Corporate Profile 47Billion Information Technology
Arbaz samsung proter
1. Samsung Electronics
and the Chinese Threat
MBA 290G Fall ‘07 Prof Charles Wu
TEAM 9
Alex Mehr, Bindiya Jadhwani, Kerem Tutuncu,
Lucian Popa, Rodrigo Fonseca, Uttara Parikh
3. 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
4. Memory Industry
• Global Memory Chip Industry
– Approx $250 billion in 2006 (10% growth)
– $227.5 billion in 2005 from $213.0 billion in 2004
• Segmentation
– DRAM ( over 50% of this market)
– SRAM (10%)
– Flash (32%)
• Asia-Pacific projected to be the largest and fastest growing market
• Cyclic industry with massive swings
– 2006 was a good year, prices were rising (revenue had 10% growth) 1
– 2007 was a bad year, significant price plunge (by 39%) 2
1. http://www.infoworld.com/article/06/05/31/78779_HNchipforecast_1.html
2. http://www.informationweek.com/showArticle.jhtml?articleID=201201654
5. 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
6. Global Market Share by Countries,
DRAM Sector
• (Source: Dataquest, May 2001)
• www.american.edu
7. 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
8. 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
10. • Factor Conditions
Location – Ports, Major markets
Labor – High concentration of skilled
engineers, HR policies
Government – policies for trade,
education
• Strategy and Structure
High internal competition – Hynix
Technology know-how, experience
• Demand Conditions
Korea has early adopters
Demand in east Asia is high
Porter’s Diamond Model for
Samsung/Korea
• Related/Supported Industries
LCD, Mobile Phone and PC industries
11. 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
13. 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
14. Samsung Structure
• Spans 58 countries
• Samsung Electronics has 5 business divisions :
– Semiconductor
– Digital Media
– Telecommunications
– LCD
– Digital Appliances
15. Samsung DRAM Facts
• 2nd Largest chipmaker worldwide (2006) 1
• Market leader in DRAM ‘92 - ’07 2
– Total DRAM Volume 896.4M units (2003)
– Over 1200 DRAM products
– “Frontier” to legacy products
– Specialty and customized products
– Versus competitors (1Q00-1Q04):
– Average price premium: 34%
– Average operating margin difference: +53%
1. www.dailytech.com
2. Samsung 2006 Annual Report
20. 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
22. 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
23. 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)
24. 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
26. Emerging Competitors
Elpida Japan’s only remaining DRAM producer
Hynix Has many financial problems
Infineon Major DRAM player with 25 R&D locations all over the globe
Micron
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
27. Chinese Environment
Regulatory A zero tariff rate for importing semi-conductors
Tax rebates to domestically produced semiconductors (avail in
2003 but stopped since April 2004)
Other preferential policies although not announced in detail, are
in the pipeline to encourage investment in semiconductors
Market Access issues still exist
Technology China lacks the critical infrastructure necessary to support a
cutting –edge semi-conductor industry
The US and Taiwan governments have forbidden shipment of
cutting edge production technology to China. So China went to
other countries
Alliances Chinese government provided cheap credit, abundant land, cheap
utilities, engineering talent, tax incentives to anyone who was
willing to partner with a Chinese company
Labor China still enjoys an advantage in labor intensive activities
28. 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
30. 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?
31. 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
32. 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
34. Largest Chip Manufacturers 2006
DRAM Competitors
• Samsung, 2nd
(+11%,+2B)
• Hynix, 8th
,first time among
top 10 (+32%, +1.8B)
• Qimonda AG, newly
created Infineon memory
division spin off, 12th
• Micron, 13th
(+10.8%, +.5B)
• Elpida 20th
(+89%, +1.6B)
35. 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
36. 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
Editor's Notes
http://www.netrino.com/Publications/Glossary/MemoryTypes.php Volatile = not power-off persistent ZRAM = Zero capacitor RAM, developed by Innovative Silicon Inc. Higher density even that DRAM, offers performances similar to SRAM but uses only one transistor instead of six. It requires a last generation fab. I don’t think this was available at the time of the case. TTRAM = twin transistor RAM, developed by Renesas PCM = phase change memory. Very fast (much faster than disks) and degrades less than flash but has temperature variations.
