to

increase their market share (y % or D = per year. 3uring the early &'s, virtually everyma)or producer has developed and (egun to implement plans for penetrating the Koreanmarket.

Aeanwhile, international economic forces had further eroded Samsung's competitiveness.#enerali/ed system of preferences >#S? privileges were withdrawn from Koreanelectronics goods (y the E.S. and the $.!. in %&CC >$0K %&C&: D77?. 0t the same time,the *on had appreciated a(out D= against the dollar, making e+ports from Korea lessattractive in their ma)or markets.

Such demand-side developments are particularly trou(lesome to a firm like Samsungwhich followed a market-pull approach rather than the technology-push strategy of product innovators like Japan's Sony >Mu Seong)ae, %&C&?. Samsung's low-end productswere increasingly s1uee/ed out of the market (y more sophisticated goods which werenonetheless price-competitive. 4urthermore, the speed of technological o(solescence hasaccelerated, with shorter product cycles making it more difficult for a mass-production-oriented firm like S$! to amorti/e its production set-ups.


29/65

0 shift of resources from B$A to own-(rand production made matters worse (ecause,un(acked (y ade1uate product development capa(ilities, it was doomed to failure. n the%&&'s, the share of Samsung's sales attri(uta(le to own-(rand merchandise has actuallyrisen to a(out I=, (ut this is due in large part to an a(solute decrease in B$A (usiness.

Samsung9s leadership responded with two sets of initiatives. Bne change is increasedinternationali/ation, which will (e considered in a separate section. The other initiativesinvolved organi/ational reform designed to overcome the lack of coordination andcooperation (etween different organi/ations within and across group mem(er firms>Samsung, %&&62 Jun and 5an, %&&8?. articular attention has (een paid to the essentialrealm of technology management.

Starting in the early %&&s, S$! undertook a gradual organi/ational integration toincrease coordination (etween production, marketing and research (oth within and across product lines. n %&&%, Samsung set up a strategic management section in S$!, whichwas in charge of planning, internationali/ation and strategic technology management

>SE&&' 0ug %&&%?. n 3ecem(er %&&D, S$!9s multiple product sectors were fullyintegrated under a single !$B, Kim Kwang 5o, previously head of semiconductoroperations >S&& 3ec %&&D?. n January %&&6, S$! restructured further (y merging theaudio and video (usiness divisions >SE&& Jan %&&6?. n mid-%&&6 Samsung started toinitiate more radical reform than it had done (efore. n Bcto(er %&&8, Kim Kwang 5owas appointed as head of all electronics affiliates, including S$!, S$3, S$A and S!.

Bne of the key reasons for this consolidation was to improve the dissemination ofknowledge throughout the group. 0n integrated technology management division wasesta(lished in %&&6 >SE&& , Jan %&&6?.

3uring the %&&s, internal improvement in 3;0A technology has generatedtechnological spill-over effects, so a num(er of core components were (eing developedand produced due to the advanced production capa(ility. Samsung says that thesemiconductor sector created technological synergy for use among all of its related (usinesses. 4or instance, the development of 3;0A process technology caused the levelof Samsung9s overall precision process technology to improve significantly >SST %&CH?.

Met, till the early %&&s, S$! had done little to upgrade its capa(ilities in product designand development. This lapse (ecame particularly dangerous as competition increased inits non-component product markets. 4urthermore, product design capa(ility was animportant complement to the internationali/ation of production2 as low-value-addedgoods were increasingly produced offshore, new and (etter products were needed toavoid the hollowing out of production in Korea.

0s competitive conditions changed in the electronics market, foreign licensing ofimportant technologies and designs (ecame more difficult. Samsung, flush from theachievement of profita(ility in its semiconductor (usiness, (egan to ac1uire newcapa(ilities through the outright ac1uisition of, or direct investment in, foreign firms.


30/65

Ta(le H shows that the ac1uisitions and strategic investments dating from the time whenSamsung's (oldest organi/ational reforms were (eing implemented covered a (road rangeof technology such as telecommunications, computers and semiconductors.

