Businessweek Archives

Look Out, World Samsung Is Coming


International Business: SOUTH KOREA

LOOK OUT, WORLD--SAMSUNG IS COMING

At a trade show in Yokohama in late April, Samsung Electronics Co. surprised Japanese and U.S. participants with a broad range of new computer screens. These included thin- film-transistor liquid-crystal-display (TFT-LCD) screens in Samsung-branded laptop computers. "Everyone was clambering over their booth," says David Andrews, chief executive of Interlingua Inc. in Redondo Beach, Calif. "Samsung was obviously telegraphing its intention to be a big player in this industry."

Samsung Electronics is also on the move back home. In early June, Chief Executive Kim Kwang-Ho announced he was cutting retail prices of consumer-electronics products and home appliances up to 16%. Samsung's bold grab for market share, at an estimated $100 million cost, will spur demand of sophisticated products such as large-screen TVs. South Koreans, with a per capita income close to $10,000 a year, are hungry for 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 ready to leap to the next level of competitiveness in the global high-tech wars. In a strategy melding heavy investment, alliances, and acquisitions, it aims to dominate markets for multimedia gear, cellular phones, and personal digital assistants. Cash won't be a problem: Its position as the world's largest DRAM producer is expected to help generate net profits of $2.3 billion this year on sales of $19.3 billion.

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 40% more from new multimedia products, LCDs, and telecommunications gear. Significantly, it hopes to cut its dependence on consumer electronics from 45% today to 20% by the decade's end.

BAD HABIT. To get there, CEO Kim must diversify fast. "We are too dependent on memory chips for our profits, and this is not a healthy thing," he says in an interview in Samsung's headquarters overlooking Seoul's historic Yi Dynasty South Gate. After spending most of his career in the company's semiconductor division, he was named vice-chairman and CEO in December, 1994.

For Kim, 55, it's an auspicious moment. The strong yen is creating an opening for Korean companies to undercut Japanese prices. Surprisingly, Japanese companies such as Toshiba, Fujitsu, and NEC are sharing technologies with Samsung Electronics because it has something to offer in return, including a steady supply of competitively priced memory chips. Most analysts agree that Samsung will stay ahead of the Japanese in the next-generation 16-megabit DRAMs, whose sales are expected to take off in 1996.

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 will come to market by 1998. That should ensure a continuing lead on the Japanese, says Jeung Eui-Ju, a senior analyst for Ssangyong Investment & Securities Co. He estimates that Samsung will control as much as 20% of the world market for 64-megabit chips. It's also producing samples of the newest generation, the 256-megabit DRAM.

DRAGONBALLS. But to make the transition from kingpin in memory chips to broad-based technology giant, Samsung has come to a bitter conclusion: Koreans lack the knowhow to develop their own frontline technology. So Samsung will rely on strategic alliances with, and acquisitions of, mainly U.S. and Japanese companies to get most of what it needs (table). "Without alliances, Samsung cannot achieve its goals," Kim says.

Since May, 1994, Samsung has set up eight alliances. They include an agreement with General Instrument Corp. for the 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 also has acquired or taken equity positions in six companies in the last year. It acquired 51% of LUX, a Japanese consumer electronics company, and 40.25% equity in AST Research Inc., based in Irvine, Calif. The acquisitions will help Samsung overcome weaknesses in audio products and personal computers. Despite having the largest market share in Korea, Samsung has had troubles understanding the U.S. desktop market. "We can help them," says AST Chairman Safi Qureshey, whose company will be assured DRAMs and LCD screens.

Samsung's biggest challenges will be in telecom 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 costs of adapting such foreign technology as video-signal processing. Thanks to 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.

But that $600 million is just the beginning. By 1997, Samsung will have spent $7.8 billion on semiconductor development and $2.6 billion on multimedia and telecommunications products. Over the next two years, Samsung also is expected to commit $1.25 billion in capital spending on TFT-LCDs, in which it should start earning profits in 1999, says one analyst.

Samsung already has begun production of 10.4-inch color active-matrix TFT screens. Although not as big as some Japanese-made panels, the screen is among the most difficult to manufacture. Samsung's speed in establishing production of the screens should allow it to survive a shakeout--and price declines--caused by massive Japanese investments in the same area.

What drives Samsung, as it does all Koreans, is an obsession with beating Japan. CEO Kim has been 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, then in charge of the integrated-circuits division, slashed prices and eventually emerged the winner in a battle for market domination. In 1984, when Samsung began production of the 256-kilobit DRAM chips, the Japanese tried to force Samsung out of the market. Kim, by that time a director in charge of production, beat the Japanese again.

But it will take more than just a burning desire to overtake Japan. Samsung is attempting a change from stay-at-home to global technology giant. Japanese companies such as Sony Corp. or Hitachi Ltd. have been doing so for at least a decade. As a result, some analysts worry about the foundations of Samsung's high-tech push.

GLOBAL PUSH. Even Kim agrees that the company's lack of efficiency in operations 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 the U.S. consulting firm Ernst & Young to help him.

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 set up massive plants in key locations--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, mostly in electronics.

While Samsung plans for overseas expansion, it must improve its brand recognition and product quality. Samsung's consumer products are now at least 10% cheaper than those of such top brands as Sony. The price differential is sometimes as high as 30%, cutting deeply into profitability. Clearly, Samsung faces major challenges on nearly every front. But its impressive high-tech successes are rapidly making believers out of the toughest skeptics.

Samsung's Alliances Are Providing Technology...

PARTNER PRODUCTS/TECHNOLOGY

GENERAL INSTRUMENT Digital television

USA VIDEO Set-top boxes, including video file servers

NEC 256-megabit DRAM chips

ISD Multilevel storage sound processing ICs

TOSHIBA 64-megabit flash memory chips

FUJITSU TFT liquid-crystal displays

AT&T Pen-based computers

MOTOROLA Personal digital assistants

...As Are Its Acquisitions

ARRAY Digital processor chip technology used

(U.S., 20% STAKE) in multimedia products

HARRIS MICROWAVE Optical semiconductors and

SEMICONDUCTORS gallium arsenide chips

(U.S., 100%)

LUX (JAPAN, 51%) CAD/CAM software

INTEGRATED TELECOM ATM technology

TECHNOLOGIES

(U.S., 100%)

AST RESEARCH Personal computers

(U.S., 40.25%)

DATA: SAMSUNG ELECTRONICSBy Laxmi Nakarmi in Seoul, with Kevin Kelly in Chicago and Larry Armstrong in Los Angeles


Too Cool for Crisis Management
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus