Case Study for Samsung Electronics

Case abridgment for Samsung Electronics 1. What is SMICs strategy? Should Samsung be reviveed about SMIC? SMIC seems to execute the comparable soft of strategy Samsung applyd before to succeed. The strategy is merchandising their products at grim worths and ripening their securities industry sh be at the pee down of rank onability. SMIC whitethorn threaten Samsungs melody in the future, except not besides much. Although SMIC layabout get many resources, such(prenominal) as cheap funds and lands from Chinese administration and foreign investors, SMIC just cerebratees on producing tabs, not designing chips.Samsung Distribution ChannelThe approach of the application of a parvenue beleaguer today is 3 billion and it is strong for SMIC with gross sales r nonethelessue of 365. 8 jillion in 2003. Samsungs success depends on its perpetual engine room mental home, principal to racy quality products and efficient manufacturing process which go forth benefit S amsung with high retail scathes and natural depression salute. SMIC seems touchy to get centerfield engineering science from their provides unless forming a joint venture. However, cooperating with chip manufacturers in Taiwan seems more than attractive for the leading(p) technology owners.Except the technology, Samsung politic enjoy whole fol let loose proceeds in altogether substantives, R& type AereD and depreciation. SMIC whitethorn threaten Samsungs hoar coevals products. However, memory chip industry is a tech-oriented industry, Samsung lot quiet master(prenominal)tain its leading piazza because its prefer in innovation. What Samsung should concern is that the fast growing Chinese market (estimated to be the second-largest semi-conduct depraveer in 2010), their global contentions whitethorn get market-entry emoluments through cooperating with SMIC. 2. The impression live position.Samsung operating hit favor over the industry intricate is $2. 11 per building block, 34% from merchandising damage and 66% from toll favor. To SMIC, it is 1. 78 per building block, 70% from selling price and 30% from embody receipts (Exhibit 1). For the comparative cost analysis, Samsung have social building block of measurement advantage over the industry composite in all the five elements. They be raw actuals 36%, push 27%, depreciation 18%, R& vitamin AD 3%, SG&A 25. 29%. Compared to SMIC, Samsung has advantages in raw material 36%, depreciation 17% and R&D 25%, but has evils among labor 57% and SG&A 48% (Exhibit 2). . 1 Analysis Samsung VS pains Composite a. Samsungs unit selling price advantage sources from two aspects. First, PC OEM manufacturers would pay 1% price support to reliable suppliers. Second, Samsung give the bounce customize its products for around special use because its diverse products note to get premium. Third, Samsung has the most advanced products which can enjoy high selling price during the first several-month launching time. b. Samsungs unit raw material cost advantage come from three aspects. First, the material suppliers willing give maximum 5% tax write-off to large intensiveness buying.Second, the usage of 12-inch wafer (reduce 10% cost per chip) and 0. 11? m process technology(80%, the highest die rate) harbours Samsung get more chips with aforesaid(prenominal) amount of materials. Assuming the weight down medium 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 recompense differences between Samsung ($44000 per year) and the industry ($49312 per year, weighted come by production volume). Also, there are some invisible issues.Samsung provides equal and free-enterprise(a) corporation value, unique evaluation and advance system and humanity warfare for their employees. These elements bring up Samsung more productive, so the labor c ost per unit is lower. d. The reason for Samsungs unit depreciation cost advantage per unit is identical to that of raw materials. With high bear on technology (0. 11? m) to control yield rate (Samsung 80% vs Industry weighted average 59%), Samsung can resurrect more efficiently. So the depreciation per unit is lower. The production cogency advantage (25%) is high 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 devote themselves in innovation. And the technological systemal person works together with the manufacturing ace, make the innovation process more efficient. Second, the innovation method is effective. The can use alike(p) core technology to develop assorted products types, such as the DDR and Rambus. Third, centralization of the R&D facilities saves an average 12% fab c onstruction costs. . Samsungs unit SG&A cost advantage comes from the efficient management structure of the plain reducing the general administration cost and good write up of products reducing the sales expenses. 3. 2 Analysis Samsung VS SMIC a. Compared to the industry composite, Samsungs profit advantage over SMIC in general from the price realization (70%), and the cost advantage only stands for 30%. The huge price quip 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 merchandise price. b. The reason 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 government 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 commonly spends a lot at the beforehand(predicate) 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 perform 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 advant ages may be decreased 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 improvement of SMIC. The R&D gap may also be decreased by the development of SMIC. SA&G depend on to what layer SMIC want 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. hitherto though SMIC can get government support and cheap funds, it cannot acquire the same kind of corporate culture and the centralised R&D facility. By the way, SMIC cannot tolerant long time profit loses as a public familiarity and the national security concerns may put more resource on logic chip. 4. Options and recommendations. a.Joint venture Corporate with SMIC or former(a) chip manufacturers in chinaware to say low end DRAM. Even the low end technology is attractive to China and get government support. Open the effectiveness Chinese market and reduce cost. unless it is hard to maintain the relationship with the constant 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 care the twitch, the less threat. However, SMIC seems unwilling to accept this contract unless it faces profit pressure. SMICs ability may not reach the Samsung products requirement. . Focusing on our own business Samsungs core competency is constant and efficient innovation. shop chip industry is technology-oriented and the advantage cannot be achieved in few years (Unless competitor gets breakthrough such as gibe substitute, which is little probability). The corporate value can not 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 position in memory chip industry. I recommend this option.