International -- Intl' Business: SOUTH KOREA
LOOK OUT, WORLD-SAMSUNG IS COMING (int'l edition)
At a trade show in Yokohama in late April, Samsung Electronics Co. suprised Japanese and U.S. participants with a complete range of new computer screens. They included thin-film-transistor liquid-crystal-display (TFT-LCD) screens in Samsung-branded laptop computers. "Everyone was clambering all over their booth," says David Andrews, chief executive of Interlingua Inc. in Redondo Beach, Calif. "The high point of the show, in fact, was that Samsung was obviously telegraphing its intention to be a big player in this industry."
Samsung Electronics is also on the move back home. On June 3, Chief Executive Kim Kwang-Ho announced he was reducing retail prices of the company's consumer-electronics products and home appliances by as much as 16%. Samsung's bold grab for market share, at an estimated $100 million cost, will help promote demand for more sophisticated products such as large-screen TVs. South Koreans, with a per capita income about to hit $10,000 a year, are hungry for those new products.
Having taken the world by storm with its 4-megabit dynamic random-access memory (DRAM) chips in 1994, Samsung Electronics, a unit of the $62 billion Samsung group, is now ready to leap to the next level ef competitiveness in the global high-tech battle. In a strategy that combines heavy investment, strategic alliances, and outright acquisitions, Samsung's aim is to eventually dominate such diverse areas as multimedia gear, cellular telephones, and personal digital assistants. Its position as the world's largest DRAM producer is expected to generate net profits of $2.3 billion this year on sales of $19.3 billion (charts, page 24). Analysts say it could generate as much as $10 billion in the next five years in net profits, leaving the company awash in cash for its spending spree.
Samsung Electronics' ultimate goal is to become one of the world's top five electronics companies, with annual sales of $50 billion by 2000. By then, executives say, Samsung will derive 40% of its sales from semiconductors and another 40% from such new products as multimedia, LCDs, and telecommunications gear. Significantly, they hope to cut their dependence on consumer electronics from 45% today to 20% by the decade's end.
To get there, CEO Kim needs to diversify in a hurry. "We are too dependent on memory chips for our profits, and this is not a healthy thing," the tall, bespectacled Kim says in an interview in Samsung's headquarters overlooking Seoul's historic Yi Dynasty South Gate. After having spent most of his career in the company's semiconductor division, he was named vice-chairman and CEO in December, 1994. His fear, of course, is a serious downturn in the notoriously fickle memory-chip business. "We can probably make good profits through 2000. After that, I don't know," Kim says. "That's why I'm restructuring Samsung's business and redefining its strategies."
For Kim, 55, it's an auspicious moment. The strong yen is creating a major opening for Koreab companies because they can undercut Japanese rivals on price. And surprisingly, Japanese companies such as Toshiba, Fujitsu, and NEC are sharing technologies with Samsung Electronics because the Koreans have something to offer in return, including a steady supply of competitively priced memory chips and other components. Most analysts agree that the company will remain ahead of the Japanese in the next-generation 16-megabit DRAMs, whose sales are expected to begin taking off in 1996.
DRAGONBALLS. The chip strategy does not end there. Samsung already has put up $2.5 billion in capital spending for the 64-megabit DRAM generation, which comes to market by 1998. That should ensure a continuing lead on the Japanese, says Jeung Eui-Ju, a senior semiconductor analyst for Ssangyong Investment & Securities Co. He estimates that Samsung will control as much as 20% of the world market for the 64-megabit chips. The company also is producing its first commercial samples of the newest generation, the 256-megabit DRAM, which is due out around 1999, and is even tiptoeing into the more complicated territory of integrated circuits.
But to make the leap from memory chip dominance to full-fledged technology giant, Samsung has come to a bitter conclusion: Koreans lack the time and knowhow to develop their own brand-new technology. So in a shift in direction, Kim acknowledges that Samsung will rely on strategic alliances with and acquisitions of mainly U.S. and Japanese companies to get most of what it needs. "Without alliances, Samsung cannot achieve its goals," says Kim with an air of resignation.
In the past year, Samsung has signed more alliances and taken equity positions in more companies than at any time in its history (table). It has signed eight alliances since May, 1994, including an agreement with General Instrument Corp. for the joint development and sales of digital television, a deal with AT&T for handwriting-recognition personal computers, and an accord with Fujitsu Ltd. to share technology in the next generation of TFT-LCDs. Most recently, in May, it signed an agreement with Motorola Inc. to develop the next-generation personal digital assistants based on the U.S. company's DragonBall microprocessor.
Samsung is clearly making good use of these alliances to fill in gaps of its own. "They're one of the world's leading semiconductor companies, and in consumer electronics they have a strong international brand name," says Marc Teyer, director of licensing and business development for General Instrument. "But like many of their Asian counterparts, system design and software is not their forte. That's where alliances come in."
