Technological Capabilities and Samsung's International Production

Strategies in East Asia

Young-Soo Kim

A thesis submitted for the degree of Doctor of Philosophy at the Australian National University

April1997

4 DRAM, OEM and international production in the mid and late 1980s

Despite criticism that was openly expressed within the group due to the expensive and

risky nature of Samsung' s investment in the DRAM business, the late chairman Lee

Byung-Chull remained strongly committed to the DRAM project until his death in 1988.

Samsung's success in DRAM production partly derived from Lee Byung-Chull's

enterprenuership.

Another aspect of DRAM production that affected, directly or indirectly, the

development of Samsung's technological capabilities and internationalisation was

connected with its original equipment manufacturer (OEM) arrangements. OEM

production benefits technologically weak firms by reducing the need for capital

investment in the establishment of international marketing and distribution channels, as

well as reducing the need for in-house design and new product development capacity.

OEM thus was a most attractive mechanism, allowing Samsung to allocate a large

proportion of the group's resources and capabilities to the DRAM sector. For nearly a

decade, according to Business Korea (March 1992), many Samsung affiliates were

starved of cash because of the size of investment directed towards the DRAM project.

In 1984-87 Samsung established two foreign production plants, one in the United States

and one in the United Kingdom, where cheap labour was not available. Jun (1987)

argues that conventional theories fail to explain this type of foreign investment, and calls

for the development of a new theory. In 1988-89 foreign investment by Samsung was

extended to low labour cost economies in Asia, America and Europe. During this

period, the export market was increasingly characterised by protectionism. Significant

features of Samsung's internationalisation in the 1980s were the strength of Samsung's

production capability on the one hand, as well as weakness in product change, strategic

marketing and international management on the other.

65

This chapter examines (1) OEM and foreign licensing which significantly influenced

Samsung's technological development; (2) innovation activities and systems; (3)

production capability and product-market position; and (4) the relationship between

international production and technological capabilities.

OEM and foreign licences

OEM and foreign licences were the most significant factors in the technological

development of Korean firms during the 1980s. They also mark a feature of the process

of internationalisation during the period. During the 1970s the source of foreign

technology in the electronics sector in Korea was mainly foreign direct investment from

Japan and the United States. In the 1980s, Korean manufacturers, with upgraded

assembling capability, shifted from being subcontractors of foreign technology suppliers

to OEM suppliers for major distributors in the United States, and for Japanese buyers

who had established their own sales channels and brand names internationally.

Korean firms could not operate efficiently in the export market without their Japanese

counterparts. Korean frrms, being final assemblers, needed a large proportion of

imported components from Japan. Table 4.1 indicates a typical feature of the Korean

electronics industry's trade: a huge bilateral trade surplus with the United States,

coupled with a huge deficit with Japan.

The leading Japanese consumer electronics companies were no longer in need of US

partners as a source of OEM buyers because they had established their own superior

sales channels and value-added products sold under their brand names (Domicity 1988:

8-7). By contrast Korean firms needed US partners. Their OEM partners fell into two

categories: traditional electronics companies, such as General Electric, RCA, Sunbeam

and Emerson Radio; and diversified retail outlets, such as J.C. Penny and Sears

(Domicity 1988: 8-7). All three major Korean firms (Samsung, Daewoo and Goldstar)

were heavily dependent on OEM exports during the 1980s and export ratios in most

products did not significantly change over time (see Tables 4.1 and 4.3).

66

Table 4.1 Korea's electronics trade with the US and Japan ($US million), 1983-87

Exports to US Imports from US Balance Exports to Japan Imports from Japan Balance

1983 1,802 1,073

729 289

1,177 -888

1984 2,354 1,124 1,230

428 1,479

-1,051

1985 2,271

999 1,272

427 1,499

-1,072

1986 3,959 1,109 1,850

544 2,681

-2,137

1987 4,938 1,406 3,532

983 3,398

-2,415

Source: The Electronics Industry Association of Korea (various years), cited by Domicity (1988)

Table 4.2 OEM partners of Korea's major electronics firms in the 1980s

OEM partners

Samsung General Electric, Sears, J.C. Penny, Akai, Eaton's (Viking), Montgomery Ward

Gold star

Daewoo

General Electric, Magnavox (Philips), K-Mart, Emerson, NEC, AT&T, Olivetti, Commodore, Parkard Bell, Hewitt­Rand NEC

Source: Compiled from Domicity (1988)

Table 4.3 OEM export ratio for Korean major electronics firms, 1986-89

percent

1986 1987 1988 1989 Colour TVs 53 59 49 53 VCRs 40 60 27 22 Microwave ovens 58 72 60 56 Refrigerators 79 72 71 57 Washing machines 29 45 59 22

Source: Chung (1990: 40)

As Korean firms' technological capabilities increased, Japanese firms cooperated with

them to generate maximum revenues, utilising their old technology. Unlike the 1970s,

Japanese firms got work done cheaply through OEM deals with Korean companies

(Table 4.4) to avoid heavy capital investment in Japan, where labour costs had

67

gradually increased (Domicity 1988). In doing so, technology licences1 were negotiated

with arrangements under which OEMs were tied to foreign component supply. In

addition, export restrictions were placed on VCRs, microwave ovens and compact disc

players (Bloom 1992: 77). For example, NC placed restrictions on Samsung for

overseas export when it licensed VCR technology in the early 1980s. When Japanese

firms began to issue licences for CDP technology, Korean firms remained dependent on

the Japanese firms for deck mechanisms (Bloom 1992: 78).

As a result, a large proportion of components had to be imported from Japanese firms.

The average import dependency on Japan was 60 per cent in 1987, but the proportion

for more sophisticated components such as magnetrons and TV tuners audio heads was

much higher (Table 4.5). As for Samsung, imports from Japan accounted for 35 per

cent of the value of its VCRs in 1987, 40 per cent for facsimile machines, 50 per cent for

computer terminals and audio cassette players, and over 60 per cent for personal

computers and computer printers (Management Today, April1987: 90).

Imported components need sophisticated high value-added technology and therefore

represent a high proportion of cost. This leads to smaller profit margins for Korean

firms. When Korean currency appreciates or wage rates increase, Korean products

become more vulnerable to foreign competition. Heavy dependence on OEM sales

makes it more difficult for Korean firms to lessen their reliance on Japanese component

suppliers due to their lack of design capability (Bloom 1992: 82) because product life

cycles require faster new product development.

As Korean firms' exports increased, Japanese firms protected the manufacture of their

core components which were essential to the assembly of final products. Bloom

(1992:81-82) identifies two strategies employed by Japanese firms in competing against

Korean counterparts which were catching up in technology. Firstly, Japanese firms, in

order to reduce the potential competition in the higher value-added and higher quality

1 Japanese firms changed their strategies in this regard. For instance, Japanese firms used semi­knockdown kits that were ready for assembly as a first defence against reverse engineering. This gave competitors what they needed, but did not allow them to truly manufacture it. This applied to TV s, stereos and compact disc players (Domicity 1988).

68

Table 4.4 Japanese consumer electronics technology licences in the 1980s

Name of company Sony

Toshiba

Hitachi

Japan Victor

Matsushita

NEC

Sharp

Akai

Alps Electric

Year

1985 1987 1987

Type of technology

VCR beta format to Daewoo Electronics. VHS-type video tape to Sunkyung Chemical Co. Technology for VCR parts: motors, rotary transformers and video heads, to Tongyang Telecom Industries, subsidiary of the Hyosung group.

1988 VCR, microwave oven and CD player components and kits in Korea.

1988 VCR technology to the Korean Broadcasting Service for use during Olympics through a tie up with Samsung.

1980s 1986

1980s 1986 1987

1983

1987

1985

1986

1987

1985

1985

Microwave oven technology to Samsung. A small precision VCR motor to Samsung.

Microwave oven technology to Goldstar Co. Shadow masks for CTV s. The production of surface acoustic wave devices to Goldstar Instrument & Electric. (These are used in a wide range of display technologies, including television.)

VHS format to Daewoo, Goldstar and Samsung. Each deal involved a two year export ban. Video cameras to Hanjin Electrics.

TV and refrigerator technology to Goldstar in return for OEM manufacture.

High output TV transmitters to Goldstar.

Manufacture of deflecting coils to Daewoo Electronics.

Production technology for VCR magnetic heads to Samsung.

Forming of a large joint venture firm with Goldstar; (Goldstar Alps electronics makes magnetic heads, TV tuners and other consumer components) establishment of two factories with a total of 5000 employees.

Source: Complied from Domicity (1988: 8-18)

finished product sectors, held back the best quality components and the more

sophisticated components for their own use. A typical case was the glass bond bar

which was used for VCR heads and the larger CPTs. Secondly, they often delayed

delivery of core components during periods of heavy demand. In 1986 Korean finns

69

encountered difficulties in the purchase of head drums for VCRs, thermal printer heads

for facsimiles, microwave oven doors and customised ICs.

Table 4.5 Korean firms' component dependency on Japan, 1987

Products Components imports from Japan $US million Percentage of

Total components ICs Computer parts Motors Glass envelopes Transformers, inductors Television parts Audio heads CTVtuners Magnetrons

Source: Bloom (1992: 73)

2,760 473 175 119 110 107 102 97 64 37

total import 60 55 67 73

100 70 96 90 96 97

Upgrading technological capabilities and innovation systems

DRAM and production capabilities

In 1983 Samsung decided to enter the DRAM market. Because of its heavy dependence

on Japanese suppliers for core components, Samsung's production activities did not

function effectively (SEC 1989). More sophisticated technology was needed. SEC ran

into difficulties with the purchase of core components because the major Japanese

suppliers tended to control their supply, particularly those used for CTVs, VCRs,

microwave ovens and audio products. In the late 1970s Kim Kwang-Ho, who is

currently CEO of the Electronics Subgroup and had worked for the TV production

department, was transferred to the semiconductor sector. His mission was to develop

core components such as chroma IC, which had to be imported from Japan. Samsung

had experienced difficulties in the timely export of CTV s to the US market due to

delivery problems with these core components.

70

Samsung's chip production capability originally stemmed from the mass production of

watch chips that began in the early 1970s. Its capability had improved considerably by

the early 1980s. In 1983 Samsung announced its entry into DRAM production when the

Korean government enforced the 'Semiconductor Industry Promotion Plan' which was

to provide firms with tax incentives and substantial loans (Ernst 1994b: 77). Previous

experience gained through the production of watch chips motivated Samsung to enter

the DRAM business. The late Chairman also had a strong desire to expand into the

high technology sector.

In May 1983 Samsung set up its first foreign R&D institute- Samsung Semiconductor

Inc (SSI)- in Silicon Valley. Samsung's first objective was to develop 64K and 256K

DRAMs, and SSI became a means for the collection of information about up-to-date

technology and markets as well as being a training post for headquarters' R&D

personnel. Samsung was also able to recruit several Korean DRAM experts who were

educated in the US, and later played an important role in developing and

commercialising DRAMs. In June 1983, Samsung licensed DRAM design from Micron

Technology2 , a medium-sized US DRAM producer. Micron was the only possible

technology source, given Samsung's consistent but unsuccessful attempts to acquire

foreign technology from TI, Advanced MOS, Motorola, NEC, and Toshiba. For the

process technology development of the 64K DRAM, Samsung had access to

technological information from Sharp3 , which was the only source of process

technology such as 16K SRAM and 256K ROM. In November 1983, the 64K DRAM

was developed, and in mid 1984, mass production started.

Samsung shortened its learning process by a variety of interactions with foreign

technology sources. In particular, it put more importance on informal learning and

training in addition to the purchase of foreign technology. This enabled SEC to master

2 Micron Technology entered into the licence agreement because it desperately needed cash to establish a low-cost second source, enabling Micron to keep its own investment at a minimum. (Ernst 1994b:79).

3 Sharp's contribution to Samsung's DRAM success was significant. Dr Sasaki, who worked for Sharp and had a close relationship with the top management of Samsung, played an important role in the transfer of semiconductor process technology to Samsung. See Ernst (1994a) for the strategic differences between Sharp and other Japanese semiconductor competitors.

71

tacit knowledge as well as the technical information from imported patents. This

provided Samsung with an opportunity to overcome problems whenever critical

situations occurred.4 For instance, Japanese technology advisers who had maintained a

relationship with the ex-chairman, Lee Byung-Chull, advised on semiconductor

technology and market trends. Similarly, the new Chairman Lee Kun-Hee's informal

networks with technology sources were useful when the 4M DRAM was developed.

For the development of the 256K DRAM, Micron's design was submitted to extensive

'reverse engineering' (Ernst 1994b: 81). This is similar to the way VCRs and microwave

ovens were developed in the late 1970s. Samsung adopted a dual strategy in order to

accelerate the process of development. Two teams, one in Silicon Valley and the other

in a Korea-based laboratory, worked simultaneously. In October 1984, the Korea-based

team developed a 256K DRAM model and in early 1985 the Silicon Valley team

developed a model. The model developed in Silicon Valley was adopted for mass

production (Ernst 1994b). Samsung had trouble with mass production of this model,

however, and it was not until April 1986 that mass production of the 256K DRAM

started. Subsequently, Samsung was able to develop advanced DRAM products: 1M

DRAM (July 1986), 4M DRAM (February 1988), and 16M DRAM (September. 1990).

This shows the innovative way in which Samsung created a new capability by quickly

combining new knowledge and information from foreign sources with its own

accumulated capabilities.

Due to the technological spillover driven as a result of the development of the 256K

DRAM in July 1985, Samsung accelerated development of key microchips. Various

kinds of microelectronic chips were made during the late 1980s, ranging from

consumer electronics to industrial and telecommunications products. In October 1984

the 64K DRAM was exported to the United States and Europe. Samsung, however,

4 Sarnsung (SST 1987: 203) states, 'of the 309 individual manufacturing process steps, it succeeded in managing all the steps except eight key process steps by the application of its accumulated chip production technology .... as for the eight key process steps, it managed to overcome difficulties by the recruitment of three experts who had participated in the project of 64K DRAM in the US and been trained at Micron Technology'.

72

suffered from a huge loss because DRAM prices fell drastically from US$ 3 in 1984 to

20 cents in 1985. This fall continued until the end of the 1980s.

Samsung's production capability improved rapidly in the 1980s, in particular due to

improvements in DRAM process technology. In November 1981 SST was able to

develop the chroma IC, one of the most important components of CTV sets (SEC

1989).5 This was followed by the motor drive IC in 1982 and the image signal IC and

the playback IC in 1984.6 These components were used for TVs and VCRs, and only

produced by Japanese and US firms (SEC 1989).

Samsung accelerated its development of key microchips: ICs for multiple voice TV,

which combined six functions in one chip, in September (SMM September 1985); and

voice synthesis ICs in 1989 for use in robots, automobiles, microwave ovens,

refrigerators, washing machines and electronic toys. This spread to the

telecommunications sector. In March 1987, SST was able to produce 61 kinds of

telecommunications IC, which were core components of information processing systems

such as key phones, computers, electronic private automatic branch exchanges

(EPABXs) and facsimile machines.7 Various kinds of microelectronic chip were

developed during the late 1980s, ranging from consumer electronics to industrial and

telecommunications products.

By January 1987, before moving its international production to Thailand, SEC could

produce a total of 37 kinds of VCR IC. It is claimed that Samsung was able to supply

all the core microelectronic chips used in VCR sets (SMM January 1987). This lessened

the dependency on Japanese suppliers for core components. In 1988 SEC developed 2

micron bipolar process technology (SMM June 1988). From 1988 to 1989 it achieved

5 In the 1980s, the head of the semiconductor sector was Kim Kwang-Ho, who is a current CEO of SEC and the Samsung electronic business sector in charge of SED, SEM, SC, SDS, etc.

6 These were technologically sophisticated components which contain both analog and digital functions in one chip (SEC 1989).

7 These telecommunications ICs were not only for Samsung's internal use, but also for the export market. Exports were expected to increase up to US$ 350 million in 1987-92 (SMM March 1987).

73

several technological breakthroughs by developing a range of core components. These

were VCR motor control ICs, which improved the quality of the picture and the sound

of VCRs (SMM March 1989); communication ASICs used in personal computers

(SMM April1989); and dolby ICs (SMM September 1989).

Apart from microelectronic chips used in TV s, VCRs and telecommunications products,

several other memory devices were also developed in the 1980s. In December 1983,

Sarnsung developed the 64K DRAM, and then the 16K electrically erasable

programmable read only memory (EEPROM) in July 1984. As the speed of

technological improvement was accelerating in the late 1980s, Samsung achieved a

technological breakthrough by developing several microelectronic chips: the 256K

EEPROM equivalent to the 1M DRAM (December 1988); 1M SRAM equivalent to the

technology level of the 4M DRAM; 4M mask ROM (May 1989); and 0.6 micron

process technology equivalent to ultra large scale integration (ULSI) level technology

(December 1989). In June 1989, the 3-inch gallium arsenide (GaAs) wafer was

developed by an in-house R&D institute, Samsung Advanced Technology Institute

(SATI), and SC was in charge of producing the wafer. Subsequently, SEC planned to

manufacture light emitting diodes and the GaAs IC.8 In September 1989, Samsung

developed the laser diode.

DRAM production had both positive and negative effects on Samsung's technological

capabilities. One of the most significant contributions was the spillover effect of DRAM

technology on its production process capability in manufacturing sophisticated

components. This improved the quality of end products, particularly digitalised rather

than analog products. Major benefits went to the development of components for

telecommunication equipment, computers and semiconductors. Due to a favourable

external market environment, Samsung has generated huge profits since 1992, and the

exchange of its own DRAM technology contributed to the development of strategic

alliances with firms possessing complementary technology.

8 Gallium arsenide is superior to silicon for use in semiconductors. Unlike silicon, GaAs can convert from laser to electricity, and from electricity to laser. The GaAs chip is five times as fast as the silicon chip. It is used for high-frequency communications where silicon semiconductors cannot be used (SMM September 1989).

74

On the other hand, due to the fact that huge financial resources were poured into the

DRAM sector for almost a decade, investment in the improvement of design and

product development, as well as foreign market development, was postponed. As a

result, both consumer and industrial products were unable to achieve sustainable

competitiveness. One negative effect of this concentration on DRAM production was

SEC Korea's failure to transfer product change capability to its US-based subsidiary.

This meant that the subsidiary did not adequately meet changing customer needs with a

high end product mix.

OEM and unbalanced technological capabilities

Because Samsung allocated almost all available resources to the DRAM sector, OEM,

which required no further capital investment in foreign market development or the

improvement in design and product change, was still attractive. Thus, there was no

significant change in the high OEM ratio throughout the 1980s (See Table 4.6).

Table 4.6 Samsung Electronics' exports through OEM ($US million), 1984-88

1984 1985 1986 1987 1988 OEM export (A) 443 483 813 1,130 1,205 Total export (B) 669 743 1,146 1,727 1,840 OEM ratio (AlB) 66.2% 65% 70.9% 65.4% 65.5%

Source: SEC (1989: 1037)

Samsung maintained close relationships with OEM buyers such as JC Penny, Sears

Roebuck GTE, Toshiba, IBM, HP, RCA, and Crown Corporation. In 1981 Samsung

exported CTV s and black and white TV s to Sears Roebuck, which had been one of

Samsung's buyers in the 1970s. In the mid 1980s, Sears Roebuck imported VCRs made

by SEC. In addition, Samsung also supplied GTE with TV sets and computer monitors,

and JC Penny with microwave ovens. Industrial electronics products were no exception.

In 1987, PCs were exported to Tech Data of the US. SEC also exported NCR 16 bit

IBM AT compatible PCs and printed circuit boards (PCB), installed with parts and

components under an OEM contract.

75

I

In order to maintain the three strategic products (CTVs, VCRs and microwave ovens) at

profitable levels, Samsung continuously improved production capability by the

acquisition of foreign technology, mostly from Japan. In order to access broad ranges of

technologies, Samsung extended its links with several technology suppliers in the

1980s, from Sanyo and NBC, to Matsushita, Toshiba, Sony and Sharp. SEC entered

into transactions with Sanyo, Toshiba, Matsushita, and Design and Manufacturing of the

US for microwave oven technology (Bloom 1992; SEC 1989). Multiple technology

sources allowed Samsung to master foreign technology quickly and as necessary. As

had been the case in the 1970s, Samsung had technical assistance agreements with

foreign licensors, mostly for the training of employees (SEC 1989: 286-90, 461-62) .

SEC particularly strengthened its relations with Toshiba. In 1982 it bought production

technology for facsimile machines, and acquired licences for more sophisticated

technology: air-conditioners over a five year period (1983), for which Toshiba sent

technical experts to SEC to train 450 technicians; cellular mobile phones, word

processors and washing machines (1984); air-conditioners, facsimile machines and

mobile phones (1985); hi-fi VCRs over a period of three years (1987), for which

Toshiba sent SEC technical advisers (SEC 1989).

SEC also developed its relations with Sanyo, Samsung's first joint venture partner. SEC

concluded a licensing agreement with Sanyo for microwave oven technology over a five

year period (December 1984), for which Sanyo sent technical experts to train SEC's

employees (SEC 1989). In May 1985, SEC also negotiated a five year licensing

agreement with Matsushita for magnetron production technology (a core component of

microwave ovens), for which Matsushita dispatched technical experts to SEC and SEC

sent its technical personnel to Matsushita Japan for training (SEC 1989:371). In

August 1983, Sony licensed Samsung to produce VHS-VCRs over a five year period

and, in February 1987, broadcasting cameras and VCRs. Samsung also linked with

Ikegami in September 1984 and with Shibasoku in May 1986 to produce broadcasting

colour monitors. Both firms also trained SEC technical personnel (SEC 1989).

76

SEC's technology acquisition was closely related to its OEM arrangements, supporting

the strategic export of profitable products. In this way, SEC accumulated improved

production capability through assembly of consumer electronics goods such as CTV s,

VCRs and microwave ovens.

On the other hand, OEM was negatively associated with upgrading product change

capability, which needs a relatively long period of investment in design and product

development because it is characterised as 'difficult-to-imitate technology'. This was no

problem in the early period when SEC freely purchased it. However, problems

developed when the technology market turned into a seller's market. The concept of

'low-cost with high volume', established during the OEM production period, was

embedded in Samsung' s organisational culture. This became a constraint on learning

and improving capabilities in international marketing and design and product

development where longer term investment was required.

Research and development, and innovation systems

SEC incrementally increased the number of its own foreign sales affiliates, while

maintaining its relationship with OEM buyers. Typically, Samsung first set up a foreign

branch office, and then it turned into a sales subsidiary when it had accumulated a

certain degree of foreign market knowledge.

Under the export led strategy, however, foreign sales channels that usually sold products

made in Korea did not closely interact with Korea-based production sites due to

Samsung's hierarchical multi-divisional organisation structure. Feedback from foreign

distribution channels to production functions in Korea was rare. Strategic marketing had

a long way to go, partly due to the lack of coordination between key value-added

activities.

The acquisition of information about changing customer needs and the need to forecast

future trends can lead to the development of new products with a competitive

advantage. This is difficult when there is a lack of coordination between manufacturing

77

and marketing. These organisational weaknesses lasted until the early 1990s and

directly resulted in low performance in the export market in the 1990s when the

electronics market became more complex and consumers' needs become diverse, with

regional variations.

At the same time, mismanagement of the 'profit centre' system (see Jun and Han 1994)

often resulted in unproductive competition between different departments and/or

divisions as well as different affiliates. One exemplar case was the brand conflict which

occurred between SEC and SED, both of which were producing the same CRT products

and competing with each other in the CRT export market, where the products were

being sold under the same Samsung brand name. In May 1986, SEC officially notified

SED to stop using the Samsung brand name for exports of CRT products. Finally, the

conflict was resolved when SEC withdrew its previous prohibition and allowed SED to

use the Samsung brand name again. Given the fact that competition with SEC was

unavoidable because SED had to continue CRT exports, however, SED eventually

decided to take on a new brand name, SAMTRON, which has been used since January

1988 (SED 1990: 338-39).

In the early 1980s, three of Samsung's affiliates, Korea Semiconductor, Korea

Telecommunications and Samsung-GTE, merged to form Samsung Semiconductor

and Telecommunications Co. Ltd (SST). It is thought that the objective of the merger

was to share semiconductor technology with the industrial and telecommunication

sectors (SMM October 1982), shifting concentration from consumer electronics to

industrial electronics.

The second stage of the merger between SEC and SST occurred in 1988. Samsung

aimed to share with SST its technological capability in the semiconductor sector and in

SEC-owned cross-border marketing channels for electronic products (SMM May

1988). In May 1988 a range of business functions including consumer electronics,

information and telecommunications, and semiconductor production was undertaken by

SEC. It appears that a hidden objective of this merger was to improve SEC's financial

78

position, since profitability continued to decrease in 1983-87. This will be discussed

later.

What SST got out of the merger was a diversification of microchips for consumer

electronics products. Before the merger, the development of microchips for consumer

electronics such as CTVs and VCRs was not a strategic priority for SST (SMM May

1988). Indeed, SEC was able to share telecommunications, computer and

semiconductors technologies. Kang Jin-Ku, who was the CEO of SST, was appointed

CEO of the new organisation of SEC (SMM September 1988).

As for R&D activities, there were three aspects to building technological capabilities:

increasing Korean-based R&D centres where Samsung was involved in the assimilation

and development of acquired foreign technology; establishing foreign-based R&D

centres which could provide it with new technologies, and up-to-date information; and

training for Korea-based R&D personnel.

SEC's newly established R&D centres in Korea during the 1980s were: the Suwon R&D

laboratory for audio and video products (1980); the Kiheung R&D laboratory for

memory devices (1982); and the two Kiheung R&D laboratories for telecommunications

systems (1983 and 1987). Samsung also established the Techno-College which offered

telecommunications and computer technology courses. From the late 1980s, Samsung

needed to integrate intra-group R&D activities. In 1987, an integrated R&D

organisation, Samsung Advanced Institute of Technology (SAlT) which linked with

several affiliates was established, concentrating particularly on chemistry, electronics and

aerospace technologies (Koh 1992). The Samsung Advanced Technology Training

Institute (SA TTl) was also set up in 1989 to provide vocational training in electronics­

related technologies such as software, computer-aided design (CAD), computer-aided

manufacturing (CAM), micro processors and semiconductors (Koh 1992).

In addition, Samsung started to establish its own R&D organisations overseas. In 1987

it formed the Santa Clara Semiconductor R&D centre within the existing branch office

which had opened in 1983 and had been producing silicon wafers since 1985, employing

300 engineers. The strategic goal for this R&D centre was to seek frontier technologies

79

in the computing, office equipment and telecommunications fields. SEC's Tokyo Design

Centre also opened in 1987 to develop product design skills in consumer electronics and

robots (Koh 1992). In 1988 SEC acquired the Micro Five Corporation of the US to

complement its technological capability in the computer sector, and set up Samsung

Software America (SSA) in Boston. The objective was to acquire advanced software

technologies and to establish a US marketing base for computer exports. In October

1989 SEC established Samsung Information Systems America Inc. (SISA) in San Jose,

California, to support export activities and gather further technology for information and

telecommunications products (Koh 1992).

However, DRAM and OEM were the production areas which continuously impacted on

the scope of technology acqusition and accumulation through licensing, in-house and

overseas R&D activities. In-house R&D activities and overseas R&D laboratories were

mostly centred on supporting the DRAM sector so that almost all R&D spending was

allocated to the DRAM business. Imports of foreign technology were mainly limited to

three strategic cash generating low end products.

Table 4.7 R&D expenditure and its effect, 1980-83 (million won)

1980 1981 1982 1983 R&D expenditure (A) 768 1,323 2,092 2,417 Effect of sales increase 2,099 36,137 22,028 133,406 Profit (B) 277 691 2,116 28,976 Net Profit (A-B) -491 -632 24 26,559 Net profit (Accumulated) -491 - 1,123 1,099 25,460

Source: SEC (1989: 284)

Samsung's R&D projects were oriented to short-term objectives. Table 4.7 illustrates

one way to evaluate SEC's R&D effect, which puts priority on short-term sales growth.

Obviously, long-term R&D projects were less preferred. The newly established SAlT

also tended to engage in short-term R&D projects, in contrast to the initial strategic

purpose which was to be longer term.

80

The new chairman Lee Kun-Hee criticised the employee evaluation system which

focused on the evaluation of short-term performance as having negative impact on the

implementation of long-term strategies (Samsung 1993). However, this system

continued until the early 1990s. In addition to the concentration on DRAM production

and OEM arrangements, Samsung's human resources evaluation system was another

element working against upgrading design and product development capabilities.

Technological capabilities and product-market position

In the 1970s, black and white TVs, refrigerators and cassette radios were Samsung's

major export products, but these items were replaced by CTV s, VCRs and microwave

ovens in the 1980s. Table 4.8 shows that production capability accumulated for CTVs

was shared with microwave ovens and later with VCRs. In 1984 SEC started to

manufacture VCRs, in addition to two major products, CTVs and microwave ovens.

Table 4.8 Major export products in the 1980s, SEC ($US million)

1982 1983 1984 1985 1986 1987 CTVs 88.2 151.7 196.7 141.9 221.6 353.8 VCRs 2.6 134.5 297.4 401.7 MWOs 59.8 95.2 149.5 127.4 238.8 308.4 Sub-total 138.0 246.9 348.8 403.8 757.8 1063.9

REFs 12.5 10.8 16.0 24.0 34.4 53.6 W/Ms 0.7 1.0 1.4 2.5 5.6 13.4 NCs 0.2 2.3 2.5 1.6 1.9 12.4 EPBXs 0.4 0.5 Keyphones 0.8 0.2 5.2 13.2 62.0 FAXs Computers 0.02 0.8 7.9 22.5 Watch chips 8.1 7.7 12.8 13.1 27.5 21.1 LineariCs 4.6 5.9 10.9 15.8 22.0 37.3 Transistors 1.2 1.2 7.6 13.7 17.8 38.8 64KDRAM 5.5 12.4 33.2 21.7 256KDRAMs 27.0 50.3 134.2 1MDRAMs 6.0 Total ex12orts n.a n.a 669 743 1146 1727

Note: MWOs =microwave ovens; REFs= refrigerators; W/Ms =washing machines; NCs =air conditioners; EPBXs =electronics private branch exchanges; FAXs =facsimile machines

Source: Compiled from SEC (1989:1032, 1036, 1053, 1057,1067)

1988 408.9 581.7 367.1

1357.7

89.8 18.1 14.6

1.6 48.4

2.2 69.5 21.9 45.6 50.0 76.9

253.4 221.3 1840

81

Sales of these three items increased about four times, from $US 348.8 million in 1984 to

$US 1,357.7 million in 1988, accounting for nearly 70 per cent of SEC's total exports.

From 1986, the VCR became a leading export product, surpassing exports of CTVs and

microwave ovens. Samsung 's mass production capability in standardised low end

products was obviously well matched with the highly demanding and price sensitive

export markets in the United States and the EC countries. Table 4.9 demonstrates that

during 1984-87, SEC's exports were largely dependent on the United States and

European countries, although the ratio decreased gradually from 76.2 per cent in 1984

to 59.1 per cent in 1987 (SEC 1989: 493-99).

Table 4.9 Distribution of export by region (per cent), 1984-87

1984 1985 1986 1987 us 69.8 63.3 65.5 41.6 EC 6.4 12 19.4 17.5 Asia 6.9 9.4 6.2 8.5 South America 6.0 6.6 7.3 6.1

Source: Compiled from SEC (1989)

For nearly a decade, about 60 per cent of products were distributed through non­

Samsung distribution channels (see Table 4.6). More importantly, the OEM ratio did

not significantly change during the period, despite the fact that the number of SEC's

foreign sales subsidiaries increased steadily and its international marketing capabilities

increased gradually. In an interview with the author, one manager acknowledged that

capital investment for international market development was not the frrst priority until

the late 1980s.

The priority placed on DRAM production explains the company's weak product

position in the market. As shown by Table 4.8, SEC had no other end products to

substitute for the three strategic products (CTVs, VCRs and microwave ovens) which

achieved export success by 1987 before the merger between SEC and Samsung

Semiconductor and Telecommunication (SST 1987). Clearly DRAM concentration

inhibited SEC from investment in the improvement of non-production capabilities such

as product change and international market development.

82

DRAM production and profitability

Overall SEC profits grew substantially: they rose nearly fifteen times from $US 9.95

million in 1981 to $US 148.85 million in 1988, while sales increased eight times during

the same period, from $US 0.52 billion to $US 4.42 billion (Table 4.10). SEC's

financial statement indicates that both profitability and sales improved dramatically after

SEC's merger with SST. This was largely because of SST's success in the export of

64K and 256K DRAMs and watch chips.

Table 4-10 Samsung Electronics' sales and profits ($US million), 1981-88

1981 1982 1983 1984 1985 1986 1987 1988

Sales 528.25 569.45 888.76 1633.60 1902.50 2270.70 3005.60 4426.60

Profit 9.95 6.87 26.72 30.36 24.21 36.69 43.58 148.85

Margin 1.88 1.21 3.01 1.86 1.27 1.62 1.45 3.36 on sales (%)

Note: Figures of sales and profits are adjusted by foreign exchange rate applied. Korean won per $US are: 700.5 (1981), 748.8 (1982), 795.5 (1983) 827.4 (1984), 890.2 (1985), 861.4 (1986), 792.3 (1987), 684.1 (1988)

Source: Compiled from SEC (1989)

The profit of the consumer electronics business increased during 1982-83: it rose four

times, from $US 6.87 million in 1982 to $US 26.72 million in 1983. But it remained

stagnant during 1983-87 in spite of a favorable external export environment in which

the Korean won depreciated steadily against the US dollar, from 660 won to the dollar

in 1980 to 890 won in 1985. From 1984, despite a doubling of sales from $US 1.63

billion in 1984 to $US 3 billion in 1987, Samsung' s profit margin decreased drastically

from 1.86 per cent in 1984 to 1.45 per cent in 1987 (Figure 4.1). During this period,

Samsung improved its technological capabilities considerably, in particular its

83

production technology9 • However, the top priority was placed on exploiting production

capability.

Figure 4.1 Performance of Samsung Electronics: sales and profit, 1981-88

160

140

120 -Profit ~Sales

§ ;.::I - 100

·s 80 tr.l :::::> 60 """'

40

20

0 81 81 83 84 85 86 87

Source: Compiled from SEC (1989)

4500

4000

3500

3000

2500

2000

1500

1000

500

0 88

In a sense, a close linkage between the production and export marketing departments

was unnecessary because most products were standardised low end products. In the late

1980s, SEC's international competitive advantage in production capability started to

erode drastically: sales growth did not guarantee profit growth, and profit margins

through OEM production became smaller. Competitors located in low labour cost

countries such as Malaysia and Thailand started to improve their production capability

and exported similar quality products to the markets where Samsung predominated.

SEC's consumer electronic business was under strong pressure from global

competition. Further growth with its production capability was seriously blocked by its

shallow product mix. As pointed out by Domicity (1988), because of the decreasing

9 The mass production capability of TV production accumulated in the 1970s was able to spill over to VCRs and microwave ovens, particularly to low end products. Total CTV production exceeded 5 million units by March 1984 and this increased to 20 million units in April 1989. The production of microwave ovens continued to increase from 100,000 units in October 1981 to 3 million in April1985, and to 10 million units in 1988. As the quantity of the end products increased, components produced by affiliated components subsidiaries rose accordingly. In addition, SEC's production of magnetrons also rose and reached 5 million units by June 1988. SED became one of the world's largest CRT makers, producing a total of 50 million by 1987. To meet growing market demand, both domestic and overseas, the monthly production of CPTs was gradually expanded to 180,000 units (December 1983), and then to 320,000 units (May 1985). The same situation applied to the production of CRT glass bulbs.

84

profitability of its three strategic products, SEC as a holding company in the electronic

business required new products for further sales growth. Computers and DRAM

products suited SEC's requirements as their export growth was just beginning (as

shown in Table 4.9). Following the merger with SST, SEC was able to improve its

profitability.

