Samsung Case Analysis

Topics: Flash memory, Samsung Electronics, Dynamic random access memory Pages: 7 (2209 words) Published: November 23, 2011
To: Kun Hee Lee, Chairman and CEO
From: VP Strategy and Business Development, Samsung Electronics Date: 31-Oct-2005
Re: Chinese DRAM entrant threat

The Strategy and Business Development team has reviewed the current position of Samsung in the semiconductor and memory chip industry. In spite of our current success, we are concerned that Chinese companies are going to begin attacking us in the same way we had went after Japan 20 years ago. We are facing new competition from Chinese companies who are trying to enter the DRAM market. They are using partnerships to learn from the rest of the industry, attracting billions of dollars to build state of art facilities and willing to sacrifice profits for market share. The question is how to response to this imminent change to the structure of the global semiconductor market which may impact the future of the company. One option we have is to collaborate actively with a Chinese partner. The risk in working with Chinese partners is that our intellectual property rights are still not protected fully and could lead to a Chinese partner become a rival some day. In addition, moving our production site from Seoul to China is not aligned with our unique company culture. An alternative option for us is to increase our investments in products for niche markets and let the Chinese control the lower end market while focusing on to develop more high value products. As seen in this document, our team has conducted an extensive analysis to react to the threat of Chinese competition. External Analysis

The global memory chip industry accounted for $33.7 billion in sales in 2003. Memory chips are classified into three categories: DRAM, SRAM and Flash. DRAM accounted for about half of the memory chip market and SRAM and Flash accounted for 10% and 32% respectively. DRAM was traditionally used mainly in PCs, but the share of DRAMs going to PCs declined from 80% to 67% between 1990 and 2003. Flash memory and SRAM market is growing by extensive use of memories in telecommunications and consumer electronics. Competitive rivalry within industry: in 2005, the industry is experiencing intense rivalry with an increase in industry capacity and partly to a normal cyclical downturn. Samsung has five major competitors with the memory chip industry which are presented in Appendix A. Bargaining power of suppliers: the industry contains powerful suppliers. With the growth of industry, suppliers become more concentrated. Only two or three dominating players dominated key segments of the equipment market and would offer discounts of up to 5% for high-volume purchase. Bargaining power of customers: Buyers are not very powerful. They are fragmented, with no single OEM controlling more than 20% of the global PC market in 2005. OEMs negotiate high on price for three reasons: memory represents 4-12% of PC cost and 4-7% of mobile phone cost, intense rivalry between PC producers, and the fact that end-customers are price conscious. OEMs would pay 1% premium for a reliable supplier since defective memory was hard to detect. There is little threat of backward integration due to high cost of required capital. Threat of Substitutes: Up to now, there are no effective substitutes that could even challenge DRAMs or Flash memory. Threat of new entrants: New entrants are facing many challenges to enter; they need high capital investment, complex technology, learning curve, brand identity significance and economies of scale. In addition, threat of retaliation is significant. However, Chinese entrants with help of joint venture and agreements are in position to obtain license and technology for manufacturing. Extreme support from government in terms of cheap credit, abundant land and other essential resources is now available to attract anyone who wants to build a cutting-edge semiconductor facility with a Chinese partner. Opportunities and Threats: One main opportunity is the significant increase in electronic consumer...
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