Samsung also has acquired or taken equity positions in six companies since May, 1994. It acquired 51% of LUX, a Japanese hi-fi audio maker, and 40.25% equity in AST Research Inc., based in Irvine, Calif. Both acquisitions are intended to provide Samsung with strength in two areas in which it has traditionally been weak: audio products and personal computers. Despite having the largest market share in Korea, Samsung has had troubles understanding the intricacies of the U.S. desktop market. "We can help them," says AST Chairman Safi Qureshey. His own company, meanwhile, will be assured a steady supply of DRAMs and LCD screens.
What impresses Samsung watchers is how this pattern of international alliances will serve to extend the company's reach. "They obviously want to be in the next stage of electronics, everything from telecom to the Internet," says Interlingua's Andrews. "They certainly don't want to get caught in one area."
Samsung's biggest challenges will be in telecommunications and the next generation of information and video technology, says Kim Kun-Chung, an executive managing director. "We plan to spend about $600 million in research and development in the next few years," he says. This money will support Samsung's new alliances and the costs of adapting such foreign technology as video-signal processing, a key element in the new Information Superhighway and video-on-demand. Thanks to its deals with U.S. companies, Samsung is developing a pilot project for Korea Telecom, which plans to introduce video-on-demand in November in Korea.
HUGE BET. But that $600 million is just the tip of the electronic iceberg. Raw spending power is what will win in the commercial marketplace. By 1997, Samsung will have laid out capital spending of $7.8 billion in semiconductors and $2.6 billion in multimedia and telecommunications products. Samsung also is dramatically expanding its investments in TFT-LCDs.
In 1995 and 1996, Samsung is expected to commit $1.25 billion in capital spending on TFT-LCDs, in which it should start earning profits beginning in 1999, says one analyst. It already has begun production of 10.4-inch color active-matrix TFT screens. Although not as big as some panels that the Japanese are making, that particular kind of screen is among the most difficult to manufacture.
Samsung's speed in establishing production of the screens should allow it to survive a looming shakeout--and price declines--caused by massive Japanese investments in the same area. "It's an accomplishment in the sense that they are the first company outside of Japan to get into that market," says Bruce Stephen, vice-president of worldwide PC research for International Data Corp., a market research firm in Framingham, Mass. "They did this in DRAMs, too. They typically come along when the commodity stage hits."
Shat drives Samsung, as it does all Koreans, is a fierce desire to beat the Japanese. CEO Kim has been personally involved in that battle for most of his career. In 1978, the Japanese tried to push Samsung out of the market for integrated circuits used in watches. Kim, who was in charge of the integrated-circuits division at the time, slashed prices in retaliation and eventually emerged as the winner in a battle for market domination. And in 1984, when Samsung began production of the 256-kilobit DRAM chips, the Japanese tried to force Samsung out of the market by slashing prices. Kim, by that time a director in charge of production, knew that the Japanese were making a futile attempt and beat them once again.
But it will take more than just a burning desire to beat the Japanese. Samsung is attempting a transformation from a stay-at-home to a global technology giant that's breathtaking not only for its level of ambition but also for its speed. Japanese companies such as Sony or Hitachi have been working on it for at least a decade. As a result, some analysts worry about the very foundations of Samsung's high-tech push.
NARROW MARGINS. Even Kim agrees that the company's lack of efficiency in operations and management is more of a threat than price competition from the Japanese. "We must change our internal process, cut delivery time, reduce overhead costs, and innovate all processes," says Kim, who has hired U.S. consulting firm Ernst & Young to help him achieve those goals. If semiconductors are eliminated, the company's operating margins are minuscule, says Jon Jong-hwa, an analyst with Baring Securities in Seoul.
At the same time, Samsung wants to raise its share of offshore production to 40% by 2000, from the current 7%. Rather than spreading smaller plants all over the world, Kim wants to benefit from the economies of scale by setting up massive plants in key parts of the world--Winyard in Britain, Tijuana in Mexico, and near Shanghai in China. "We plan to convert these plants into local corporations with little interference from Seoul," says Kim. In China alone, the Samsung group plans to invest $4 billion over the next several years, most of which will be in electronics.
While Samsung plans for overseas expansion, it must improve its brand recognition and product quality. At present, Samsung's consumer products are at least 10% cheaper than those of such top brands as Sony Corp. The price differential is sometimes as high as 30%, cutting deeply into the profitability of Samsung's products. Clearly, Samsung faces major challenges on nearly every front. But its impressive high-tech successes are rapidly making believers out of the toughest skeptics.By Laxmi Nakarmi in Seoul, with Kevin Kelly in Chicago and Larry Armstrong in Los Angeles