SEC's earnings were poured into capital investment in DRAM production, the pet

project of Lee Byung-Chull. Tight money control by the chairman's secretariat was

Table 4.11 Samsung Electronics' global production subsidiaries in the 1980s

Year Country Name of subsidiary Products Share(%)

1984 us CTVs 100

1987 UK Sarnsung Electronics Microwave ovens 100 (B illingharn) Manufacturing (UK) (later these were

replaced by CTVs)

1988 Mexico Sarnsung Mexican SA CTVs 100 Thailand Thai-Sarnsung Electronics Co., VCPs, CTVs, 51

Ltd

1989 Indonesia PT Sarnsung Maspion Indonesia Refrigerators 50 Malaysia Sarnsung Electronics Malaysia Microwave ovens 100

Sdn. Bhd. Turkey Sasmung Electronics Ticaret A.S. CTVs 20 Spain Sarnsung Electronics Espanola VCRs 100

S.A. Hungary Sarnsung Electronics Hungarian CTVs 95

Co., Ltd

Source: Compiled from SEC (1995b)

largely a result of DRAM investment. Profit derived from consumer electronics export

was insufficient for capital investment in the establishment of the DRAM plant. The

investment in the pilot project for the development of the 4M DRAM in 1986, amounted

to $US 35 million, equivalent to the total profit earned in 1987 and the cost of the

commercial production plant for the 1M DRAM established in 1986 was estimated at

more than US$ 200 million.

85

SEC only directed a small proportion of its sales profits towards R&D: 3.8 per cent in

1987 and 3.5 per cent in 1988. This was far below the R&D investment of its Japanese

counterparts, whose ratios amounted to 7.9 per cent for Matsushita in 1989 and 7.6 per

cent for Toshiba in the same year (Koh 1992). The postponement of improving product

change capability in the 1980s because of concentration on the DRAM burdened SEC and

this has continued to be a constraint on expansion through international production and

foreign subsidiaries' performance in the late 1980s and 1990s. This will be discussed in

Chapters 6 and 7.

Table 4.12 Korea's exports and imports to and from the United States ($US thousand), 1976-90

Exports Imports Trade Balance 1976 2,492,573 1,962,907 529,666 1977 3,118,648 2,447,439 671,209 1978 4,058,345 3,042,950 1,015,395 1979 4,373,929 4,602,581 -228,652 1980 4,606,625 4,890,248 -283,623

1981 5660,861 6,050,199 -389,338 1982 6,118,644 5,955,811 162,833 1983 8,127,850 6,274,431 1,853,419 1984 10,478,796 6,875,475 3,603,321 1985 10,754,100 6,489,322 4,264,719

1986 13,879,958 6,544,708 7,335,250 1987 18,310,792 8,758,219 9,552,573 1988 21,404,087 12,756,658 8,647,429 1989 20,638,993 15,910,683 4,728,310 1990 19,359,997 16,942,472 2,417,525

Source: Korea Foreign Trade Association ( 1991)

Horizontal expansion through international production

In the 1980s Samsung moved into two quite different locations for international

production: one in high labour cost economies and the other in low labour cost

economies. The former includes the United States and the United Kingdom (1984-87)

and the latter includes Mexico, Thailand, Indonesia, Malaysia, Turkey, Spain and

Hungary. The locations were dispersed through Asia, America and Europe (Table

4.11). However, most foreign subsidiaries manufactured standardised consumer

86

products such as CTV s, microwave ovens and VCRs, for which Samsung had

accumulated technological capabilities since the late 1970s. This type of foreign

investment is a kind of horizontal diversification overseas.

Increasing trade barriers in the US and the EC

The second oil shock and domestic political umest in the late 1970s caused Korea to incur

. a bilateral trade deficit with the United States for three consecutive years (1979-81)

(Table 4.12). After 1982, Korea's trade surplus increased more than ten times, from

$US 0.16 billion in 1982, to $US 18.5 billion in 1983. At the same time Korea's CTV

exports to the United States rose rapidly, from 630,000 sets to 1,900,000 sets during the

same period. As the voluntary export restraint was lifted, they grew more than three

times during 1982-83 (Table 4.13).

As a consequence, in May 1983 dumping charges were filed on Korean made CTVs by

General Electric, and preliminary anti-dumping duties were imposed on three electronics

companies: 3.87 per cent for Goldstar, 3.05 per cent for Samsung and 1.77 per cent for

Daewoo. In February 1984 these duties suddenly increased to an average of 13.9 per

cent, and in September they rose further to 32.5 per cent, although they eventually settled

at 10.65 per cent in December (Park 1986).

Table 4.13 Korean CTV exports (thousand units), 1980-85

1980 1981 1982 1983 1984 1985 Total (A) n.a n.a 1,107 2,499 2,959 2,826 US market(B) 381 553 630 1,933 2,002 1,705 B/A% 60 77 68 60

Source: Electronics Industry Association of Korea, various years

Subsequently, the US trade barriers were further extended to CTV components such as

colour picture tubes and printed circuit boards. In November 1986, the US government

imposed anti-dumping tariffs on all CPTs and PCB products that had been imported

from January 1984. Samsung and Goldstar referred this to the Court of International

Trade, but they eventually failed in their efforts against the US measure (EIAK 1989:

249).

87

From the mid 1980s, the EC increased its trade barriers against Korean made electronics

goods. The EC continued its anti dumping action on imported Korean microwave ovens

(July 1986), VCRs (March 1987) and CTVs (August 1987) (Table 4.14). Taking

VCRs as an example, the volume of Korean VCR exports to the EC increased by 167

per cent between 1986 and 1987. The European Association of Consumer Electronics

Manufacturers filed against several Asian manufacturers for dumping. The result of this

action was that Korean firms had to pay high dumping charges. The preliminary

dumping duties were 25.2 per cent (Samsung); 26.4 per cent (Goldstar) and 29.8 per

cent (Daewoo), higher than the 18 per cent levied on Japanese firms such as Orion and

Hunai.

Table4.14 EC's anti-dumping measures against Korean consumer electronics

Products Date of :file Date of Date of Final Contents Preliminary decision review

Microwave July 1986 Voluntary export restraints (31 ovens per cent of total export demand, .,.

i.e. 2 million units)

VCRs Mar. 1987 July 1988 Feb. 1989 Dumping charge (11.5 %-23.7%)

CTVs (less Aug. 1987 Dec. 1989 Preliminary dumping charge than 16 inches) (10.2%-13.06%)

Colour picture Voluntary export restraints tubes (160,500 units for 1989)

Colour monitor Jan. 1987 July 1989 Nov. 1989 Preliminary dumping charge displays (20.1 %-32.5%)

Source: Compiled from EIAK (1989: 257)

A similar scenario applies to microwave ovens, colour picture tubes and CTV s. The

EC's protectionism continued into the 1980s. In January 1988 the EC decision to cease

the generalised system of preferences (GSP) provided an advantage for the export of

Korean made electronics goods (EIAK 1989: 255). At the same time, dumping duties

were also placed on the products made within the EC, where the local content ratio was

88

less than 40 per cent (Japan Economic Journal 28 January 1989). Thus, the so-called

'screw driver' type of international production was under strong pressure. As a

consequence, the UK based Samsung production subsidiary, established in 1987 and

mostly dependent on imported components from Korea, encountered serious problems.

SEC had to protect its existing export markets mostly in the US and EC.10

Table 4.15 Comparison of Samsung and Goldstar's CTV plants in the Unites States

Location

Year of production

Type of operation

Scale of investment

Capacity of production

Production operation

Sam sung

1984

Wholly owned subsidiary

$US 25 million .(1984) and additional investment in 1986

Initially 360,000 units, but increased to 1 million by 1986

375,000 units in 1988

Golds tar

1982

Wholly owned subsidiary

About $US 20 (1981) and an additional investment in 1984.

450,000 units per year for the period 1982 -83, but it increased to 1 million units in 1984-1987.

Annual production volume of CTVs were: 78,000 (1990), 130,000 (1991) and 295,000 (1992)

Sources: Compiled from Goldstar (1993: 901-912): EIAK (1989: 269), SEC (1989)

International production and innovation strategies in the US and the UK

In 1982, Samsung set up a US-based CTV plant in New Jersey. The establishment cost

of $US 25 million was a huge capital investment, nearly equivalent to SEC's profit in

1983. The plant was equipped with two CTV production lines with an annual capacity

of 360,000 units. It was further expanded with an additional three production lines in

1986, giving a total annual production capacity of one million CTVs by 1986. In 1987,

Samsung moved to the United Kingdom for the production of microwave ovens,

investing $US 7 million, with plans for further expansion of VCR production lines (SEC

10 These problems may have resulted from the fact that Goldstar and Samsung followed a market-pull approach rather than the technology-push one adopted by Sony. See Yu Seongjae (1989) for further details.

89

1989: 515). In October 1987, it started production with a capacity of 150,000 per

annum.

In 1988, total production of CTVs at the New Jersey plant accounted for 357,000 units

which was far below the annual plant capacity of 1 million. It is claimed that SEC

planned to enter into the high end market, shifting from 19 inch and 26 inch CTVs to 29

inch CTVs from 1989 (SEC 1989: 1072). However, in the first half of 1989, SEC

started to divest from the New Jersey CTV plant, moving one production line to

Mexico, and ceasing US production of CTV s in the early 1990s.

Table 4.16 International production lines for Samsung and Goldstar in the 1980s

Location Samsung

The United States January 1984 (CTVs).

Europe 1986 in the United Kingdom (microwave ovens).

Mexico November 1988 (CTV chassis and CTVs)

Thailand 1988 in Thailand (CTVs).

Sources: Compiled from SEC (1989) and Goldstar (1993)

Golds tar

April1981 (CTVs).

1986 in Germany (CTVs, VCRs and microwave ovens)

August 1988 (CTV chassis and CTVs)

1988 in Thailand (black and white TVs, CTVs, audio products and washing machines)

Samsung's internationalisation in the 1980s was a defensive strategic move in response

to increasing trade barriers. This survival strategy in the face of pressure from exports

was different from the aggressive nature of internationalisation adopted by established

MNCs which exploited their monopolistic advantage. More specifically, Samsung's

motivation for international production was driven by Goldstar' s strategic move, which

had been promoted by the expectation of increasing trade barriers in the United States

and European countries. We cannot rule out the possibility that Samsung's international

production was partly promoted by the expectation of its production capability would be

utilised and that there would be support from affiliated component manufacturers,

90

whose production capability would provide SEC with low price and relatively good

quality standardised components.

Moreover, Samsung's organisational culture, that of the calculated risk-taker, also

influenced the way it organised foreign investment projects. The investment in the

United States was undertaken after a certain degree of international management

experience had been gained through the Portugal-based CTV joint venture. It should

also be remembered that Golds tar's operation in Alabama had started production in

1982 and had begun to be profitable from 1983. At the last minute, Samsung set up a

US-based CTV plant in 1984, soon after a dumping charge was filed on CTVs imported

from Korean plants.

Samsung's scale of investment was similar to Goldstar's (see Table 4.15). In 1987

similar strategic behaviour drove the firm's investment in the United Kingdom. In late

1986, in the expectation of increasing EC protectionism, Goldstar moved to Germany to

produce CTVs and VCRs. A couple of months later, Samsung established aUK-based

microwave oven plant

Samsung set up the New Jersey-based CTV plant under technologically critical

conditions. Its technological capabilities were very vulnerable, and it had to cope with

external pressure from the United States. Moreover, the failure to establish affiliated

component suppliers inhibited SEC from local component sourcing. There was a plan in

which SED would set up a CPT plant in the United States (SEC 1989), but this was not

realised.

The competitiveness of Samsung's CTV products in the United States decreased

drastically. The real cost of production in the United States was higher than in Korea.

The only benefit was the saving in import tax. Samsung's competitiveness was based on

mass production of easily imitated products. Samsung's products had not been

supported by 'difficult-to-imitate capability' such as product change capability. Neither

was SEC-Korea, the parent company, able to assist with product change capability.

Samsung' s major concern at that time was to ensure the success of its DRAM business.

91

SEC-Korea was more centred on the exploitation of production capability, that is, the

commercialisation of its manufacturing capability in VCR and microwave oven

production, than on improving capabilities in product change, strategic marketing,

international management and linkage with local component suppliers. Sarnsung's

international venture was apparently successful for the first two years of operation, so,

like Goldstar, SEC expanded its plant with additional capacity. The subsidiary could not

survive, however, with the payment of anti-dumping tariffs on CPTs and PCBs.