Table : Samsun Electronics "orporation

T;o ($ to #eb=>(4.

ES?

0pr.%&&6

S$! ac1uired D= of 0rray and esta(lished cooperativearrangement in digital process chip technology used inmultimedia products.

5arris AicrowaveSemiconductor >ES?

Aay.%&&6

5AS speciali/es in gallium arsenide chips and is one ofthe world9s leading makers of optical semiconductors.

"EN >Japan?Aay%&&8

0c1uisition >7%=? of Japanese hi-fi audio maker:

- "EN: development and sales

- S$!: manufacturing and sales

!ontrol 0utomationnc. >ES?

Jun.%&&8

0c1uisition >7%=? of the !03F!0A softwaretechnology company.

$


31/65

n addition to improving its competitiveness in consumer electronics, the investmentsreported in Ta(le H make clear Samsung's desire to diversify further into the informationtechnology sector. Samsung reports that in %&&8 the structure of its sales was consumerelectronics >6C=?, semiconductors >8=?, and information systems >DD=? >S$! %&&7(?.5owever, the share of information systems would (e more or less %7= if a large

proportion of components such as !;Ts and computer monitors were e+cluded from it.Samsung's computer (usiness had e+perienced only low growth despite a series ofinvestments and alliances struck in the %&C's with leading ES firms such as 5ewlett-ackard, Aicro-4ive !orp., A, and !ontrol 3ata. S$!9s system design capa(ility haslagged (ehind that of its Taiwanese rivals, and S$!9s B$A ratio for computer productswas much higher than that of Taiwanese firms. ts position in computer systems outsideof Korea was particularly weak.

The recent ma)or investment in 0ST ;esearch provides Samsung an alternative means ofovercoming its internal weakness in the computer (usiness. The agreement ena(lesSamsung to share the 0ST (rand name and to sell memory chips to the 0ST. S$! is

actually not entitled to (e directly engaged in the 0ST9s management for the first fouryears of ac1uisition >Jun)a Shinmun, & Aarch %&&7?.

5owever, Samsung's ac1uisition of foreign firms >e+cept perhaps "u+ and !ontrol0utomation nc.? was not aimed at ameliorating Samsung's internal weakness in productdesign and development, (ut at ac1uiring frontier technologies seen as essential to the production of ne+t generation products.

Internationali9ation of Production

0lthough Samsung's organi/ational strategy for the &'s revolves around consolidation,

the strategy for its physical production facilities involves increasing movement offshore>Samsung %&&6: %87?.

Samsung's earliest overseas production efforts were a ortuguese )oint venture operationstarted in %&CD, a ES su(sidiary esta(lished in %&C8, and a su(sidiary set up in Ae+ico in%&CC. They had competence in the production of !T sets and many core components.y the end of %&CC it also had twelve sales su(sidiaries outside Korea.

4ollowing unsatisfactory results with E.S. production, Samsung focused more intenselyon esta(lishing low-cost manufacturing plants in Ae+ico, peripheral $urope, andSoutheast 0sia. Several factors stimulated this move. *e have already discussed a(ove

the various factors eroding Samsung's competitiveness, including market saturation, lossof preferential tariff status and appreciation of the *on. ut an important motivation mayhave come from the strategies of its rivals.

Aoves (y Japanese and other Korean electronics firms seem to have induced Samsung toadopt a follow-the leader9 strategy. n the mid-%&Cs, Japanese companies such asAatsushita, Toshi(a, Sony, and Sanyo started to move into Southeast 0sia to esta(lish production su(sidiaries. 4or instance, Aatsushita9s foreign investment pro)ects in


32/65

Southeast 0sia and !hina num(ered five in %&CH, four in %&CC, three in %&&, four in%&&%, three in %&&D and eight in %&&6 >toh and Shi(ata %&&8?.

The consumer electronics goods produced (y Japanese overseas affiliates started to penetrate into the low-end glo(al market where Korean firms had predominated

>although not under their own names? until the late %&Cs. 5ere was a strong challengefor Samsung. The Japanese (rand products made in the 0S$0< region were cheaper thanthe products made in Korea. n the case of microwave ovens, the cost of the Sanyo product, manufactured in Southeast 0sia for the B$A market, was %6= cheaper than thatmade in Korea.

