Samsung Electronicsand the Chinese Threat

MBA 290G Fall ‘07 Prof Charles WuTEAM 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.html2. 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

• Factor ConditionsLocation – Ports, Major marketsLabor – High concentration of skilled engineers, HR policiesGovernment – policies for trade, education

• Strategy and StructureHigh internal competition – HynixTechnology know-how, experience

• Demand ConditionsKorea has early adopters Demand in east Asia is high

Porter’s Diamond Model for Samsung/Korea

• Related/Supported IndustriesLCD, Mobile Phone and PC industries

Porter’s five forces for DRAM

Substitute products• Danger of future substitutes

given rapid changes• Probable little switch cost

Rivalry• Small no. of competitors• Significant exit barriers• Cyclic Industry growth

New entrants• Guarded by economies of scale• Significant capital costs• Learning Curve• Threat of retaliation• Little brand identity significance• Government Policy –e.g. China

Customers• No significant buyers

by volume• Buyers are very price

sensitive• Price limited by other

memory substitutes• Little threat of

backward integration?

Suppliers• No significant

differentiation of inputs

• Suppliers not concentrated

• No threat of forward integration

SAMSUNG

Samsung History• Established in 1969 to manufacture black and white TV sets

• Purchased a Korea Semiconductor Business in 1974

• In 1980 dedicated most of its resources to semiconductor business and built its first manufacturing facility.

• By early 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.com2. Samsung 2006 Annual Report

DRAM Operating Profits

0

1

2

3

4

5

6

7

Sam

sung

Micro

n

Infin

eon

Hynix

SMIC

SG&AR&DDepreciationLaborRaw MaterialsPrice

Samsung Performance

• Cost Advantages– Lowest raw materials cost (volume)– Lowest depreciation– Labor and SG&A not high– Shared core designs– Lower cost fabs (12%)– Flexible production lines– Higher yields (because of process quality)

• Highest Price– Highest reliability in industry: >$1 premium

Cost of Materials

DRAM Cost of Materials vs Volume(2003)

0

0.5

1

1.5

2

2.5

0 200 400 600 800 1000

Prod. Volume 256Mbit equiv (M Units)

Cost

of

Raw

Mate

rials

($

)

SMIC

Samsung

MicronHynix

Infineon

SAMSUNG STRATEGY

Kun-Hee Lee

Chairman & CEO

Generic Competitive Strategies

• Two dimensions of competitive strategy– Competitive advantage - low cost vs.

differentiated play– Target Market - broad vs. niche play

• Samsung, because of the unique ecosystem created around it, has successfully spread its product line across both of these dimensions

Generic Competitive StrategiesT

arg

et

Ma

rke

t

Overall Low-CostProviderStrategy

(Commodity DRAM)

BroadDifferentiation

Strategy(Cutting Edge DRAM)

FocusedLow-CostStrategy

(Low cost flash memory)

FocusedDifferentiation

Strategy(Rambus DRAM)

Best-Cost ProviderStrategy

(Samsung’s Strategy)

Lower Cost Differentiation

BroadRange of Buyers

Narrow Buyer

Segmentor Niche

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 CompetitorsElpida 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 Technology

Investing in next generation DRAM technology with a $500 million investment from Intel

Nanya Technology

Producing 256 Mbit DRAM in a Joint Venture with Infineon

SMIC The only Chinese DRAM manufacturer. It is China’s most advanced producer and a major competitor for Samsung

Chinese EnvironmentRegulatory 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 semiconductorsMarket Access issues still exist

Technology China lacks the critical infrastructure necessary to support a cutting –edge semi-conductor industryThe 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 2006DRAM 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