Samsung 's strategy for the process of building capabilities was different from

Matsushita's. Matsushita had strengthened its product change capability before

launching its US-based CTV project in 1974. Matsushita's objective was to serve its

US customers with high end and high quality products (Kinugasa 1982), while

Samsung' s prime objective was to sell low end and low quality products to the US

market in contrast to Matsushita (Table 4.17). Matsushita could quickly transfer its

accumulated product development capability to the US plant. Similarly, local links with

component suppliers were forged at the right time.

Investment during 1988-89

Following the unsuccessful operation of Sarnsung's two plants in the United States and

the United Kingdom, Samsung looked for other locations for international

production. At the same time SEC encountered cost pressures due to the appreciation of

the Korean won and wage increases from the mid 1980s.

Accordingly, profitability gradually decreased. In the late 1980s Samsung, one of the

world's biggest producers of TV sets, microwave ovens, VCRs and colour picture

tubes, was under continuous pressure at the low end of its market from Japanese

offshore plants in Southeast Asia Japanese firms were developing better products and

manufacturing them in lower wage Southeast Asian countries (Far Eastern Economic

Review 30 May 1991).

The quality and price of products made in the Southeast Asia was better than Korean

made goods. Even Chinese manufacturers started to enter the television market, with

92

their black and white TV s, and small screen CTV s. This resulted in the declining

international competitiveness of Samsung products made in home-based plants.

During 1988-89, Samsung followed Goldstar's strategic move to low labour cost

economies, which gave Samsung low cost locations and avoided trade barriers (see

Table 4.16). Chapter 6 discusses the international activities in Southeast Asia in greater

detail.

Table 4.17 Strategic differences between Matsushita and Samsung: international production in the United States

The year of production in the United States

International management capability

Product change capability

Linkage capability

Matsushita

1974

10 years (in 1965 Matsushita set up a foreign TV production subsidiary in Puerto Rico11 near the United States)

Targeted at high quality and high end products with improved product design and development capability

Established local component sourcing networks

Source: Kinugasa (1982), SEC (1989) and Goldstar (1993)

Summary

Sam sung

1984

2 years (in 1982 Samsung set up a Portugal-based CTV joint venture)

Targeted at low end products (No particular effort was made in product design and development activities)

Most components were imported from Korea

During the 1980s Samsung embarked on an aggressive program to learn and accumulate

foreign technology by interaction with a number of technology suppliers.

11 Although the Puerto Rican market was not large, there were severallocational advantages. Puerto Rico was near the US market and located in the same tariff area as the United States. Products made in Puerto Rico were regarded as 'made in USA' and could be exported to the United States without tariff. In addition, Matsushita could utilise Puerto Rico's cheap labour (Kinugasa 1982).

93

Adopting a slightly different approach, Samsung learnt more sophisticated DRAM

technology in the 1980s than it had in the 1970s. This was a dynamic technological

capability building process, which capitalised on the previously accumulated production

capability in the 1970s. Samsung established foreign-based technology laboratories to

seek information, recruit overseas Korean scientists and train home-based scientists,

while simultaneously learning and developing technological capabilities through in-house

R&D institutes in Korea.

Samsung's strength lay in its mass production capability, but its weaknesses were a lack

of product change capability requiring improved design and product development, as

well as international management and strategic marketing capabilities. These weaknesses

directly or indirectly derived from a high dependency on OEM arrangements as well as a

concentration on DRAM production.

As Samsung's overall technological capabilities improved (mostly in mass production

capability), international production was geographically diverse, from Portugal to the

United States, the United Kingdom, Thailand and Mexico. Externally, increasing trade

barriers in the United States and Europe continuously pushed Samsung toward

internationalisation despite its immature technological capabilities. International

production by Samsung followed Goldstar' s lead in an attempt to defend its established

export markets. This also reflected the risk-averse nature of Samsung's established

organisational culture. Thus, internationalisation proceeded reluctantly featuring a

process of transferring and exploiting production capability - which only provided a

temporary competitive advantage.

This temporary competitive advantage in production capability was an 'easy-to-imitate

capability' which was short-lived in the foreign locations in which Samsung operated. In

addition, Samsung failed to establish a strong production network position through

local linkages with affiliated component suppliers of SEM and SED. These eventually

led to Samsung's failure in its international operations in the United States and the

United Kingdom during the 1980s.

94

5 Organisational reform and international production in the 1990s

In the 1990s, Samsung's gross sales grew consistently, but its net profit decreased

drastically from 4.0 per cent in 1989 to 1.6 per cent in 1990 and from 1.3 per cent in

1991 and to 1.2 percent in 1992. Table 5.1 indicates that Samsung's profitability

declined faster than that of Goldstar and Daewoo when the same external environment

factors had a more marked effect on Samsung' s performance. This was because

Samsung's technological capabilities were more vulnerable than those of its counterparts

in face of growing global competition.

..... 5 (.)

as p,

Figure 5.1 Margin on sales for SEC, Goldstar and Daewoo; 1988-1993

4

3.5

3 ~SEC

2.5 ~Goldstar

-x-oaewoo 2

1.5

0.5

0+--------r------~--------+--------r------~

88 89 90 91 92 93

Source: Kim and Campbell (1994)

Samsung found it hard to respond flexibly and in a timely manner to changes in the

external environment. This was due in part to Samsung's organisational rigidity and

technological weaknesses. In particular, the pace of internationalisation proceeded

slowly. In order to overcome these difficulties, Lee Kun-Hee initiated radical

organisational changes from 1993, in an attempt to regain Samsung's decreasing

competitive advantage through major organisational restructuring. Subsequently, its

internationalisation advanced more quickly, driven by the 'New Management'

95

!

movement. This chapter focuses on the relationship between Samsung' s organisational

reform and its accumulation and improvement of technological capabilities as well as its

international production process during the 1990s.

Table 5.1 Performance of Korean electronics companies, 1988-93

1988 1989 1990 1991 1992

Gross sales Sam sung 4,595 6,063 6,353 6,500 7,600 ($US million) Go1dstar 4,139 3,836 4,201 5023 4,787

Daewoo 1,621 1,765 1,846 2,357 2,182

Net profit Sam sung 148.8 233.4 102.8 106.8 94.4 ($US million) Go1dstar 26.6 26.5 47.4 25.2 33.4

Daewoo 26.0 20.5 18.2 18.5 20.9

Margin on Samsung 3.1 4.0 1.6 1.3 1.2 sales(%) Go1dstar 0.6 0.7 1.1 0.5 0.7

Daewoo 1.6 1.2 0.9 0.9 0.9

Return on Sam sung 6.2 6.5 2.4 1.7 1.8 investment Goldstar 1.0 -1.8 2.4 1.2 1.9 (%) Daewoo 1.8 1.4 0.9 0.9 0.9

Source: Company documents, cited by Kim and Campbell (1994)

A new competitive environment and major organisational change

Changes in the competitive environment

1993

10,100 5,337 2,473

190.8 81.0 47.8

1.9 1.3 1.0

5.6 3.0 1.4

Korean electronics firms have been aggressively involved in learning and knowledge

accumulation over the past two decades. They have continued to improve their

capabilities through learning-by-doing. In this way, Korean electronics products were

able to maintain a competitive advantage until the late 1980s. In the 1990s, some

significant changes occurred in the global electronics market. Demand growth in

markets in the United States and Europe slowed down remarkably while price

competition continues to play an important role (Ernst and O'Connor 1992). In

addition, access to foreign technology has become extremely difficult and the speed of

technological obsolescence has accelerated.

96

In particular, latecomer electronics firms found it more difficult to get access to frontier

technology, the access to technology discussed by Ernst (1997)1 and Ernst and

O'Connor (1992). Their competitiveness decreased remarkably except for components

such as DRAMs.

As explained in the Chapter 4, Samsung's technological capability was marked by an

imbalance between product and production. It had a relatively high capability in mass

production, but was very weak in product design and development. This is a legacy of

Samsung 's OEM production style in which product designs were provided by OEM

partners. When major global electronics firms entered the low end market where

latecomer electronics firms like Samsung had predominated nearly a decade,

competition was unavoidable between Samsung' s own brand products and those by

firms from industrialised countries.

During the early 1990s, Samsung's international competitiveness m consumer and

industrial electronics goods decreased. In spite of a good external climate characterised

by an appreciation of the yen and a depreciation of the won against US currency,

Samsung's competitive advantage in production capability gradually waned. In

particular, consumer and industrial electronics products incurred a huge loss in

international operations. This was in contrast to Samsung' s high performance in the

1970s and 1980s.

Major organisational change under 'New Management' movement

Samsung's new Chairman, Lee Kun-Hee perceived the need for change. In order to

respond to a rapidly changing external environment, two problems were perceived in the

management of Samsung: the use of central planning and internal auditing as a

mechanism to control the group affiliates, a problem which had been embedded in

1 Ernst (1997) observes that developing countries are confronted with a twofold challenge. It is difficult to acquire the public knowledge element of technology due to aggressive intellectual property right strategies and the proliferation of 'high-tech neo-mercantilism'. For Korean and Taiwanese firms, access to the public knowledge element of foreign technology has become increasingly difficult and costly, especially for new product designs and key components.

97

organisational culture during the late chairman, Lee Byung-Chull' s period; and a rigid

and bureaucratic organisational system on the topic of organisational culture (Choi

1995). Choi (1995 : 78) states that,

... the late Chairman recognised that importance of nurturing capable and hard-driving managers. In fact it was his philosophy that the survival of a company depends, most of all, on the quality of its managers. Sarnsung, thus, was the first private company in Korea to recruit employees by entrance examination in 1957. He also set up the chairman' secretariat to develop long-term plans and conduct internal audits. The company also monitored subsidiary performance very closely and encouraged good performers, but descended heavily on bad ones. To enhance the status of the best new recruits... he demanded absolute loyalty from them and guaranteed them a sure career path within the company in return.

Lee Kun-Hee believed that a 'volume-oriented growth' strategy, which was derived

from production capability with minor changes of product, production process and

organisational systems, was unlikely to be effective due to rapid changes of technology

and international market. Organisational reform in Samsung would entail major changes

because the 50-year-old organisational culture of the group which had grown under the

'profit centre' system encouraged a narrow, short-term approach.

The new chairman often raised with managers and senior executives the problems that

critically impeded Samsung from high performance and growth. At the same time, SEC

introduced minor changes in its organisation. For instance, in 1991, SEC set up a

strategic management section undertaking planning, intemationalisation and strategic

technology management in order to manage its complex organisations efficiently and

effectively (SEMM, August 1991). In December 1992, SEC integrated its multi­

divisional business sectors, and appointed Kim Kwang-Ho as head of Samsung

Electronics (SMM, December 1992).

Although changes were imperative under the new competitive circumstances, the new

Chairman soon realised that employees became resistant to change and too reluctant to

take risky initiatives (Choi 1995). Lee Kun-Hee believed that it was not easy for the

habits of 50 years to be changed immediately, thus, unprecedented measures were used

to dislodge them. Changes were: the working hours of Samsung employees were

changed from 9 am to 7 pm, to 7 am to 4 pm; any worker at a production site was

98

empowered to stop the entire line if a defect was found; senior executives were asked

to spend at least half of their six-day week at factories, meeting suppliers and customers

instead of remaining behind their desks. In January 1993, SEC restructured its

organisation again because SEC needed to increase coordination between different

organisations in response to a rapidly changing international environment. The audio and

video business sectors were integrated and a technology management division was

newly established. (SEMM, January 1993).

From the beginning of 1993, Samsung began a radical organisational reform2 of its

management along the lines of its major Japanese counterparts (Table 5.3). In October

1994, Kim Kwang-Ho was appointed as head of the electronics sector, which includes

SEC and its subsidiaries including SED, SEM and SC. This was the first fully integrated

organisational structure since 1969 when Samsung entered the electronics industry.

Through the 'Frankfurt Declaration' in 1993, Lee Kun-Hee showed Samsung's senior

executive managers how much Samsung products lagged behind in terms of product

quality and international marketing3 • Explicitly, Lee Kun-Hee urged all Samsung

employees to reevaluate their roles. 'Change yourself first' became the prime slogan of

the 'New Management' movement. The New Management philosophy encompasses

the three major guiding principles of quality management4 , multifaceted integration5 and

globalisation6 •

2 The reform was initiated by Lee Kun-Hee, who was called the Samsung group's chief visionary officer and Kim Kwang-Ho, who supplied the vision and set the strategic goals (Business Times 19 February 1994).