The same is true for the components. Aatsushita started to produce !;Ts and tuners inSoutheast 0sia, and e+panded into !hina > ihon "eiai Shimbun D% 0pr %&&D?. Sony (uilt a color !;T plant in Singapore > ihon "eiai Shimbun DH reported in Koh, %&&D: 6I?, Samsung


33/65

engineers complained most a(out: an unsatisfactory ;3 working environment >78=?2 (eing overloaded with pro)ects >6=?2 insufficient time for the feasi(ility study of future pro)ects >DH=?2 and (eing overwhelmed with documentation and paperwork re1uirements>DI=?.

Aany of the organi/ational pro(lems that hindered the development of effective productinnovation in the past continue to plague S$!. Koh >%&&D? reported that productiondepartments are seldom involved in the early stages of new pro)ects, that pro)ects werechosen (y the corporation on the (asis of their e+pected short-term impact on individualstrategic (usiness units, pro)ects reflecting a longer-term outlook were likely to (esuppressed (y marketers or (y the SEs themselves, and that communication was pooramong marketing and engineering departments and the company's ;3 center >pp.6I-H?.

erhaps to decentrali/e some of its innovator activities away from this inauspiciousenvironment, S$! went overseas, esta(lishing foreign design centres in order to upgradeits product development capa(ility. The centers have (een esta(lished in each of

Samsung's main market regions to help develop products (etter suited to local needs,following a pattern already well-esta(lished (y its Japanese rivals.

The first such center was esta(lished in the consumer electronics (astion of Bsaka in%&&% with five employees for audio and video products. The following year, a center wasset up in 4rankfurt, #ermany, for the development of products to (e distri(uted in$urope. n %&&8 S$! set up Samsung 3esign 0merica in the ES for consumer electronic products for the ES market in cooperation with a local design corporation, 3$B >ES?. nearly %&&7, S$! esta(lished a product planning post in Southeast 0sia for thedevelopment of regionally marketa(le product models. ts activity has currently (eenlimited to collection of market information with only three Korean personnel.

Ta(le C shows evidence suggesting that Samsung's regional focus (egan to pay offrapidly in its $uropean market.

Table ) ?ocal mar@et share of Samsun brand products

roduct !ountry %&&%-%&&D %&&6

Aicrowave ovens Spain 8.7= %%.%=

Aicrowave ovens


34/65

!ordless phones Sweden D.= D6.=

Source: The author9s interviews with S$! in Korea during


35/65

0udio sales

Aalaysia

A*B

!;T

>S$3?

!;T glass>S!?

monit

Singapore B ;5Q

!hina

0udio products

audiocomponents,key(oards>S$A?

!;transformers>S!?

!;

!;

components

tuners,!;heads,motors

>S$A?

!T

ietnam !T

ndia !T

various years?

The vertically integrated operations in !hina were set up more 1uickly than those inSoutheast 0sia, possi(ly reflecting the firm's increased confidence in overseas production. Since %&&8, Samsung has announced the creation of other integrated production comple+es in its strategic markets.

To date, interaction (etween Samsung's two 0sian su(-networks has (een mostly limitedto !;Ts sent from Aalaysia to a !hina !T affiliate and !hinese-made !;components sent to a Thai affiliate. This is (ecause two su(-networks were originallydesigned to serve two largely separate 0sian markets. The key intermediary is theSingapore-(ased purchasing office, which purchases and distri(utes a huge amount ofcomponents among the Samsung affiliates and those of their Japanese counterparts in theregions. 5owever, the most important intra-firm transactions are still highly centrali/ed,occurring (etween the affiliates and the Korea-(ased product division, or (etween the


36/65

affiliates and the Korea-(ased glo(al marketing division >in charge of e+portarrangements?.

The separateness of the two su(-networks may prove a competitive disadvantage.Japanese producers in the region usually divide their product mi+ geographically

according to the su(sidiary9s technological capa(ility, facilitating the achievement ofscale economies. y comparison, Samsung9s production networks in 0sia are still at a primitive stage, incorporating certain redundancies.

