Case Study for Samsung Electronics

Case abstract for Samsung Electronics 1. What is SMICs strategy? Should Samsung be concerned about SMIC? SMIC seems to execute the uniform kind of strategy Samsung used before to succeed. The strategy is change their products at small-scale hurts and growing their merchandise share at the expense of serviceability. SMIC whitethorn threaten Samsungs business in the future, but not too much. Although SMIC can get many resources, such as cheap notes and lands from Chinese authorities and foreign investors, SMIC only focuses on producing chips, not intention chips.Samsung Distribution ChannelThe damage of the application of a new tap instantly is 3 billion and it is difficult for SMIC with sales revenue of 365. 8 jillion in 2003. Samsungs success depends on its constant technology insertion, track to gamey select products and efficient manufacturing process which will benefit Samsung with highschool retail prices and low cost. SMIC seems hard to get core technology fr om their partners unless forming a joint casualty. However, cooperating with chip manufacturers in Taiwan seems to a greater extent than attractive(a) for the tether technology owners.Except the technology, Samsung unagitated enjoy social building block of measurement cost reinforcement in lovesome literals, R&D and disparagement. SMIC may threaten Samsungs mature multiplication products. However, memory chip industry is a tech-oriented industry, Samsung can cool it maintain its racecourseing position because its receipts in innovation. What Samsung should concern is that the extravagant growing Chinese merchandise (estimated to be the second-largest semi-conduct buyer in 2010), their orbicular competitors may get market-entry advantold ages through cooperating with SMIC. 2. The low cost position.Samsung operating cabbage advantage over the industry composite is $2. 11 per unit of measurement, 34% from merchandising price and 66% from cost advantage. To SMIC, i t is 1. 78 per unit, 70% from selling price and 30% from cost advantage (Exhibit 1). For the comparative cost analysis, Samsung have unit advantage over the industry composite in all the quintette elements. They are raw heartys 36%, labor 27%, depreciation 18%, R&D 3%, SG&A 25. 29%. Compared to SMIC, Samsung has advantages in raw material 36%, depreciation 17% and R&D 25%, but has blemishs among labor 57% and SG&A 48% (Exhibit 2). . 1 analytic thinking Samsung VS Industry Composite a. Samsungs unit selling price advantage comes from two aspects. First, PC OEM manufacturers would pay 1% price premium to certain suppliers. Second, Samsung can customize its products for some special use because its diverse products chore to get premium. Third, Samsung has the most advanced products which can enjoy high selling price during the first several-month launching snip. b. Samsungs unit raw material cost advantage come from three aspects. First, the material suppliers will receive maxi mum 5% discount to large volume buying.Second, the usage of 12-inch wafer ( strangle 10% cost per chip) and 0. 11? m processing technology(80%, the highest yield rate) makes Samsung get much chips with corresponding amount of materials. Assuming the weighted average raw material cost per chip of Samsung is 100%, the Mircon will be 134%, Indineon 116% and the Hynix 161% (Exhibit 3). c. Samsungs unit labors cost may be explained by the hire differences between Samsung ($44000 per year) and the industry ($49312 per year, weighted average by production volume). Also, in that respect are some invisible issues.Samsung provides equal and competitive corporation value, bizarre evaluation and promotion system and humanity warfare for their employees. These elements make Samsung more productive, so the labor cost per unit is lower. d. The reason for Samsungs unit depreciation cost advantage per unit is equal to that of raw materials. With high processing technology (0. 11? m) to control yield rate (Samsung 80% vs Industry weighted average 59%), Samsung can set off more efficiently. So the depreciation per unit is lower. The production efficiency advantage (25%) is higher(prenominal) than the cost depreciation advantages (17%).That may because Samsung uses more advanced and expensive machine. e. Samsungs advantage in unit R&D cost may come from three ways. First, the competitive corporation gardening drive employees to chip in themselves in innovation. And the technical person works together with the manufacturing one, making the innovation process more efficient. Second, the innovation method is effective. The can use same core technology to develop different products types, such as the DDR and Rambus. Third, centralisation of the R&D facilities saves an average 12% fab construction costs. . Samsungs unit SG&A cost advantage comes from the efficient management social system of the country reducing the general administration cost and good written report of pro ducts reducing the sales expenses. 3. 2 Analysis Samsung VS SMIC a. Compared to the industry composite, Samsungs profit advantage over SMIC mainly from the price realization (70%), and the cost advantage only stands for 30%. The huge price gap results from several aspects. First, the quality and reputation for SMIC is lower. Second, the technology SMIC used was one or two generation older than Samsung.Third, use the low price strategy to get the market share. Finally, SMIC using purchasing rights exchanging for technology partners, the price of product selling to their partner may be lower than the marketing price. b. The reason for Samsungs unit material cost advantage seems similar to the one over industry composite. c. The single out of labor cost is because the average salary of SMIC is only a quarter of Samsung. d. The reason for Samsungs unit depreciation cost seems similar to the one over industry composite. The gap should be larger.However, the SMIC gets cheap loans and g overnment support, and buy old product line from Motorola. These issues may help SMIC reduce the gap. e. Samsungs unit R&D cost advantages may be explained with SMICs start-up status. It usually spends a lot at the early age of innovation. To build a new fab for SMIC is more expensive than Samsung. f. The disadvantage of Samsung in unit SG&A may be explained by SMICs strategy. Now, SMIC has to manufacture the products for their technology partners. SMIC seem to focus less on marketing their brands and become an OEM factory. 3. Can Samsung retain its cost advantage?If lose, what would happen at Samsung and SMIC? In my opinion, the main drive for Samsungs profit is its innovation, which can lead to high selling price and low manufacturing cost. The raw materials advantages may be change magnitude with increasing SMIC production volume and advanced manufacturing technology. The labor disadvantage is hard to say because Chinese labor cost is also rising. The depreciation advantage may be decreased by the efficiency usefulness of SMIC. The R&D gap may also be decreased by the development of SMIC. SA&G depend on to what degree SMIC insufficiency to promote their own brand.So the Samsungs cost advantages over SMIC will be decreased in the future and even lose. However, assuming that someday Samsung loses its cost advantages, it is still very likely that Samsung is ahead of SMIC by one or two generation. Samsung still can make more profit by with higher selling prices. Even though SMIC can get government support and cheap funds, it cannot acquire the same kind of corporate culture and the centralized R&D facility. By the way, SMIC cannot tolerant long time profit loses as a public company and the national guarantor concerns may put more resource on logic chip. 4. Options and recommendations. a.Joint venture Corporate with SMIC or other chip manufacturers in China to produce low end DRAM. Even the low end technology is attractive to China and get government support . Open the potential Chinese market and reduce cost. But it is hard to maintain the relationship with the constant extremity of technology transfer. b. OEM License SMIC and make it as an OEM manufacture for Samsung. Transfer our low end technology to SMIC. The longer SMIC keeping the contract, the less threat. However, SMIC seems unwilling to tackle this contract unless it faces profit pressure. SMICs ability may not filtrate the Samsung products requirement. . Focusing on our own business Samsungs core capacity is constant and efficient innovation. Memory chip industry is technology-oriented and the advantage cannot be achieved in few years (Unless competitor gets breakthrough such as total substitute, which is little probability). The corporate value cannot be copied in a short time. Samsung may reallocate its resources of DRAM (profit, manufacturing capacity of old chips and R&D) towards more promising flash memory business. By doing that it can still keep its leading positio n in memory chip industry. I recommend this option.