1. Barriers to Entry
Because of the extremely intricate and sophisticated nature of manufacturing semiconductors, a competitor should expect high initial capital requirements to build facilities needed for production. Cost to build a new semiconductor fab has gone up from $200 million in 1985 to $3 Billion in 2004. Incumbent companies have capabilities to design newer generations of semiconductors with greater amounts of memory and processing abilities that make older generations obsolete. Older generations tend to drop half their amount in price one year after a new model is reduced (exhibit 6). The United States and Taiwan governments restricted domestic producers from shipping semiconductor equipment to China. China’s government began to subsidize all semiconductor infrastructural needs to local producers in hope of making China competitive in the market. Micron was granted amnesty in an April 2005 price fixing charge against Hynix, Infineon, and Samsung for bringing the alleged wrong doing to the US Department of Justice. This type of coordination is prevalent among firms in an Oligopoly, in which Barriers to Entry are categorized as high. 2. The Power of Suppliers
With each generation of semiconductor equipment, the technology grew more complex and the number of suppliers became more concentrated. Although these suppliers are concentrated and hold a lot power on the raw materials industry, they lack the incumbent specialization knowledge to compete with incumbent firms. Samsung spent billions in research to develop their current stacking strategy to fit more cells into a semiconductor chip; technology suppliers cannot compete with. Applied Materials, Tokyo Electron, and ASML dominated key segments of the equipment market. Suppliers of memory raw materials would provide discounts of up to 5% for high volume buyers. This shows that suppliers rely on the buyers business so heavily they want to entice repeat business by offering a discount, resulting in low switching costs to change suppliers. 3. The Power of Buyers
Customers in the memory industry are much more highly fragmented than suppliers. No single OEM controlled more than 20% of the global PC market in 2005. Products in the memory market are differentiated by the amount of memory provided by the semiconductor and how reliable the memory would be. OEMs would pay upwards of a 1% average price premium for a reliable supplier of memory, therefore creating high costs from switching to a reliable supplier to one who hasn’t proven itself yet. As previously mentioned, due to the amount of resources spent on R & D in the memory industry there is a lack of threat from backwards integration. Memory buyers lack the technological education, know how, and resources to compete with the incumbent firms they purchase memory from. 4. Threat Of Substitutes
The memory industry has very low threat of substitutes. Some firms are pursuing the use of nanotechnologies, but these are nowhere near refined and it is likely that if they emerged Samsung would be able to catch up quickly. The various types of memory offered by Samsung are a core part of computers, which is an industry that experiences extreme growth every year and shows no signs of decreasing success. It is very unlikely that PC manufacturers will shift away from these core parts. 5. Rivalry Among Existing Competitors
In 2005, despite the extremely inflated cost of building a new fab, Chinese firms rushed to enter the industry, unconcerned about sacrificing profits for market share because of their ease in raising funds. Concurrently, Samsung was finding great success in marketing new types of cutting edge memory chips designed for emerging technologies (mobile phones, game devices, and other consumer electronics). Regardless of this success Samsung had to be very...