The weakness of Samsung's performance in the consumer goods sector meant that itfound itself with e+cess capacity in its overseas plants. n practice, this has meant that theoffshore plants are underutili/edLin spite of their vocation to improve cost-competitivenessL(ecause Samsung9s employee evaluation system is oriented to performance at the plant level, making employees resistant to transferring productionoverseas when no activity would fill the void at the Korean plant.

This has (een much less of a concern in the case of plants producing components, whichhave (een a(le to sell the ma)ority of their output to other firms operating in the region, particularly Japanese affiliates. Samsung's 0sian networks have thus (een a(le to (uildon the company's past history of B$A relationships with Japanese companies. 4ore+ample, two component-producing su(sidiaries S$A-Thailand and S$3-Aalaysia supply more than C= of their output to Japanese companies.

n fact, Samsung's 0sian television production network has (een deeply enmeshedvirtually from its inception with those esta(lished earlier (y Japanese firms. 4or e+ample,not only does the !;T producer S$3-Aalaysia sell the (ulk of its output to near(yJapanese affiliates of Sanyo, Aatsushita, Sharp, and 4unai, it also sources a(out a third of

its total components from mostly Japanese suppliers such as S$A %&&: D6C?. S$3-Aalaysia fills a specific role in theregional division of la(or of Japanese firms2 (y providing %8-inch !;Ts, it permits thecomponent su(sidiaries of Japanese producers to speciali/e in larger, more higher-valueadded picture tu(es.

Samsung's production presence in 0sia is increasingly connected to marketing o()ectives.To that end, the firm has esta(lished ties with mainland and overseas !hinese partners,typically as a pre-re1uisite for market entry, in addition to esta(lishing its owndistri(ution channels. ts local )oint ventures are thus the mirror of those it esta(lished inKorea in the %&Hs with Japanese partners, trading production know-how for marketaccessLonly now the know-how is Samsung's.


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n at least one case, an affiliate esta(lished for the local market >in ndonesia? was forced (y poor performance to shift to e+ports. ut more generally sales were a(le to shift frome+port to local markets.

So far these locally-oriented operations have achieved local and even regional linkage

(etween production and marketing activities, (ut design and product developmentactivities still (elong to organi/ations in Korea: ... we continue to move Korea-(asedmanufacturing sites overseas. nstead, leave the concept of design, development, researchinstitutes at home >Samsung %&&6: %87?. ut this has left a void at affiliates for whichthe local market is important. 4or instance, the ndonesian affiliate distri(uting !Ts tothe local market is searching for locally marketa(le products that differ from the productsdesigned in Korea for glo(al markets.

n early %&&7 S$! formed a new product planning post at its Singapore-(ased regionalhead1uarters. The team was to concentrate on supporting product design anddevelopment activities targeted to the 0sian regional market. Met, there is no sign that this

team has actively interacted with the group affiliates >or with non-affiliatedorgani/ations?. Met S$! is under pressure to carry out product design closer to individualmarkets as Japanese and $uropean rivals have increasingly done, fre1uently co-locating product design with offshore production. ;ecently, a new e+ecutive officer who hadworked for the department in charge of product development has (een assigned to thendonesian refrigerator affiliate, signaling a possi(le decentrali/ation of productdevelopment within the region.

The component-producing affiliates are also e+periencing product design difficulties.They currently lack the capa(ility to implement minor changes re1uested (y non-affiliated customers in the region, and are forced to forward all re1uests (ack to Korea.

Samsung is thus una(le to compete effectively with numerous other rivals which havealready decentrali/ed such capa(ilities. Thus one of Samsung's continuing challenges isto make the leap from mass to fle+i(le production.

ut even as they try to e+ploit local markets, Samsung's 0sian affiliates are part of aglo(al production network, supplying a considera(le num(er of components to Samsungaffiliates in $urope and 0merica. $+amples include: S$A-Thailand which has supplied parts to S$! in $urope, ra/il and Korea2 S$3 has e+ported %8-inch !;Ts to Ae+ico2S$!-ndonesia has assem(led !s for a ortugal (ased !; plant2 and S$3-Aalaysiahas (een supplying electron-guns for !;Ts to S$3-#ermany, and S$3-Ae+ico.