3 Over a two month period, 850 senior executives were summoned in London, Los Angeles, Tokyo, Osaka, and Fukuoka in groups of 20 to 40 (Choi 1995: 79).

4 Samsung committed itself to producing high quality products. It adopted the line stop system in order to reduce the defect ratio of its products, based on a sense of individual responsibility and initiative (Samsung Homepage, WWW 1996).

5 Samsung aims to apply this concept to every field on many levels, including infrastructure, facilities, technology and information management. The objective is to maximise competitiveness and efficiency through consolidation of different elements. Samsung claims that unlike a traditional departmental configuration, multi-faceted integration brings organisations, people, infrastructure and facilities together (Samsung Homepage, WWW 1996).

6 Samsung's global strategy emphasises the expansion of overseas production facilities by means of joint ventures and foreign acquisition. Samsung claims that true globalisation requires mental, physical and cultural adaptation to the local environment (Samsung Homepage, WWW 1996).

99

Table 5.2 Organisational changes of major Japanese electronics firms

Company Name

Hitachi

Toshiba

Matsushi Electric Industrial

NEC

Sony

Mitsubishi Electric

Sharp

Sanyo Electric

Date of implemen­tation Aug 1993

Oct 1992

Nov 1993

Aug 1992

Sep 1993

Dec 1993

Jun 1993

Apr 1993

Dec 1993

Reform

Development centre established in each business division and R&D system reorganised.

Began to put more effort into product development.

Reorganised its former central research institute into a technological development base for fields closely related to product development, and strengthened cooperation with its business divisions. The objective is to assemble engineers from different fields, link technological development, and develop products that meet the user's needs.

Established a new business group, seven development research facilities and a technological research facility within the development group, in order to improve R&D efficiency. Some researchers were transferred from the head office's research institute.

Announced that it would promote the overseas transfer of R&D operations, although research in basic technology, the foundation of its research, would be conducted in Japan. It decided that it was more efficient to conduct R&D for products oriented toward local overseas markets at the locality concerned.

Established R&D and Planning Offices as part of head office organisation and intends to establish an R&D system_ that is. mutually interactive.

Transferred the four head office research institutions to the business division. Shifted emphasis toward a greater product development orientation.

Established a new product R&D institute in its business department. Reorganised its three business department research facilities and two development centres within the business department, and established a technological research institute and four product development research institutes.

Shifted toward greater emphasis on product development, and strengthened its business department research institute.

Source: Japan Society for the Promotion of Machine Industry, Economic Research Institute 'Basic Survey of the Research and Development Activities of Corporate Business', April 1994, quoted in Tsuda and Shinada (1995)

100

One thing which distinguishes Samsung's organisational reform from that of its

Japanese counterparts is that Samsung aimed at the establishment of a new and relevant

organisational culture necessary to adapt the changing competitive environment, while

Japanese firms stressed product innovation, development capability and

internationalisation of R&D activities (see Table 5.2). These different approaches

occurred at a time when both Samsung and Japanese firms were attempting to cope with

decreasing international competitiveness.

Learning and innovation strategies and systems

In the 1990s, Samsung's learning and innovation focused on three major activities:

namely, acquisition of frontier technology for next generation products; upgrading of its

design and product development capability; and development of its international

management capability and international distribution channels. Samsung was able to

acquire complementary technology in exchange for its advanced DRAM technology.

R&D investment and its systems

In the late 1980s Samsung began to emphasise R&D investment. Although the

proportion of Samsung's R&D investment to its total sales varied over time (Tables 5.3

and 5.4), Samsung's R&D investment increased nearly ten times during 1987-95, from

$US 95 million in 1987 to $US 875 million in 1995. It increased rapidly during 1989-92,

but decreased during 1993-95. It is worth noting that after SEC merged with SST,

Samsung's R&D investment rose substantially from 3.5 per cent in 1988 to 6.3 per cent

in 1989. Most of this increase in R&D investment was allocated to the semiconductor

sector. Less emphasis was placed on R&D investment to improve product innovation

and development capability, which would have been conducive to enhancing the

competitiveness of its consumer and industrial electronics goods.

Table 5. 3 R&D investment by Japanese firms and SEC, 1989

Hitachi NEC Sony Toshiba Matsushita SEC

R&D 1,714 1,662 1,300 1,166 1,670 250 investment (billion won)

R&D/Sales 9.7 12.0 15.1 7.6 7.9 6.3 %

Source: Company data and Japanese Science and Technology White Paper, cited by Koh (1992: 28)

101

More recent R&D investment composition has not changed. Of $US 87 5 million of total

R&D investment in 1995, SEC planned to spend about $US 625 million on

semiconductors and next generation audio and multimedia products, accounting for

Table 5.4 R&D investment in SEC (1987 -95)

Year Total sales (A) Total B/A R&D investment (C) C/A% (billion won) investment (B) % (billion won)

1987 2,500 n.a n.a 95 3.8 1988 3,400 n.a n.a 120 3.5 1989 4,000 n.a n.a 250 6.3 1990 4,500 n.a n.a 380 8.5 1991 5,280 n.a n.a 470 9.1 1992 7,553 1,586 21.0 600 8.0 1993 10,348 2004 19.4 652 6.3 1994 14,617 2,900 19.8 750 5.1 1995 16,600 3,800 22.3 875 5.3

Note: The figure for 1995 is based on SEC's forecast.

Source: Compiled from SEC (1995b) and Koh (1992: 29)

about 70 per cent of the total R&D budget (SEC 1995b). This proportion of Samsung's

R&D investment allocated to product innovation of consumer and industrial electronics

products is similar to that in the 1980s. In other words, the DRAM influence that began

in the 1980s continues to constrain the development of non-DRAM product innovation

capability.

Samsung was also weak in R&D management systems. As several authors (Bloom

1992; Ernst and O'Connor 1992; Ernst 1994b) have pointed out, weaknesses of

innovation management systems were common among the Korean chaebol electronics

firms. Centralised control over SEC's in-house R&D organisations continued until the

early 1990s and there was no significant difference until the end of 1995. Its

hierarchically integrated in-house R&D organisations provided researchers and

engineers with an unsatisfactory working environmene .

7 Using company surveys, Koh (1992: 36) reveals several problems raised by researchers and engineers: (1) unsatisfactory R&D working environment (54%); (2) project overload (30%); (3) insufficient time for feasibility studies of future projects (27% ); ( 4) overloading of documentation and paper work (26% ).

102

Samsung has four departments and four committees to handle R&D projects. The

departments are the Strategic Planning Office, Technology Planning, R&D Management

and Marketing Departments, of which the Strategic Planning Office coordinates four

business departments. The committees are the Executive Committee, the Senior

Directors Committee, the Technical Review Committee and the Product Planing

Committee. There are three types of R&D projects: research, development and

commercial projects8 • Under the procedure for managing R&D projects, project ideas

are proposed by the R&D department and filtered by the special committees in terms of

manufacturability and marketability. Proposals are then evaluated by senior directors

(mainly R&D and SBU directors) at the end of each year. This complex and hierarchical

procedure has caused problems9 (Koh 1992: 35-36).

This short-term R&D strategy was widely accepted by Samsung's departments. It

appears that this acceptance stems from the 'profit centre' system, as outlined in Chapter

3. Koh (1992: 33) observed that of the totall,387 R&D projects (574 projects in 1989

and 713 projects in 1990) in SEC, including commercialised projects and on-going

projects in the R&D centre, almost 80 per cent were categorised as commercial short­

term projects of less than a year's duration.

This short-term approach also applies to the Samsung Advanced Institute of technology

(SAlT), which was established as the Group R&D centre responsible for basic and

applied research into materials, chemistry, electronics and aerospace, as well as

coordinating R&D activities with affiliated companies. Koh (1992: 34) argues that until

the early 1990s SAlT emphasised its role as co-ordinator of short-term or medium-term

commercial joint projects, rather than long-term research. Similarly, under its 'profit

8 Research projects stress the development of core technologies or key components, overcoming Samsung's technological dependency on developed countries. These projects last over three years (Koh: 1992: 33). Development projects aim at avoiding the risk of commercial projects, thus their major goals are to make prototypes or to justify technical feasibility. The projects last between one and three years. Commercial projects focus on domestic and overseas markets and last less than a year.

9 Koh (1992: 36) critically evaluates Samsung's R&D system and notes that researchers and engineers criticise the system for several reasons: (1) project selection involves too much documentation; (2) there is insufficient time to investigate feasibility because of the work load of existing projects; and (3) the information processing system is unsatisfactory in terms of patent analysis and new technology information (e.g. time lag and insufficient manpower to analyse related information).

103

centre' system, commercial R&D projects were favoured because these projects are

crucial to achieving near-term performance of SBUs. Long-term projects in turn were

less attractive to the marketing department and strategic business units (SBUs) (Koh

1992: 36). In addition, its hierarchically multi-divisional structure of organisation also

led to a lack of inter-functional cooperation. Koh (1992: 36-37) observes that,

In R&D planning systems in SEC, it is seldom the case that production departments are deeply involved in projects from their early stages .... concerning the relationship amongst marketing, engineering and R&D departments: (a) communication is not sufficient between marketing departments; and (b) communication is not satisfactory amongst marketing, engineering departments and the R&D centre.

SEC's distribution of R&D investment and R&D management systems provided a rare

opportunity to upgrade its major product change capability. Establishing design centres

overseas in the 1990s was an effort to upgrade Samsung's skills in design and product

development. In another organisational restructure, SEC integrated key functional

activities such as production, international marketing and R&D, placing them under the

same business division and linking export marketing activities to each product business

unit

Design and product development

As explained in Chapter 4, SEC's attempt to upgrade its product change capability in

the consumer and industrial electronics sectors was postponed due to the influence of

DRAM and OEM. As a result Samsung was weak in design and product development.

This was also due to the lack of a suitable domestic R&D infrastructure in the field of

design in Korea. By the early 1990s, there were only 35 specialised industrial product

design centres in Korea, compared with 400 in Japan. Of the largest 30 Korean

companies, only sixteen companies had their own design institute. The level of industrial

design capability in Korea was inferior to Japan's and to other newly industrialised

countries. About 70 per cent of Korean product design is dependent on OEM buyers

and foreign licences (Dong-A Ilbo, 29 August 1993).

104

Table 5.5 and Figure 5.1 show us the level of Samsung's design capability. According to

the global consumers' evaluation, the design capability of Samsung brand products was

far behind that of Sony, Panasonic, Zenith and RAC in the US market and of Grundig

and Saba as well as Japanese brand products in Europe. In addition, US and

European consumers treated Samsung brand products as low end goods. This was

reflected in the low value placed on Samsung brand products.

Table 5.5 Product design and value of major TV s by manufacturers

Samsung Goldstar Sony Panasonic Zenith RCA Grundig Saba

High-end products US Europe 3.9 3.7 3.7 4.0 5.9 5.2 5.3 5.2 5.1 4.4 5.1 4.8 4.7 5.5 4.6 5.2

Source: Compiled from Han (1990: 228-30)

Design US Europe 4.4 4.3 4.2 4.5 6.1 5.7 5.4 5.5 5.6 4.4 5.6 4.9 4.5 5.2 4.5 5.0

Product value US Europe 4.2 4.1 4.0 4.2 5.7 5.2 5.2 5.4 5.4 4.3 5.4 5.0 4.3 5.2 4.4 5.2

In a similar vein, a Japanese technology adviser recalls that he was astonished that most

of the designers did not properly understand the basic procedure of product design, and

even external product design functions were assigned to the mechanical design

department (author's interviews with Samsung Tokyo Office, 1 November 1995).

Clearly Samsung did not possess major product change capability based on creative

design by the early 1990s.

Several attempts have been made to upgrade design capability from the establishment of

foreign design centres to the acquisition of foreign firms with superior design capability.

In 1991, SEC set up an Osaka-based design centre with five employees for audio and

video products, and it established a Frankfurt-based design centre in 1992 for products

particularly distributed in Europe. In 1994, SEC established Samsung Design America in

the United States, investing $US 950,000 in cooperation with IDEO, a US-based design

laboratory, with a focus on consumer electronic products relevant to the US market. In

1995, Samsung Fashion & Design Institute, offering a three-year course, was established

105

in Korea in cooperation with a US-based design institute. This institute plans to produce

130 design specialists per annum, in line with the Samsung Group's scheme to increase

the number of designers from 1,600 to 2,400 in 1998.

