Case Analysis - Samsung Electronics

What is SMIC's apparent strategy?

SMIC aims to acquire the technological knowledge, organizational skills for designing and production process, through alliance and technology licensing with other major International chip design house, which with time will help them to become a Chip designer on its own. At the same time with low pricing they are striving to grow their market share at the expense of profitability.

Should Samsung be concerned about SMIC?

Yes it should be concerned.

Presently SMIC and other Chinese semiconductor manufacturer co are lacking in DRAM designing knowledge but they are aggressively trying to acquire the same, with strategic alliance with International Chip designer. Someday in near future, if SMIC be successful on in-house designing, with the sound financial investment back up and Govt support available in China, they can be a major rival to Samsung in even advanced, niche products markets.

SMIC will have low production cost due low labor cost in China. Market size in China is huge and with possible Govt incentive to the Chinese buyers for buying SMIC products and promoting growth of Chinese company, SMIC will have major advantage.

How important is low cost as a profitability driver in DRAMs?

For DRAM though there are some niche markets for very customized products, due to the fast technology advancement the prices for new generation memory products drop within a short period of introduction. As per Gordon Moore's theory, semiconductor density would double every 18 months, which is proven to be true for past 40 yrs and as per Hwang's law, Flash memory density would double every 12 months.

Thus for profit to be sustainable the low cost is very important.

Low cost will be derived from maximization of productivity thru technology advancement, economic sourcing of raw material, low labor cost and integration of R&D and Production team. Excellence in quality will pay some additional profit as some upwards price premium are always paid to the reputed reliable supplier.

What is Samsung's cost advantage (percentage) against its competitor's composite?

From 5 DRAM's producer as shown in exhibit 7a, only Samsung having an operating profit with high margin of about 24%, which is derived from the above stated drivers for obtaining low production cost as well as having the benefit of obtaining higher price premium .

How was Samsung's cost advantage achieved in each element of cost?

Raw material cost is much less from obtaining better discount for high volume purchase.

Depreciation is less from better spreading, compare to other DRAM producer.

Integration of R&D and Production from single location of establishments.

High investment for new age technology in production facility, enabling to increase productivity, more chip within single wafer.

Strong consumer product line within company, specifically designing their products to use the DRAM produced