Auch as its Japanese partners did in the %&Hs, Samsung has trained the employees in its0sian affiliates, often (y sending them to Korea, or (y sending Korean trainers to theaffiliate. The Korea-(ased plants play a central role in Samsung's regional technologynetwork. This differs from the practice of Samsung's Japanese rivals in the region, whosetraining sites are increasingly offshore.

n %&& forty technicians from the recently-esta(lished refrigerator plant in ndonesiawere sent to a Korean factory for three months. Bne-third of the workers at Samsung's


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microwave oven plant in Aalaysia were also trained in Korea, and Korean technicalinstructors also trained local workers >SE&& Jan %&&6?. 0 ma)or glass (ul( factory inAalaysia sent local technicians to Korea for training (oth (efore and after operationsstarted >S! %&&8:6%7?. The heads of production lines at a components plant in Thailandreceived more than three months training in Korea, and fifteen Korean technical

instructors were dispatched to train local employees >S&& Sep %&C&?.

"ittle is known a(out the level of local linkages of Samsung's affiliates. Bne ndonesianaffiliate reported local content ratios of %7= for audio components and only 7= for!;s in %&&D, its first year of production. 0t the Thailand !T affiliate, the initial levelof local content was a(out %=. *ithin several years, the ratio of components sourcedfrom local and near(y regional suppliers had risen a(ove 7=. t was also reported thatthree Korean components suppliers moved to Aalaysia to supply Samsung's microwaveoven plant, showing that local content does not necessarily mean linkages to locally-owned firms. The Aalaysian !;T plant is also anticipating the arrival of Koreansuppliers. 3ongguan Samsung $lectro-Aechanics, a producer of audio components and

computer key(oards in !hina, procures C= of its materials from Korea versus %&= in!hina.

Southeast Asia

Samsung's operations in Southeast 0sia started out somewhat tentatively, primarilyfocusing on assem(ling final goods for e+ports. 0s the company developed itscapa(ilities to set up offshore production, it added output in core components re1uiring alarger initial commitment of resources. The e+perience of its network creation inSoutheast 0sia undou(tedly simplified the su(se1uent creation of other intra-groupnetworks in !hina and in $urope.

Thailand was the starting point for Samsung's entry into Southeast 0sia. n %&CH S$! setup a (ranch office in angkok. n %&CC it esta(lished a )oint venture companyLThaiSamsung $lectronicsLwith Saha athana nterholding, one of the three (iggest (usinessgroups in Thailand >S&& Aar %&C&?. S$! had a 7%= share, and Saha athana 8&=. S$! provided the management, technology, machinery and (rand name, whereas Sahaathana provided the land and local manpower, as well as knowledge of the local market.TS$ started producing !Ts in %&C&, with production rising steadily 7, per year in%&&8 >S$AA, June %&&8?. !;s were added in %&&6, and washing machines two yearslater. TS$ intended to distri(ute half of its output to the local market, and the rest to theES and the $! through S$!9s marketing channels >S$! %&C&: IDI?. The goal of 7=local sales had not 1uite (een achieved (y %&&8, (ut the level has gradually increased.

Soon after setting up production in Thailand, Samsung esta(lished a 7:7 )oint venturein ndonesia for refrigerator production with Aaspion, a local distri(utor of consumerelectronics products. Bnce again Samsung provided e1uipment, know-how, and a (randname, while Aaspion provided a plant, la(or and land >S&& Aar %&C&?. Briginally the pro)ect was designed with the e+pectation that local market would a(sor( much of theoutput. 3espite a capacity of I, units per year, production reached only %%, units


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in the first year, %&&, and D, in %&&%. n %&&D, the affiliate, Samsung Aaspionndonesia, changed its strategy and targeted regional and glo(al markets, supported (y itsown overseas sales network. This strategy was successful and the affiliate has made a profit since July %&&D.