Figure 5.2 Design capability of major TV brands

high 7 . :Grundig

:e . Europe

4 :II - e Sony

wanasonic

Zenith -----......... ---........... -.. -·- --........... -. --. -..

low

0

low

Source: Compiled from Han (1990:228-230)

: Samsung .

4

United States

7

high

SEC also aimed to increase the use of foreign-based designers. In 1995 there were 50

designers working in the United States, Germany and Japan, but the number will rise to

100 designers by 1996. Samsung is also planning to set up a design laboratory in

Singapore to support the design capability of its subsidiaries located in Southeast Asia10

producing CTV s, VCRs, microwave ovens, refrigerators and washing machines. In

addition to increasing the number of design centres, Samsung annually sends ten

designers to Japan, Germany and the United States for three to six months' training

through an exchange program between headquarters' design departments and overseas

design centres.

10 In 1996 Goldstar also plans to set up design institutes in China and India, and Daewoo plans to establish an integrated institute to handle product planning and development functions in Mexico. Mr Shin Sung-Mo, who worked for Goldstar's design centre in Europe, acknowledges that European consumers have different preferences from those in Japan and the United States in terms of the colours and the external design of the products (Chosun-Ilbo, 10 February 1992).

106

Another attempt to improve Samsung' s major product change capability is the

establishment of M&A, a cooperative alliance with a US and a Japanese frrm. Another

example of this cooperation was a high end audio product development project. For this

project, Samsung allied with two US-based frrms, Hale Design Group (HDG) and

Madrigal and also acquired Lux, a Japan-based firm with good design capability. For

the first phase of its operations, Samsung has been engaged in the joint development of

two audio product models targeted at the high end markets in Korea and overseas. This

project aims at combining both parties' strengths. SEC provides expertise in the

computer analysis of sound and speaker structure and in-depth knowledge of new

materials applications, while HDG brings outstanding capability in speaker design and

sound assessment

Samsung' s recent emphasis on design and development is closely related to its changing

competitive circumstances. It was a distinguishing feature that until the 1980s R&D and

design of consumer electronics were totally dependent on headquarters in Korea, albeit

in coordination with the design centre in Japan. Subsequently Samsung established

design centres in Asia, Europe and America. The three different design centre locations

reflect two important elements. One is the emergence of regional economic blocs such

as the North America Free Trade Agreement (NAFTA) and the European Union (EU),

and the other is Samsung's globalisation strategy under the 'New Management'

movement. Under this strategy, Samsung located design centres closer to overseas

production facilities in order to meet regional customers' needs. Yet Samsung' s efforts,

until the end of 1995 were limited mostly to two major regional markets, namely, the

EU and America. There are no design and product development laboratories in

Southeast Asia and China, despite the fact that Southeast Asia and China are among the

fastest growing markets in the world. This is be further discussed in Chapters 6 and 7.

Strategic alliances with frontier technology suppliers

While foreign licensing was a predominant channel for the acquisition of foreign

technology during the 1980s, Sasmung has adopted strategic alliances (joint

107

development and joint production) and acquisition as a means of gaining access to

foreign frontier technology. This is a significant change. There are four features of

Samsung's strategic alliances (Table 5.6). Firstly, the source of foreign technologies has

been diversified, and is no longer confined to Japan and United States, but has been

extended to Russia, the United Kingdom and Denmark. Nonetheless, US and Japanese

firms remain Samsung's major technology partners.

Secondly, the number of alliances has increased rapidly in line with the growing

commitment to globalisation under 'New Management'. The 1993 organisational reform

provided an impetus to accelerate technological cooperation with foreign fums with 24

of a total of 26 cooperative alliances realised during 1993-95. This is also closely

associated with the improvement of DRAM technological capabilities. The number of

alliances increased substantially (from five in 1994 to ten in 1995), spurred by

Samsung's technological breakthrough in the development of the world's first 256 M

DRAM. This surpassed the leading semiconductor fums such as Intel, Toshiba and

NEC. With this high-tech breakthrough, Samsung allied with Toshiba and NEC. The

former alliance was to develop ICs for the use of consumer electronics and the latter

was for the joint production of DRAMs in Europe11 • Through its alliance with the US

firm, General Instruments, Samsung could participate in the race for the next generation

high definition TVs (HDTVs). Samsung also obtained a licence to use the high-speed

memory technology developed by Rambus Inc. of the United States (The Nikkei

Industrial Daily, 25 January 1995) to complement its silicon and GaAs chip technology.

Thirdly, Samsung established broad technology networks to seek complementary

technologies to such products as digital cellar systems, microprocessors, application

specific integrated circuit (ASIC), and thin film transistor-liquid crystal display (TFT­

LCD). Interestingly, Sarnsung renewed its connections with Micron Technology and

Texas Instruments, which had been sources of DRAM technology in the 1980s, but the

relationship had been severed due to a dispute over intellectual property rights in

DRAM technology. In a similar manner, Samsung entered into a cross-licensing

11 In February 1995, SEC and NBC agreed to co-produce DRAMs for the EU market: NBC Semiconductor (UK) will supply semifmished 4M DRAMs to Samsung-TI in Portugal for the final production process (The Nikkei Industrial Daily, 8 March 1995).

108

Table 5.6 Major strategic alliances: Samsung Electronics in the 1990s

Partners Origin of finns Year Scope and content

HP us 1990 Joint development and sales ofRISC workstations.

DNS Japan 1992 Joint development and production of semiconductor manufacturing equipment.

POSCO& Korea 1993 Silicon wafer plant established in Korea (SEC: MEMC us 20%). TOWA& Japan 1993 Joint venture to produce semiconductor Hanyang Precision Korea fabrication facilities (SEC: 40% ). IBM us 1993 Joint development and sales of desktop PCs. OKI Japan 1993 Technology transfer and assistance of

synchronous DRAM technology. Mitsubishi Japan 1993 Cooperation in the cached DRAM area. Qualcomm us 1993 Technical cooperation in the digital cellar

system area. Micro technology us 1993 A cooperative arrangement for next generation

memory devices. AT&T us 1993 Joint development of notebook and pen-based

PCs. USA Video us 1994 Joint development and sales of set-top-boxes. ARM UK 1994 Co-development of 3-bit RISC microprocessors. lSD us 1994 Co-development of multilevel storage sound

processing ICs. Texas Instruments us 1994 Semiconductor production at TI's existing plant

in Portugal (SEC: 30 % ). NEC Japan 1995 SEC & NEC agreed to co-produce

semiconductors for the EU plant Toray Japan 1995 TAB semiconductor plant set up in Korea (SEC:

51%). Crosna Russia 1995 Joint venture to produce telecommunication

systems (SEC 71% ). Toshiba Japan 1992 Technical cooperation in the flash memory area

1995 Joint development of ICs for use in consumer electronics products.

General Instrument us 1994 Joint development and sales of HDTV. 1995 Co-development of dual-mode video decoder

circuits. Dancall Denmark 1995 Joint development of DCS 1800/GSM mobile

phones (Software & RF). Hales Design us 1995 Joint development and sales of speakers. group Fujitsu Japan 1995 Cross licensing agreement on next generation

TFT-LCDs. Motorola us 1995 Agreement to work together to design chips and

develop systems and application software for PDAs.

Weitek us 1995 Co-development of multimedia ICs.

Source: Compiled from SEC (1995a)

109

agreement for the next generation of TFI' LCDs with Fujitsu, which had been closely

cooperating with Hyundai in the DRAM sector.

Table 5. 7 Samsung's strategic alliances with Korean partners

Participators Products Activities

Samsung, Goldstar, Daewoo, HDTV Joint R&D Alps, Hankuk:, KIST, KIET, others

Samsung, Goldstar and Daewoo Large size refrigerators Shared manufacturing/swap

Samsung, Daewoo and 20 others CATV and CATV parts Joint R&D

Samsung Corning and Goldstar All products Cross licensing

Samsung, Goldstar TDX Joint R&D Samsung , Goldstar LDP Mechanism Technology transfer

Source: Compiled from Jun (1995: 183)

Finally, Samsung has been prominently involved in technological collaboration with its

arch-rival, Goldstar. In 1992 SED and Goldstar entered into a cross-licensing

agreement. According to the contract, both firms are to share more than 8,800 patents

related to CRT, computer monitors and LCD which have been registered in Korea and

overseas for three years (SMM, August 1992). The collaboration between Samsung and

Goldstar has also been extended to a TDX R&D project and LDP mechanisms. Besides

this, Samsung has been actively engaged in a joint R&D project on HDTV and CATV

with other Korean technology partners such as KIST, KIET, Daewoo etc. (Table 5.7).

International management capability and foreign market development

In the 1990s, Samsung focused on the development of its international marketing and

international management capability. The need to improve these two capabilities derived

from two important factors. The first is that Samsung experienced difficulties in its

international operation during the 1980s in the United Kingdom and the United States

due to lack of experienced staff. The second is that Samsung was heavily dependent on

OEM. More specifically, Samsung came to see that there was no guarantee of

110

successful foreign production with only advanced production capability but without

international marketing networks through which its own brand name product could be

distributed. Further, international management capability needed to be learned through

a painstaking international process.

As illustrated in Chapter 4, Samsung's US-based CTV plant had to be re-located to

Mexico from 1988, while the UK-based microwave oven plant ceased production and

was replaced by CTV production facilities. This was in contrast to Samsung's high

performance in domestic operations in Korea. The new chairman believed that

international management capability could not simply be acquired without a long-term

strategic perspective. In 1991 Samsung introduced an ambitious new international

training program for unmarried assistant-manager level employees under which they

were sent to foreign countries for one year. Samsung pays all their expenses while

staying in foreign countries and pays the employee's normal salary and benefits. They

have no set tasks for the year. Their only requirement is to learn a foreign language, and

to gain an understanding of the socio-economic environment and business culture,

without needing to be involved in daily business operations.12 The aim of the program is

to produce regional specialists on the countries in which staff are resident (Lee 1995:

260; SEC 1995b). By February 1995, SEC had sent a total of 594 employees abroad to

some 42 countries (SEC 1995b). Other group affiliates such as SED, SEM and SCare

also sending their employees overseas under this scheme.

Compared with Samsung's previous short-term focus, this training program is a long­

term strategy. The program, as Lee (1995: 260) says, requires a huge investment, and

its outcomes are only apparent in the long term. This reflects the strong commitment of

Samsung's top management to globalisation.

12 Samsung spends $US 50,000 per person on this scheme annually. This budget comes from human resource training and education funds, which account for 3.5 per cent of its total labour costs.

111

The foreign staff exchange scheme13 is another means of upgrading international

management capability. This exchange program enables foreign employees to mingle

with other nationals, and to enhance their understanding of cross-cultural differences

(Lee 1995: 260). Recently, Samsung has cooperated with Korea University in training

foreign employees at the managerial level in Samsung's foreign affiliates. This move

also represents a longer-term approach.

International marketing and service

According to a survey conducted in the United States and Belgium in 1990 (Table 5.8),

the two major Korean electronics brand products sold for the lowest consumer prices,

despite the fact that their quality index was not significantly lower than those of other

brands such as GE , Sharp and Toshiba. An explanation for this is that Korean brand

products have been undervalued as a result of their image as low end goods, and

possibly because of a lack of brand recognition amongst international consumers.

In the 1990s, Samsung established foreign sales subsidiaries: Spain in April 1990,

Singapore in 1990, the US in January 1992, Italy in January 1992, Sweden in May

1992, France in August 1992, and Portugal in January 1993 (EIAK 1993). By February

1995, SEC also had 22 overseas marketing subsidiaries, 38 overseas branch offices, and

four regional component depots in the United States, the United Kingdom, Panama and

Singapore.

SEC also expanded its own after-sales service centres and maintained relations with

local after-sales service agents. By 1994 SEC had three service subsidiaries, twelve sales

subsidiaries' service centres, 58 distributors' service centres and 8,586 authorised

service centres worldwide. In 1992, SEC established the Samsung Europe Service

Centre in the United Kingdom, through which Samsung provided its customers with

better after-sales service in Europe. In February 1995 this centre introduced an

advanced warranty system under which Samsung customers could have their products

repaired more conveniently.

13 Under this scheme, foreign employees working at Samsung's overseas subsidiaries are sent to Korea to learn about Korea and Samsung, while teaching about their own countries to Korea-based employees.