http://www.infoworld.com/article/06/05/31/78779_HNchipforecast_1.html http://www.infoworld.com/article/06/04/18/77500_HNdramrising_1.html DRAM – Dynamic Random Access Memory SRAM – Static Random Access Memory - type of buffer memory that facilitated computer processing and mobile phone functionality Flash – used heavily in digital cameras and mobile phones - do not lose data when power was turned off - can be NOR or NAND. NOR is used for data that is rarely modified (e.g. bios) and NAND is rest (vast majority)
Rapid Technical Progress The first is rapid technical progress. This means that holding inventories as a way of smoothing out demand fluctuations is not productive; because of the short lifetimes of semiconductor products, the inventories will lose value and even become obsolete if they are held too long. Instead, firms must sell what they have as quickly as they can. Scale of R&D Investments Second, very large R&D investments are required to enter this industry—typically, as much as 10 to 15 percent of annual sales. This R&D is often specific to the segment of the market that the firm is entering. Nature of Learning Curves Learning economies are very important. For military aircraft, a learning curve of 85 to 90 percent is estimated, which means a doubling of output drops unit costs by 10 to 15 percent. In semiconductors this curve is closer to 70 percent, quite a bit steeper. In addition, the source of the learning economy in semiconductors is different from that in aircraft. The curve is not caused necessarily by labor productivity. Instead, improvements come from two sources. One is die-shrinks: Over the cost of a product cycle, the number of chips on a wafer increases. Over any product’s life, this happens typically two or three times, essentially increasing the product on each silicon wafer. The other source is yield learning: The number of good chips on the wafer increases over time as a percentage of the total number of chips. Together these sources generate the steep learning curve. This curve is thought to have flattened somewhat, but good evidence of this is difficult to come by. High Sunk Costs Capital intensity is very high and rising. A mid-sized fab today costs $1.5 billion to $2 billion, or even more. Furthermore, if a firm decided to build a fab and then wanted to exit the industry, the resale value would be low. Also, it typically takes 1 to 2 years to build a new fabrication facility. This long gestation time is often overlooked in addressing cyclicality. A spike in demand might prompt a decision to build a fab, but it would not be ready for mass production for a year and a half or two years. This lag time plays a significant role in the very wide swings in the industry, because demand might be fading just as new capacity reaches the market. Capacity Constraints in Production The importance of capacity constraints, too, is often overlooked. The output of the semiconductor industry is really a mixed bag including both old, trailing products and new, leading-edge products. Typically, the leading-edge product is produced in the most modern facilities, which are run at full capacity. A modeling strategy that approaches an optimization problem is likely to run up against a constraint boundary. This is important for anyone trying to use interior first-order conditions to make inferences about, say, marginal costs. The Importance of Technology Shocks Finally, the sources of deep cyclical swings are difficult to quantify, but conversations with people in the industry indicate that periodic technology shocks have been important in explaining spurts of robust demand. In the early 1990s, for example, the PC market experienced a boom, and this in turn created an unprecedented demand for memory chips that lasted approximately three years. Again, the dawning of the Internet era around 1995 created additional demand for semiconductors that only now appears to have tapered off. Wireless communications also propelled the market forward in a way that had not been anticipated.
Korea has secured leading position in the development of next-generation products and technology, by virtue of extensive facility investments to enhance productivity. When it come to DRAM, Korea has captured approximately 40 % of global market. Korea has been the largest manufacturing country in the world since 1998 and emerged as the second largest manufacturing country in total memory semiconductor production. Ref: http://www.american.edu/initeb/hp2566a/Domestic%20Production/index.htm
In 1990, 80% of the demand for DRAM came from PCs. This declined to 67% by 2003.
- with each generation, technology grew more complex and number of suppliers became more concentrated. Rivalry between PC producers is high, and have to face price conscious consumers ----- OEMs negotiated high on price. The end customer has very little consciousness of the BRAND of the DRAM. There’s no ‘ SAMSUNG INSIDE ‘ as there is with Intel.
