Samsung's Swelling Size Brings New Challenges
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Sydney, 23 November 2009 SEOUL—Samsung Electronics Co. has closed in on Hewlett-Packard Co., the world's largest technology company by revenue, a surprising development for a firm still perceived by many people as an also-ran to Japanese electronics companies.
It has risen to H-P's roughly $110 billion in annual sales by adopting a strategy and structure similar to International Business Machines Corp. at the height of its power in the 1980s—making both components for electronics products and the actual devices sold to consumers.
About one-third of Samsung's revenue comes from companies that compete with it in producing the TVs, cellphones, computers, printers and cameras where it gets the rest of its money.
But Samsung walks a tightrope everyday between its interests and those of other electronics makers to which it sells key parts like memory chips and display screens.
That tension was displayed as recently as Tuesday when it announced without fanfare plans for its own software operating system for smart phones, called "bada," which means sea in Korean. The move challenges Apple Inc., one of its biggest customers for flash memory chips and screens, as well as Microsoft Corp. and Google Inc., the firms it now relies on for the main software in its smart phones.
Lee Ho-soo, a Samsung executive vice president, says the company will still build smart phones with Microsoft's Windows Mobile and Google's Android software, but it wanted the flexibility and control that firms like Apple get from owning a phone platform, too. "We feel we need to be multiplatform in smart phones and cannot just focus on one," Mr. Lee said.
To reduce the frictions that can come from competing with customers and suppliers, Samsung requires each business unit to account for its own profitability, pay for its own capital needs and negotiate with each other on the same terms as outside firms.
"People look at our businesses and see vertical integration. It really isn't," says David Steel, a Samsung senior vice president and marketing strategist. "It's a portfolio of component businesses and consumer-product businesses and, within that, we don't compromise on the idea that each business is charged with its own success."
While Samsung's divisions don't subsidize each other, analysts say the units still get benefits from each other at times. For instance, if there's a shortage of liquid crystal displays, or LCDs, Samsung's TV-making unit can still count on getting some. "They're notorious in the industry for internal competition," says Paul Semenza, a vice president at market research firm Displaysearch. "But they can help each other out in the respective extremes of the business cycles."
Samsung has long been the biggest maker of memory chips for computers and, over the past decade, became the leader in flash memory chips used in other gadgets.
Three years ago, it unseated Sony Corp. as the world's largest TV maker and, two years ago, passed Motorola Inc. as the second-largest cellphone maker after Nokia Corp. It jockeys with another South Korea-based company, LG Display Co., for the leading position in LCD sales.
And in contrast to other giant electronics firms, Samsung has reached those positions without major acquisitions and by running its own factories instead of hiring contract manufacturers. Meanwhile, H-P on Wednesday announced its latest acquisition, an agreement to buy networking-gear maker 3Com Corp. for $2.7 billion in cash.
Vast size means Samsung can throw enormous resources behind an innovation, as it did in March when it spent $50 million to launch a premium line of LCD-TVs with ultra-thin screens.
But it has reduced its willingness to take risks. In smart phones, Samsung has been slow to settle on a strategy. Company executives say that's because they're juggling competing demands from carriers. But some observers say it shows Samsung is most comfortable sitting out technology battles until the market path is clear.
"I still believe that Samsung is a great second-best company but not an innovator," says Chang Sea-jin, a business school professor at the National University of Singapore and author of a 2008 book about the rivalry between Samsung and Sony. "Samsung is very good when technological trajectory is visible."
Big size has helped Samsung cope with the profit squeeze that all electronics makers face due to the constant downward price pressure of the chips at the heart of their products. Samsung posted a record profit of $3.1 billion in the third quarter, but it did so with an operating margin of just 11%. By contrast, its operating margin was 27.8% in the first quarter of 2004, when it set the previous record. Revenue in the latest period was 71% higher than it was then.
Samsung has about 164,000 employees, up from about 60,500 a decade ago. Samsung's chief executive officer, Lee Yoon-woo, recently told employees to aim for a new goal: $400 billion in revenue by 2020, about the current level of Wal-Mart Stores Inc., the world's largest company by sales. Samsung will push into areas like health care and home energy products over the next decade and may take advantage of acquisitions.
"We know it will be very difficult for us to achieve that goal with organic growth," said Kim Hyung-do, a vice president for strategic planning. But he added the company also sees room to grow in some segments where it already has a foothold, like PCs, printers and systems-logic chips, the kind that are used as the brains in digital media players and other gizmos.
For Mr. Lee, setting that target marked another step out of the shadow of his predecessor Yun Jong-yong, who in 11 years as CEO took the company from $21 billion to nearly $100 billion in revenue.
Mr. Lee took over in May last year and almost immediately was faced with pulling the company through the global recession. He slashed production and inventories, slowed hiring but laid off just 200 people, mostly high-level executives in South Korea.
The company experienced just one unprofitable quarter and has been helped throughout the downturn by the weakness of the South Korean won against major currencies. Even as the won has gained against the U.S. dollar in the past two months, Samsung executives recently told analysts the won's ongoing weakness against the euro and the yen will help its bottom line.
Samsung's rise an industry leader has been obscured by its reliance on Korean accounting standards. Only this year did Samsung begin to reveal consolidated sales figures on a quarterly basis, making it possible to see just how close it is to H-P's crown.
Samsung's revenue was 97.05 trillion won, or $82.4 billion, in the first nine months. For the full year, it will be close to the $113 billion H-P is expected to report for its fiscal year ended Oct. 31. The different timeframes could help Samsung since this November and December are likely to be better months for electronics sales than they were a year ago.