Group 5 Mahtaab Kajla (280) Nitesh K Gupta (260) Prachi Chawla (287) Rahul Mittal (290) Vishad Dubey

(315) Vinny Arya (313)

Samsung Electronics
Established in 1969 to manufacture black and

white TV sets 5 business divisions- semiconductor, digital media, telecommunications, LCD, digital appliances Global leader in memory chip production for electronic devices Offered 1200 variations of Dynamic Random Access Memory (DRAM)

Major Competitors

Elpida Memory Inc. Hynix Semiconductors Infineon Technologies AG Micron Technology Nanya Technology Corp SMIC

Faced by threat of Chinese entry into the memory chip industry

Threat of Substitutes > No substitute for DRAM up til now > Threat from substitutes created due to technological advancement

Bargaining power of buyers > Price sensitivity of customers > Decreasing product life cycle due to changing customer preferences

Threat of new entrants Bargaining power of suppliers > Powerful suppliers due to smaller numbers > Only 2-3 main players dominated key segments > Large scale potential entry by Chinese Firms > Barrier of entry through economies of scale- huge capital outlay required > Steep learning curve as evident in Exhibit 7 ( R & D Costs)

Rivalry with existing competitors

> Competitive advantage due to cost leadership and strong R &D

> Competition from existing players

HIGH

MEDIUM

LOW

 Strong R & D Cost Leadership Diversified portfolio of products Healthy HR Practices Expertise in the production process Ability to customize

High average selling price compared to industry standards Highly levered capital structure
STRENGTHS WEAKNESSES

THREATS

OPPORTUNITIES

Threat of entry by Chinese Competitors Expectation of cyclical downturn

Opportunity to develop new DRAM products through R &D initiatives Untapped opportunity in the rapidly growing market of China

Proximity of location of main R&D and fab lines leading to saving of 12% of fab construction costs Shared common core design Employment of efficient technology- stacking (higher yields) Strong Research and Development Economies of scale Bulk discounts from suppliers Low overhead costs
Healthy HR practices leading to motivated employees who foster efficiencies in the working
Low raw material costs ( Exhibit 7a-7k) SG&A costs low ( Exhibit 7a-7k)

Reliability of product
OEMs paid an upward price premium of an

average of 1% for a reliable supplier

Ability to customize products as per customer demand

Alternative 1 Collaborate actively with a Chinese Partner

ADVANTAGES > Access to Chinese markets witnessing an unprecedented growth > Access to investment made by Chinese firms obtained at low cost debt > Partnering with Chinese rival would save a threat of price wars > Access to incentives provided by Chinese govt. to joint ventures DISADVANTAGES > Intellectual Property rights were not safeguarded properlysharing blueprints and expertise could be dangerous

> Threat to the culture at Samsung

Alternative 2- Do not partner with China. Increase investment in cutting edge memory products, particularly for niche markets
ADVANTAGES > Preserve expertise and research knowledge over the production process > Focus on high value niche products better utilization of R & D which is a competitive advantage > Protect the unique culture at Samsung

DISADVANTAGES > Threat of price wars after the entry of Chinese competitors

> Threat to Samsungs market share

Exhibit 4 & 5: SMIC has so far entered only in the 256 Mbit of DDR SDRAM which is a very niche area as compared to the 1200 different variations DRAM products of Samsung
Even in this niche segment, SMIC runs on a negative operating margin. ( Exhibit 7a : -9.3% compared to a high operating margin of 24.1% of Samsung) Cost Structure Analysis- SMIC has high raw material costs compared to the costs of Samsung which it posseses primarily due to the volumes it commands. However, high depreciation could be possibly accounted to a variation in accounting method adopted. No concrete information is available to support the same. ( Exhibit 7a)

SHORT TERM

- In the short run, there is no immediate need to collaborate

- Do not engage in price wars or predatory pricing.

-Engage into strategic alliances with Infineon and Elpida to restrict their partnership with Chinese firms

- Enter into high value niche markets in the short run and exploit the competitive advantage in R & D

Samsung should move horizontally on the value chain grid and explore opportunities in the parallel value chain of the Chinese firms- this will help it mitigate risk as well as create new value propositions

Horizontal integration will also pave way for diagonally integrating with Chinese Competition, thus uncovering new ways of controlling the supply of critical components and boosting demand.

LONG RUN
Given the present financials, it might seem less than probable for the Chinese offerings to be sustainable in the long run. - However, considering the boost that the Chinese firms are receiving from their government, they would soon venture into the memory chip market. We recommend horizontally integrating with Chinese firms only in the areas where we cannot attain a significant cost leadership or are not on a level playing field. Focus should be on preserving expertise in production and research.