Samsung Electronics

Samsung Electronics - DRAM Market

Strategic Challenges in 2005:

Samsung is facing the challenge of new entrants into the industry from China. In spite of their ability to survive the last two cyclical downturns in the industry, Hee Lee is worried that China will fundamentally change the industry. Does Hee Lee need to change his strategy?

Options:

1) Collaborate actively with a China partner

a. Pros: If industry growth picks up, major producers will look to Chinese partners to expand joint investments. If partnered with China, new business will flow to Samsung.

b. Cons: Intellectual property risks;

Survival of unique company culture with a move to China

2) Increase investments in cutting-edge memory products for niche markets

a. If Samsung is the low cost, productivity leader, they should not be teaching the Chinese their secrets.

b. They could cede low end market to China and develop more high-value niche products.

Kun Hee Lee - Chairman of Samsung Group

Company Facts/Analysis:

2003 - Memory Division exceeded Japanese rivals in size and profits.

44% Operating Margin vs. Infineon (best producer) at 6%

896M Units Produced at Samsung vs. 672M at Micron

Industry Facts/Analysis:

Year 2000 - Semiconductor Industry has $200B in sales; Growth of 16% per year since 1960

Semiconductors - two categories

**Memory chips - used for storage - DRAM, SRAM and Flash

Logic chips - used to process information and control processes

**This case is about Memory Chips

Year 2003, Memory Chips are a $33.7B industry

2003 DRAM Sales

67% for PCs - (Declined from 80% since 1990)

3.5% for Communications Devices

7% for TV and Game Devices

2003 Other Memory Sales

10% - SRAM (buffer memory used for phones)

32% - Flash Memory (biggest growth area)

Suppliers:

* "Powerful suppliers"

* Concentrated number of suppliers (2-3) as the technology became more sophisticated

* Raw material suppliers provided 5% discounts for high-volume buyers

Buyers:

* Price-conscious consumers (2ndary buyers) - because of this, OEMs (Original Equip. Mfg) negotiated hard with suppliers

* OEM would pay 1% premium to a reliable supplier - errors were costly

* Fragmented customer base with no single OEM with > 20% of PC market in 2005

* Memory represents 4%-12% of material costs of PC

* Memory represents 4%-7% of material costs for mobile phone producer

Competitors:

* Chinese willing to sacrifice profits for market share. Also have strong government support and local/international funding.

* Chinese lacked organizational experience and tacit knowledge for mastering design and production process, however, large funding partners provided potential to meet these challenges over the next decade.

Barriers to Entry:

In China, the cost of building a new "fab" went up from $200M in 1985 to $3B in 2004

Because of the costs associated with incumbent mfg switching methodologies, new start-ups could come in and start new business with new technology and bypass incumbents without little resistence.

Substitute Products:

* In 2005, there were no effective substitutes to challenge DRAMs or Flash memory.

* Nanotechnology being contemplated

Threats:

* If new products came on the market by new start-ups, the incumbents would be locked into old processes because of the costs of changing to new methodologies.

Process Improvements

* Design and process improvements directed toward allowing more electronic circuits to fit on smaller chip sizes while ensuring greater uniformity in the manufacturing process.

* Every 10 years, new technology allows for larger wafer sizes

* Memory chip producers also invest in process technology to improve chip quality and reduce defects

The Competition

Elpida - Japan

* Starting new construction for 12" wafer fabrication facility in Hiroshima. Cost - $4.5B - partially financed by Intel +public equity issue.

Hynix - South Korea

* Profitable in the 1990s but lost the lead. Organizational problems with timing of decision making on capital investments has caused problems for this company. They were bailed out but work-force cut 30% and assets were sold.

* New JV with ST Microelectronics to build a memory production plant near China.

Infineon, Germany

* Spun off from Siemens in 1999

* Strong alliances in the industry.

* JV with Winbond