n %&&%, the pace of investment picked up. 0 second affiliate in ndonesia was esta(lishedto produce !;s and !3 players for e+port. Samsung controls C= of T SamsungAetrodata $lectronics. The minority partner is Aetrodata ndonesia, which had previously (een the sole distri(utor of Samsung products such as monitors and officee1uipment. roduction started in 0ugust %&&D. The audio output was e+ported mostly to$urope and elsewhere in 0sia. ideo products were e+ported worldwide, (ut in $urope a previously-esta(lished !; affiliate in Spain foreclosed much of that market. Aost ofthe production was sold under the Samsung (rand name, (ut it also undertook B$A saleswith #$, 0kai and other companies. n early %&&7 the affiliate started to manufacture!Ts for the local market.

%&&% was also the year that Samsung (egan production in Aalaysia. Bne investment wasan e+port-oriented plant producing microwave ovens, Samsung $lectronics Aalaysia, awholly-owned su(sidiary. 0ll its products are e+ported to the ES, 0ustralia and $uropethrough Samsung's international marketing su(sidiaries. ery recently, the affiliate was (usy preparing to produce microwave ovens to (e sold for the local market.

0lso esta(lished was Aalaysia Samsung $lectron 3evices, its first (ackward integrationin the region, and its first offshore production of !;Ts anywhere in the world. y %&C&,S$3 was e+porting more than I= of its !;T production, mostly to Japan, Southeast0sia, 5ong Kong and !hina >S$3 %&&: 8&?. S$3 Aalaysia, a wholly-ownedsu(sidiary, was set up

with an annual capacity of %.H million units, which has since (een dou(led, along withincreases in the plant's automation level. #iven the strong level of demand in the region,it's not surprising that the operation achieved profita(ility after only si+ months ofoperation. "ess than D= of its output went to Samsung's Thai television affiliate, withthe rest (eing sold to near(y affiliates of Sanyo, 4unai, T, Thomson and othercompanies. y this time, clearly, Samsung had mastered the organi/ational skills neededto move production offshore.

This success undou(tedly helped Samsung decide to undertake a second round of (ackward integration in the region >S! %&&8: 7I7?. n %&&D, Samsung received approvalfrom its ES partner !orning #lass *orks to esta(lish a glass (ul( plant in Aalaysia nearthe !;T affiliate. Bnce again, this was Samsung's first offshore production for this product. nitially, it had sought to reduce the risk (y setting up a )oint venture with 0sahi#lass, a ma)or Japanese producer. ut when 0sahi decided not to go ahead with the pro)ect, S! proceeded on its own, investing GD7 million >S! %&&8?. Starting in %&&6,Samsung !orning >Aalaysia? assem(led panels and funnels imported from S!-Korea,with an annual capacity of D.7 million units. S!-Aalaysia has diversified its product linesfrom %8-inch glass (ul(s to D and D%-inch glass (ul(s. t also plans to increase its


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vertical integration (y (uilding a glass fusion plant >S! %&&8:6%I?. S!-Aalaysia is alsoe+pected to produce (ul(s for plants esta(lished (y the other ma)or Korean !;T producers, Brion and #oldstar, in ndonesia, !hina, and ietnam >S! %&&8: 7I%?. S!-Aalaysia planned to e+pand its production capacity to 6.I million units (y %&&7,investing an additional ESGD million >SE&& 0ug %&&D?.

0nother component operation was started in %&&6, this one in Thailand. S$A-Thailand, awholly-owned su(sidiary of Samsung $lectro-Aechanics was actually announced in late%&&, (ut didn't (egin operations until %&&6 (ecause it had to (e sure of market demand>Jun and Kang %&&8?. t produces a variety of components, such as deflection yokes andfly(ack transformers for !Ts, and oil condensers for microwave ovens, plus other partsfor audio-visual e1uipment >S&& Sep %&C&?. ts production capacity in %&&6 was %.8million tuners, D.8 million 3Ms and 6.& million 4Ts >$0K %&&6?. Bnly a(out %= ofits output went to Samsung's local !T affiliate, with the rest (eing distri(uted tounaffiliated companies in the region, particularly Japanese manufacturers such as s Affiliates in Southeast Asia b7 "ountr7

