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Transcript of Arbaz samsung proter
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