Samsung's strategy pressures competitors

Samsung Electronics Co. Ltd is piling on the pressure in the second quarter with a flood of
investments approximately Rs.28,226.70 crore (7.3 trillion Korean won or $7 billion)
migrating into advanced geometries to further reduce costs and proposing a hefty 100 per
cent jump in DRAM bit shipment and 130 per cent forNAND memory components.
Despite this, Samsung executives speak little about boosting depressed DRAM average
selling price. That goal, which they admit will benefit the entire memory component market
and is critical to profitability in the embattled sector, will come later.
"We plan to make massive investments and try to expand our market share through
implementation of aggressive investment plans and migration into advanced geometry,"
said Yeongho Kang, vice president of the semiconductor business at Samsung, in a
presentation to the investment community following the release of the company's first
quarter results.
"We will accelerate our efforts to strengthen our competitive edge and continue to widen the
gap with our competitors to achieve further growth and profitability," added Kang.
Playing catch up
Aside from the normal pricing as well as demand and supply imbalance that thememory
market has always had problems dealing with, Samsung is also the main reason its main
DRAM rivals appear so disorganised in their response to the industry's most challenging
profit problems.
That's because the company's margins remain positive while the rest of the field is selling
products well below cost. The overall impression is that Samsung has not only managed the
crisis better but is also able to benefit from the discomfort of rival memory manufacturers.
It's not that Samsung is not hurting. In the first quarter, for instance, Samsung reported
operating margin of 4 per cent, down sharply from 9 per cent in the preceding quarter and
12 per cent in the comparable 2007 quarter.

Though disappointing, the results were vastly better than figures reported by rivals,
including fellow Korean Hynix Semiconductor, which said gross margins slid to minus 11
per cent and operating profit margin was negative 30 per cent for the quarter.
The situation was only mildly better at Micron Technology Inc. The company reported gross
profit margin of minus 3 per cent for its latest quarter ended February 28. Operating profit
margin during the same period fell to minus 57 per cent, worse than at Hynix.
This pattern is forecast to continue in the second quarter with some relief coming perhaps in
the second half of the year when back-to-school sales and a snapback in demand is
expected to improve prospects for higher pricing.
Until then, Samsung is going to pile on the pressure through a combination of technology
initiatives, product differentiation and a willingness to absorb more body blows related to
lower pricing, according to Woosik Chu, vice president of investor relations at Samsung.
"In the second quarter, we expect weakness to continue and any meaningful improvement
would have to wait until the second half of the year," Chu said. "In particular the memory
market is expected to continue to experience difficulties due to lack of demand and supply
overhang."
With the problem so clearly defined, it would seem obvious that Samsung would work
towards reducing supplyfor instance by reducing productionand insisting on firmer
pricing at OEM customers.
Jacking up production
While this might seem counterintuitive, however, the company is heading in a different
direction. It expects to jack up production sharply in the quarter, well above industry
average, according to semiconductor unit head Kang.
The company also said it would increase investment further to separate itself from the
competition. The strategy is based on the belief at Samsung that victory in the bruising
memory market war will depend not merely on achieving improved demand and higher
ASPs but on forcing some vendors to abandon the business. The only way Samsung can
achieve the long-term goal of winnowing the DRAM field is to improve its ability to withstand
further price weakness by lowering production costs through technology improvements,
according to company executives.

"We expect the memory market will remain weak but we are taking market leadership as
capacity increase and the market recovery is delayed," Kang said. "2007 was a very
challenging year for the memory market but our competitiveness has been very
distinguished. We will try to increase our current memory market share through the most
competitive cost structure and expansion of differentiated products."
It's a strategy that has so far worked for Samsung and while executives said the memory
division might join rivals in posting negative gross margin in the second quarter, the
company is unlikely to abandon the stealth move to deliver an eventual TKO to weaker
competitors.
- Bolaji Ojo
EE Times