!BEAalaysia? !;T glass (ul(s, %&&D

"hina


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Samsung's network in !hina is actually divided into two relatively separate pieces, one of which is located at Tian)in, and the other in #uangdong rovince. 0 new electronicscomple+ has recently (een announced for the Singapore-sponsored Su/hou Township,located a(out half-way (etween Samsung's southern and northern !hina plants.

n the early %&&s, Samsung selected Tian)in, which is close to Korea, as a strategic 43location. S$! rapidly set up integrated operations to (uild first !;s then !Ts.Samsung 0erospace ndustries )oined in this location to produce cameras for the local!hinese market.

Tian)in Samsung $lectronics >TS$!? was S$!9s fourth offshore !; plant, and itssecond in 0sia. t was esta(lished in early %&&6 as a 7:7 )oint venture with a state-runelectronics firm. 0 total of ESGI8 million was invested in the vertically-integrated pro)ect, which produces !;s, !; decks and !; drums. n %&&7 it produced 8,!; sets. 5alf of its products are (eing sold locally, while the remainder have gone to0ustralia and the former Soviet Enion.

Just prior to the !; affiliate, Samsung !orning set up a plant to produce rotarytransformers for !;s, a product it had made in Korea since the late %&Cs >S! %&&8?. nlate %&&D, after the approval of Samsung-!orning's ES partner, S!-Tian)in started to produce rotary transformers with a capacity of C, units, which was rapidlye+panded in the following months. 4rom %&&6, it added more sophisticated products suchas four-channel rotary transformers, in addition to the two-channel type >S! %&&8?. S!-Tian)in planned to e+pand to a capacity of 7 million units per year (y %&&7 >S!%&&8:7I%?.

n 3ecem(er %&&6, S$A esta(lished Tian)in Samsung $lectro-Aechanics, an C:D )oint

venture with one of the state-run electronics corporations, to manufacture a variety ofcomponents which could (e used in the !;s produced near(y and in the !Ts thatwere soon to (e produced. The total investment re1uired was ESGI million. roductionstarted in Aay %&&8 with the following capacities: 6.I million T and !; tuners2 D.8million !; heads2 6.I million precision motors2 I, computer spindle motors>SE& Jan %&&8?. This is of course much more than can (e a(sor(ed (y Samsung's localaffiliates.

n %&&8, S$! formed Tian)in Tongguang Samsung $lectronics, a 7:7 )oint venture withthe same partner as the !; plant, to produce color T sets. S$! invested ESG6million for a production capacity of % million sets. t is the largest of Samsung's overseas!T plants, and recent annual output was C, units, a(sor(ing a(out one-third thetuner capacity of the near(y components plant.

Samsung 0erospace ndustries appears to have made an unrelated opportunisticinvestment (y setting up a 7:7 )oint venture to produce cameras with a large localcamera maker, Tian)in !amera. The total investment was a relatively small ESG%million. The target markets are !hina, 5ong Kong, Thailand and Singapore. ts futuree+pansion will (e mostly dependent on the marketing efforts of the !hinese partner.


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n southern !hina, Samsung esta(lished a smaller network for audio products. 4irst camecomponents, with 3ongguan Samsung $lectro-Aechanics, a wholly-owned su(sidiary in#uangdong rovince. t was technically the first offshore plant of Samsung's S$A (ranch, having (een esta(lished in mid-%&&, at the same time as several other Koreancompanies invested there, (ut production didn't (egin until %&&D. 0n e+pansion in %&&8

raised production capacity: from 8, audio decks to C,2 from %.C million audiospeakers to 8 million2 and from %, computer key(oards to 6,. Aost of theoutput is shipped to Southeast 0sia, !hina, 0merica, and Korea >$0K %&&6?.

