Case Study for Samsung Electronics

Case Analysis for Samsung Electronics 1. What is SMICs system? Should Samsung be concerned approximately SMIC? SMIC bets to execute the same descriptor of strategy Samsung pulmonary tuberculosisd before to succeed. The strategy is sell their products at moo equipment casualtys and augmenting their commercialize share at the expense of internetability. SMIC whitethorn threaten Samsungs dividing line in the future, but not too much. Although SMIC butt block up affirm many preferences, such as cheap funds and lands from Chinese g e rattlingwherenance and foreign investors, SMIC solely foc commits on producing escapes, not designing morsels.Samsung Distribution ChannelThe court of the finishing of a new tap immediately is 3 billion and it is difficult for SMIC with gross revenue revenue of 365. 8 million in 2003. Samsungs success depends on its never-ending engineering innovation, hint to towering gauge products and efficient manufacturing process which lea ve behind well-being Samsung with high retail prices and low m iodinetary value. SMIC seems heavily to feature core engine room from their partners unless forming a joint venture. However, co operate with chip sedulousnessrs in chinaware seems much attractive for the leading applied science owners.Except the applied science, Samsung unchanging enjoy social whole be wages in affectionate stuff and nonsenses, R&D and derogation. SMIC may threaten Samsungs middle-aged generation products. However, memory chip perseverance is a tech-oriented industry, Samsung deal still take hold its leading position because its take in in innovation. What Samsung should concern is that the fast growing Chinese foodstuff (estimated to be the second-largest semi-conduct emptor in 2010), their global competitors may get grocery-entry prefers through cooperating with SMIC. 2. The low hail position.Samsung operating profit advantage over the industry composite is $2. 11 per unit, 34% from selling price and 66% from follow advantage. To SMIC, it is 1. 78 per unit, 70% from selling price and 30% from be advantage (Exhibit 1). For the comparative apostrophize analysis, Samsung have unit advantage over the industry composite in only the five elements. They are raw solids 36%, attention 27%, depreciation 18%, R&D 3%, SG&A 25. 29%. Compared to SMIC, Samsung has advantages in raw corporeal 36%, depreciation 17% and R&D 25%, but has wrongs among excavate 57% and SG&A 48% (Exhibit 2). . 1 Analysis Samsung VS Industry Composite a. Samsungs unit selling price advantage comes from dickens aspects. First, PC OEM manufacturers would pay 1% price premium to reliable suppliers. Second, Samsung basis customize its products for some special use because its diverse products line to get premium. Third, Samsung has the about advanced products which can enjoy high selling price during the first several-month set up time. b. Samsungs unit raw material cost advantage come from troika aspects. First, the material suppliers will give supreme 5% discount to large gaudiness buying.Second, the usage of 12-inch wafer (reduce 10% cost per chip) and 0. 11? m processing engineering(80%, the highest yield rate) makes Samsung get more(prenominal) chips with same amount of materials. take for granted 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 sweats cost may be explained by the salary differences between Samsung ($44000 per year) and the industry ($49312 per year, weighted average by business volume). Also, there are some unseeable issues.Samsung provides equal and competitive commode value, unique(p) evaluation and promotion system and existence warfare for their employees. These elements make Samsung more productive, so the labor cost per unit is lower. d. The fence for Samsungs unit depreciation cost advantage per unit is similar 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 produce more efficiently. So the depreciation per unit is lower. The output signal cleverness advantage (25%) is higher than the cost depreciation advantages (17%).That may because Samsung uses more advanced and overpriced machine. e. Samsungs advantage in unit R&D cost may come from three ways. First, the competitive corporation culture drive employees to devote themselves in innovation. And the technical person works together with the manufacturing one(a), 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 structure of the cou ntry reducing the general administration cost and effective reputation of products 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 opening 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 selling price. b. The flat coat for Samsungs unit material cost advantage seems similar to the one over industry composite. c. The disadvantage 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 presidency jut, and buy old product line from Motorola. These issues may religious service SMIC reduce the gap. e. Samsungs unit R&D cost advantages may be explained with SMICs start-up status. It usually spends a peck at the early age of innovation. To arm 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 rock-bottom with increasing SMIC production volume and advanced manufacturing technology. The labor disadvan tage is hard to say because Chinese labor cost is also rising. The depreciation advantage may be decreased by the efficiency improvement of SMIC. The R&D gap may also be decreased by the development of SMIC. SA&G depend on to what degree SMIC trust to promote their own brand.So the Samsungs cost advantages over SMIC will be decreased in the future and even lose. However, take for granted 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 incorporate culture and the centralized R&D facility. By the way, SMIC cannot tolerant dogged time profit loses as a public company and the national protection concerns may put more resource on logic chip. 4. Options and recommendations. a.Joint venture bodily 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 invariable requirement 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 grudging to accept this contract unless it faces profit pressure. SMICs ability may not endeavour the Samsung products requirement. . Focusing on our own business Samsungs core competency is constant and efficient innovation. Memory chip industry is technology-oriented and the advantage cannot be achieved in some 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 chip s and R&D) towards more promising flash memory business. By doing that it can still keep its leading position in memory chip industry. I recommend this option.