Samsung Electronics Strategic Analysis

Memo

To: Kun Hee Lee, Chairman and CEO of Samsung Electronics

From: Josh Graham, Senior Consultant, Whirlwind Consulting Co.

Date: 28-Apr-08

Re: Emerging Chinese DRAM industry

Executive Summary

Whirlwind Consulting Company has reviewed the current position of Samsung in the semiconductor and memory chip industry, and has completed an extensive internal and external analysis to determine Samsung’s options in response to the threat of significant future expansion within the Chinese semiconductor industry. It is our opinion that Samsung should begin an incremental decline in the production of low-end DRAM memory chips, and initiate an extensive strategic movement towards capturing the higher-end of the DRAM market, as well as new niche markets, such as Flash memory.

The external analyses showed that there are many competitors that have begun to focus solely on production of low end DRAM. The greatest threat observed is the rampant growth of the Chinese company SMIC, which comes as a result of low-cost production and tax-incentives from the Chinese government. The primary recommendation that resulted from this analysis is that the low-end DRAM market has become overcrowded, while the high-end market is currently occupied by only one major competitor, Eplida Memory.

The internal analyses were a clear indication that Samsung’s current organizational structure, policies, and business strategy are all competitive advantages. The conclusions drawn from the SWOT analysis were that Samsung’s strengths carry more weight than your weaknesses, and that the opportunities that exist, if properly exploited, should help Samsung navigate the threats with no significant difficulties. The financial analysis was also an indication of the exemplary track record of Samsung Electronics, most notably the semiconductor division. Our opinion is that Samsung should have no financial difficulty with shifting your concentration to a new segment of the memory chip market.

It is the recommendation of Whirlwind that the implementation of this strategic shift should occur in two phases. The initial phase will be a concentrated focus on R&D and informing channel partners of the upcoming changes. The second phase will be the restructuring phase. Both production structure and employee structure will need to be shifted to facilitate the manufacture, advertisement, and sale of the new focus for Samsung’s memory chip business.

Current Issue

Samsung Electronics has been a model example of success in the constantly shifting technology industry over the last twenty years. Samsung has risen to the top of the semiconductor sector of the market, and has enjoyed the largest market share for over thirteen years. However, as a result of the success of all sectors of the technology industry, it does not usually take long for new competitors to enter any portion of the market. Similar to the way that Samsung entered the semiconductor industry over 15 years ago, several companies in China have been working diligently to obtain market share at the expense of Samsung. Through mainly low-cost production, these Chinese companies pose a threat to the leading segment of Samsung’s semiconductor business, the 256Mbit DRAM division. As of 2003, the 256Mbit DRAM production, shown in Table 1, represented 78% of Samsung’s manufacturing process. Some analysts have estimated that by 2010, China will be the world’s second largest producer of semiconductors behind the United States. The issue facing Samsung is how to deal with this newly developed Chinese semiconductor industry. The future of Samsung will depend on how it evolves in response to this imminent change to the structure of the global semiconductor market.

Competitor Analysis

Samsung has five major competitors within the memory chip industry. They consist of the following: Elpida Memory, Hynix Semiconductor, Infineon Technology, Micron Technology, and Semiconductor Manufacturing International Corporation (SMIC). All these companies have unique characteristics that are outlined in Table 2, and described below.

Elpida Memory is the only DRAM producer left in Japan. Their strategic focus is on memory chips for smaller devices, such as cell phones, gaming systems, and other consumer electronics. In 2004, they added another production facility in an attempt to increase output, and increase market share. Elpida manufactures advanced memory technologies, like double data rate (DDR) DRAMs and Rambus-based DRAMs, in addition to standard memory modules. They have investment ties to Nintendo, Hitachi, and Intel.

Hynix Semiconductor is the second largest memory chip manufacturer in Korea behind Samsung. Hynix has suffered over the last 6 years as a result of poor economic decisions, and legal troubles in the United States. Hynix still manufactures DRAM and other standard memory chips, but sold most of their other businesses to avoid bankruptcy as a result of their former debt. Despite financial troubles, Hynix has recently decided to collaborate with a Chinese company to build a new production plant in China. Hynix accounts for almost two thirds of the memory chip sales in Asia.

Infineon Technologies is a German-based company, and has manufactured semiconductors since the start of the technological revolution. Infineon has more than 25 locations for research and development spread all over the world. They have significant financial and business development ties to various smaller memory chip companies. Three quarters of Infineon’s sales are in Asia and North America. Its primary product is DRAM. Infineon’s top customers are Hewlett-Packard and Dell, two of the largest home and office computer suppliers in the world.

Micron Technology is the only remaining US producer of memory chips. They have grown in size mostly through acquisitions and mergers. Micron has also had some financial difficulties and has been forced to sell most of its non-DRAM divisions. Micron sells to companies in telecommunications, but the majority of its sales are in the computer market, mainly Dell and Hewlett-Packard. More than half of Micron’s sales are in Asia, while the United States accounts for 30% of sales. Micron has financial ties to Intel, and is currently researching and developing new-generation DRAM technology.

Semiconductor Manufacturing International Corp (SMIC) is China’s largest producer of logic and memory products. SMIC is a foundry for