Starting in late %&&D, S$A9s 3ongguan affiliate (egan supplying audio components to5ui/hou Samsung $lectronics, another #uangdong affiliate. S$! owns &= of the sharesin this company, while its !hinese and 5ong Kong partners hold 7= respectively. n T3N?central office switches for local use, which had (een developed (y Samsung incooperation with the Korean government. The )oint venture with two local partners, oneof which is a state-run telecommunications corporation in Sandong, represents aninvestment of ESGD million. t is currently producing 6H, T3N switches.

n %&&8, Samsung announced a G% million dollar investment plan for Su/houTownship. The initial plants would (e devoted to household appliances and the assem(lyof transistors and linear !s for use in consumer electronics. Samsung $lectro-Aechanicssaid that it would manufacture oil condensers and air conditioning motors there as well.

Ta(le %% summari/es Samsung's investments in !hina.

Table 11 Samsun>s Affiliates in "hina b7 Reion

;$#B< 044"0T$


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$lectronics

#uangdong 3ongguan Samsung $lectro-Aechanics speakers, key(oards, etc., %&&

5ui/hou Samsung $lectronics audio products, %&&D

Su/hou Su/hou Samsung $lectronicsrefrigerators, microwave ovens, washingmachines and air-conditioners, %&&8

Samsung reveals a dynamic interaction (etween firm capa(ilities and international production networks. n the early stage, when Samsung was (uilding capa(ilities, foreignlinkages were needed for technology and marketing. 0s the group's capa(ilities grew, itventured into international production. 5owever, its capa(ilities in mass production wereinade1uate to ensure the success of its initial efforts to (ypass trade (arriers in its ma)ormarkets (y (uilding offshore production (ases there. t was only (y following a re-

orientation of its international production to low-cost operation in peripheral areas that itwas a(le to correctly match its current capa(ilities with its network structure. Aeanwhile,it has re-oriented the nature of its non-production linkages with foreign firms to helpfoster the development of the design and marketing capa(ilities it has lacked in the past,fre1uently through ac1uisition.

nternally, the Samsung #roup's electronics activities have suffered from an almostcomplete de-linkage (etween production >in 0sia?, marketing >in the Enited States and$!?, and design and development >in Korea? over the two decades after the %&Hs. This paper tends to confirm the argument (y Kogut and Pander >%&&6: I67? that the key tosuccessful international production is ... to recom(ine the knowledge ac1uired at home

with the gradual accumulation of learning in the foreign market. Thus Samsung'saffiliates in Southeast 0sia were gradually a(le to increase the percentage of output soldin the local market, relying at first mostly on e+ports. Met the continued centrali/ation of product development has slowed the learning process in offshore affiliates.

#iven the weakness of product development in the Korean electronics sector, it is possi(le that centrali/ation is necessary during the period in which ma)or innovationcapa(ilities are ac1uired. ut we have already seen that this leaves offshore productioncenters vulnera(le as they try to penetrate local markets in competition with rivals whouse minor change capa(ility to tailor products for local customers.

The different technology management pattern esta(lished (y Samsung's Japanese rivalsseems to (e relevant. The ma)or Japanese consumer electronics firms have decentrali/edminor product change capa(ilities at many of their production affiliates in Southeast 0sia,increasing the fle+i(ility of their production networks and freeing up engineeringresources in Japan for more valua(le work.

Samsung's international production networks are also different from those of Taiwanesefirms. *hile Samsung tends to focus on economies of scale, largely in consumer


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electronics products manufactured in a vertically integrated system, Taiwanese firmsfocus on economies of networking in the region that permit a large degree of fle+i(ility toadapt to the rapidly changing information technology market. Thus, we can note in passing that this research supports the idea that international production systems havedeveloped in divergent, rather than convergent ways.

Korean industrial policies have (een important for facilitating, and even inciting, thefirms9 international competitiveness (y re1uiring foreign firms to transfer technology ine+change for market access, supporting e+ports, protecting the home market, andsupporting research.

5owever, policy errors have also occurred. The first was near-sightedness in creating atop heavy industrial structure mimicking that of Japan (ut without that economy'sunderlying dynamic of continuous upgrading of prod

63557479 consumer durable industry

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