Factor conditions – Location - South Korea ports, Close proximity to China and East Asian Countries, Single site- Samsung’s main R/D facility and all its fab lines located at a single site just below Seoul. Benefit of Collocation, and scale of fab investment. Engineers live together, air is fresh, beautiful, productive environment Labor – Engineers -The overall level of education in Korea is relatively high Korean government has planned to support educational institutions such as colleges and private institutes related to IT skills and The number of programs containing higher education in computer science/engineering is increasing. Therefore the supply and the quality of Korea's skilled workforce is expected increased. HR policies – Aptitude test covers language skills, math knowledge, reasoning and space perception. High potential workers join. Recruited Westeners and people from Korean Diaspora. Demand conditions Korea has shown the high computing penetration rate since 1998 Korean demand for computers – Samsung global scale. Strategy and Structure lower cost using Samsung infrastructure, and diverse capital resources and government support. Has the technology, internal competition know-how, experience since 1974. it encourages the continuous development of technology and improvement of business models in business sectors. Related and Supported industries Hynix Semiconductor - Local competitor, competition within Korea effect strengthened as they are both global competitors. Samsung has secured leading position in DRAM market . In addition, Samsung ranks itself in top manufacture in LCD and Mobile phone. With continuous efforts to develop new technology and to reach niche market abroad, Korea can keep the leading position.
Substitute Products : The existence of close substitute products increases the propensity of customers to switch to alternatives in response to price increases (high elasticity of demand). Price of substitutes: The price of the competing firms are lower. Average selling price is $15.25 (between 2000and 2004) , whereas the competitors have significantly lower prices. Although they are reporting losses, the firms continue to try to get market share. The Chinese firms are especially competing due to the Chinese government support. Switch costs: The switch costs are not high, making it harder to hold the strategic advantage Product differentiation: Samsung has the most product differentiation, and SMIC is only producing 256Mbits. Established Rivals: Sometimes rivals compete aggressively and sometimes rivals compete in non-price dimensions such as innovation, marketing, etc. Industry growth: Cyclical. This year (2007) 1.97 percent growth for the DRAM market. But it changes, and profits and operating margins are high for Samsung currently, it is decreasing. (http://arstechnica.com/news.ars/post/20070828-hard-times-ahead-for-dram-industry.html) Exit Barriers: Firms have great sunk costs. Number of Competitors: It is currently the major ones are Micron, Infineon, Hynix and SMIC, but there is threat of entry, especially from China. New Entrants economies of scale: Samsung has an economies of scale advantage, as a major producer of technological products not limited to DRAMs or semiconductors. Brand Identity: Samsung has the best brand identity –(Most recognized global brands data show they are no. 21 worldwide) http://www.ourfishbowl.com/images/fishbowl_story/2672007/bestglobalbrands_2007ranking.pdf Capital Costs: It requires multi billion dollar investment just to get into the market and produce DRAMs. Learning Curve: More important than the capital costs, there is a significant learning curve present. Samsung had to learn how to manufacture from Micron about 30 years ago, and although there are efforts to keep the know-how. However, especially China has very talented and abundant engineers and skilled workers to beat the learning curve fast. Government Policy: China backs the firms – SMIC government supported Retaliation: Samsung is the market leader, competitors compete on price despite losses.
These figures reflect Samsung Electronics numbers Samsung had 3 divions: electronics, finance, trades and services Samsung group revenue in 2004 was 135 billion In 2006 brand value was 20 th of $16.1 billion Ref: Samsung 2006 Annual Report - http://www.samsung.com/us/aboutsamsung/ir/newsMain.do http://www.dailytech.com/AMD+to+Make+Top+10+List+of+Worlds+Largest+Chip+Makers/article.aspx?newsid=5214 http://money.cnn.com/magazines/fortune/global500/2006/full_list/
This graph shows that volume is an important part of the cost of materials. There are other factors, like transportation costs. Samsung has the lowest costs, BUT SMIC is doing relatively well given its low volume. There is a good potential for decreasing cost if volumes increase.
Regulatory: These policies include a zero tariff rate for import of semiconductor equipment and tax rebate to domestically produced semiconductors. Although China stopped its tax rebate policy on semiconductors manufactured in China in April 2004, as a result of U.S. complaint to WTO about the discrimination against imported semiconductors, Chinese government has offered to roll out equally preferential policies, if not more to encourage the development of semiconductor industry. Technology: Because semiconductor industry requires heavy investment, it has become a common practice to use second hand equipment in order to speed up return on investment. According to industry insiders, leading industry manufacturers also use second hand equipment
