Intensity of the Competition within DRAM industry
The competition is high because the competitors are relatively equally balanced in the industry with powerful suppliers and high exit barriers due to high fixed costs and very specialized assets, which keep the companies competing even though they are earning low or negative returns (Exhibit 7a shows an industry average of -15% operating margin). Although the industry growth is at 16% per year, low product differentiation (almost as commodities) and low switch costs for the buyers force the competitors to compete on prices. Chinese Entrant Strategy
The large-scale entry by the Chinese firms in 2005 adds to this competitive pressure within the DRAM industry. The Chinese firms adopt Samsung’s strategy from 20 years ago by competing in prices of the older product lines; they are willing to sacrifice profits for market share. To overcome the high capital investment barrier to entry, the Chinese firms attract billions of dollars from foreign investors and the Chinese government to build state-of-the-art facilities; in addition, they form partnerships with and obtain licenses from industry incumbents like Infineon and Elpida to learn the necessary expertise in design and production process that are one or two generations old. Initially, many of these Chinese firms focused on producing logic chips, with the exception of SMIC. However, the possibility of these logic chip makers entering the DRAM is imminent, especially when the chip manufacturing capacity in China is expected to increase from 4% to 9% of the world’s capacity by 2007. These Chinese firms can easily leverage their current logic chip facility, foreign funding, and design capabilities to compete in the DRAM industry. Changes in the DRAM Industry
Worsened by 2005’s cyclical downturn, the DRAM industry will become even more competitive on pricing as the Chinese firms are becoming more important players; in late 2004, Samsung was already experiencing...
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