112

Table 5.8 Comparison of CTV price and quality

Brand Price ($US) Quality index Breakdown index

RCA 470 90 7 Hitachi 470 84 7 Zenith 405 83 11 Mitsubishi 445 80 6 Sony 500 80 6 GE 375 78 6 Sanyo 399 77 5 Sharp 370 74 7 Toshiba 384 76 4 Korean brand 300 73 8 (FirmA) Korean brand 300 78 10 (Firm B)

Source: Compiled from Consumer Report (February 1990) and cited by Han (1990)

However, the company's marketing and service resources were not allocated on the

basis of sales volume. Although the NAFT A and EU regions accounted for only 58 per

cent of the total sales contribution (Table 5.9), Samsung allotted 84 per cent of its total

service resources to these regions (Table 5.10). In a similar manner, the service network

in Latin America accounted for 10 per cent, while its sales contribution was only 5 per

cent. Although Asia's sales contribution reached 34 per cent, Samsung assigned only

21 per cent of its service resources to Asia.

Relatively few marketing resources were placed in Asia, despite the fact that the Asian

market is growing rapidly compared with America and Europe. The future direction of

Samsung's marketing and service efforts is therefore expected to centre on the

development of Asian markets.

In 1993-94, SEC's capability in international marketing was gradually improving. Its

OEM sales ratio was reduced to an average of about 40 per cent, compared with about

60 per cent during the 1980s. However, a legacy of the heavy OEM dependency was

that key business areas within the company had not developed close relationships. As

observed by Koh (1992), the marketing department rarely coordinated its activities with

the R&D and engineering departments. There was little chance to conduct strategic

marketing activities in Samsung. A more specific weakness was that 'on the spot

113

information' from customers had not been properly delivered to relevant departments so

that they could learn from the feedback and conduct product innovation.

Table 5. 9 SEC's sales share by region (per cent), 1993-95

North America Central and South America Europe and CIS Asia and Oceania Middle East & Africa

1993 42

6

23 25 4

Note: The figures 1995 are based on company's estimates.

Source: SEC (1995b)

1994 37 5

21 34

3

Table 5.10 Regional distribution of SEC's global service networks, 1994

North Latin Europe Asia America America

SeiVice Network (%) 40 10 44 21

Source: SEC (1995b)

Technological capabilities and product market position

1995 37

5

22 30

6

Total

100

During 1989-93, Samsung's sales grew consistently, but there was an increase from

$US 6.5 billion in 1991 to $US 14.6 billion in 1994, accounting for 37 per cent during

1993-94, compared with 16 per cent during 1991-92. However, the trend in net income

growth differs from that of sales growth. For instance, net income decreased for the

three consecutive years during 1990-92, but it started to increase in 1993 and rose

dramatically in 1994, accounting for $US 1.1 billion and $US 2.2 billion in 1995 (Table

5.11).

This high performance in the mid 1990s is attributable to the success of the DRAM

business, which became a big cash cow for Samsung. In 1993 SEC seized 13 per cent of

the global DRAM market share and became one of the world's seven largest

114

semiconductor suppliers. Samsung's market share also increased from 3.6 per cent in

1993 to 4.5 per cent in 1994, the highest growth of all its competitors (Table 5.12).

Table 5.11 SEC's performance ($US billion), 1989-95

1989 1990 1991 1992 1993 1994 1995 Domestic n.a n.a n.a 3,103 3,550 4,633 5,400 Sales Exports n.a n.a n.a 4,450 6,798 9.984 11,200

Total sales 6,063 6,353 6,500 7,553 10,348 14.617 21,000

Net income 233.4 102.8 106.8 94.4 190.8 1,199 2,233

Margin on 4.0 1.6 1.3 1.2 1.9 8.2 10.6 sales(%)

Source: Compiled from Kim and Campbell (1994) and company data

Mfiliated components suppliers, SED and SEM, also performed well with an

improvement of production capability, which was assisted by improvement in DRAM

process technology. As a result, SED and SEM joined the ranks of the largest

component suppliers. SED seized 13 per cent of the international market share in the

sales of cathode ray tubes and become the largest CRT supplier in the world. SEM was

the largest supplier of DYs and FBTs with a global market share of 13 per cent and 15

per cent respectively (Table 5.13).

The export performance of SED and SEM in component production in 1993 was also

noteworthy. Nearly all products were exported to the international market. SED's

export ratio was almost 90 per cent, while SEM' s export ratio was approximately 70

per cent.

Samsung made three important gains from its success in DRAM production. Firstly, the

high performance of DRAM business gave Samsung a chance to access offshore loans,

which could be used for the acquisition of foreign firms in the race for global technology

alliances, and for capital investment in the establishment of foreign production facilities

during 1993-95. Of a total 19 offshore loans during 1992-95, 13 loans were realised

115

during 1994-95. The amount of borrowing increased rapidly, from $US 195 million in

1993 to $US 527 million in 1994 and to $US 578 million in 1995 (see Table 5.14).

Table 5.12 Performance of global semiconductor companies, 1993-94

1993 1994 Growth(%) Sales Marlcet Rank Sales Market Rank ($US share ($US share million) {%} million) {%}

Intel 7,970 9.3 1 10,121 9.2 1 27 NEC 6,141 7.2 2 7,944 7.2 2 29 Toshiba 5,727 6.7 4 7,527 6.9 3 31 Motorola 5,957 7.0 3 7,237 6.6 4 21 Hitachi 5,015 5.9 5 6,485 5.9 5 29 TI 4,083 4.8 6 5,280 4.8 6 29 SEC 3,044 3.6 7 4,893 4.5 7 61 Fujitsu 2,928 3.4 8 3,858 3.5 8 32 Mitsubish 2,823 3.3 9 3,735 3.4 9 32 Philips 2,300 2.7 12 2,905 2.6 10 15

Source: Data Quest (January 1995), cited by SEMM in 1995

Table 5.13 The global market share of Samsung products, 1993

Total sales Exports Global marlcet Global ranks Product ($US million) ($US million) share(%)

SEC 10,145 6,678 DRAM 3,220 3,056 14% 1 CTV 915 637 6 6 VCR 687 553 10 2 Microwave oven 346 286 15 2

SED 1,527 1,345 CRT 1,023 915 13 1

SEM 916 639 DY 90 84 13 1 FBT 101 91 15 1

Source: Company data cited by Jun and Kang (1994)

Secondly, advanced DRAM production capability became a cornerstone to the

development of Samsung's component manufacturing capability. The high performance

of Samsung' s component affiliates contributed to improving the international

competitiveness of its end products such as CTV s, VCRs and microwave ovens.

116

Table 5.14 Samsung Electronics' offshore financing

Year floated Form Amount Country Financing mode (million)

Capital fmancing 1991 Global Depository receipt $US 100 n.a

1992 Convertible bond $US 100 n.a 1993 Global

Depository receipt $US 150 n.a 1994 Global

Depository receipt $US 100 n.a

Overseas bank 1994 Offshore loan $US42 Chohung London loans

1994 Offshore loan $US40 Chohung Singapore

1994 Offshore loan $US 100 KDBTokyo 1994 Offshore loan $US45 Hanil New York 1995 Offshore loan $US 150 KDBTokyo 1995 Offshore loan $US 278 KDBTokyo 1995 Offshore loan DM46 KDBTokyo

Corporate bonds 1992 Straight bond $US 30 n.a 1992 Yankee bond $US 200 USA 1993 Floating rate note $US 45 n.a 1994 Floating rate note $US 300 n.a 1994 YenFRN YEN20 n.a

(DRAGON) 1995 DMbond DM300 Germany

Source: Compiled from SEC (1995a)

Finally, Samsung's advanced DRAM process technology assisted in the development of

highly sophisticated chips, which are core components for next generation products such

as those used in multimedia sector. These include: ASICs, ROM, RAM, TFT-LCD

(April 1992); 1 megabyte page EEP ROM (June 1992); 4M pseudo SRAM (August

1992); 245 megabyte HDD (November 1992); 4M SRAM; 16M nand flash memory

and modem IC (November 1993); and 245 megabyte HDD (November 1992); gate

array (January 1993)14 •

14 For components used for audio and video products, microelectronic chips were developed by Samsung R&D laboratories between 1992 to 1993. These are: 8-bit microcomputer (February 1992); the stereo decoder IC (May 1992); the LDP chip set used both for PAL and NTSC types, three core chips for audio and video products, and the CDP chip set (August 1993); the high frequency chip set

117

On the other hand, it appears that success with DRAM did not improve Samsung's non­

production technological capabilities such as design and product development,

international marketing and international management (supported by strategic marketing

with own brand name products), each of which is in the nature of a 'difficult-to imitate

capability', requiring continuous innovation and the investment of time in the process.

Nevertheless, SEC export sales grew steadily from $US 4.45 billion in 1992, to $US

6.78 billion in 1993, and to $US 9.98 billion in 1994 (SEC 1995b) due mainly to the

increase in DRAM exports. Although SEC's export growth doubled during 1992-94,

performance in manufacture of end products for consumer and industrial electronics was

very low.

Figure 5.2 and Table 5.15 indicate two important points. Firstly, Samsung's sales

growth during the first half of 1993-94 was the lowest among the three leading Korean

electronics companies during the first half of 1993-94, amounting to only 2.7 per cent

compared with 18 per cent (Goldstar) and 28.6 per cent (Daewoo). Goldstar's sales

growth far exceeded that of Samsung' s. This is in contrast to the fact that SEC had

outperformed Goldstar from the mid-1980s. Secondly, Goldstar's competitiveness had

improved since 1991, possibly because of a relatively favorable external environment,

that is, the gradual depreciation of the Korean won and yen appreciation which have

occurred since 1990. However, this was not the case for Samsung. Samsung's

weakness in major product change capability continued to be a constraint in achieving a

better performance of end products both in the domestic and the export markets in the

1990s.

Table 5.16 shows some evidence of improvement in Samsung's product innovation

capability. Some products maintained their competitive advantage in export markets,

and seized a considerable market share in the Europe and America. However, this

(September 1993); the CD-ROM IC (May 1993). In addition to these, there were also a number of VSLI level chips: the TDX chip and the video colour printer IC (January 1992); automatic answering machine chips (March 1992); the electricity-saving IC (August 1992); and the thinking-image processor (TIP) for facsimile machines (March 1993).

118

competitive advantage was not effective in Southeast Asia and China where Japanese

firms had dominated the market since the 1970s.

Table 5.15 Sales of major consumer electronics products, 1993-94 (billion won)

SEC Golds tar Daewoo 94(A) 93(B) (A-B) 94(A) 93(B) (A-B) 94(A) 93(B) (A-B)

JB% /B% /B%

CTV Domestic 130.2 110.0 18.3 141.7 129.8 9.1 60.8 53.6 13.4 Export 245.3 258.2 -4.9 268.9 214.4 25.4 278.6 187.0 48.9

VCR Domestic 55.6 55.2 0.7 56.7 50.4 12.5 22.1 20.9 5.7 Export 232.4 210.6 10.3 244.5 188.7 29.5 148.3 125.3 18.3

REF Domestic 170.7 174.8 -2.3 189.0 177.1 6.7 80.7 47.5 69.8 Export 50.2 46.8 7.2 57.5 46.1 24.7 49.8 40.3 23.5

W/M Domestic 93.2 99.0 -5.8 99.4 106.4 -6.5 58.1 65.4 -11.1 Export 14.8 12.2 21.3 20.3 13.4 49.2 23.4 10.2 129.4

MWO Domestic 29.6 23.1 28.1 32.7 23.3 40.3 17.7 17.9 -1.1 Export 113.9 115.9 -1.7 99.2 75.7 31.0 74.4 64.9 15.1

Sub-total Domestic 479.3 462.1 3.7 519.5 487.0 6.6 239.4 205.3 16.6 Export 656.6 643.7 2.0 690.4 538.5 28.2 574.5 427.4 34.4

Total 1,135.9 1,105.8 2.7 1209.9 1025.5 18.0 813.9 632.7 28.6

Note: 1. The figure represents three firms' performance between the first half of 1993 and the first half of 1994.

2. REF (Refrigerators); W/M (washing machines); MWO (microwave ovens).

Source: The New Media (October 1994)

Technological capabilities and international production

In the 1990s, the number of Samsung foreign subsidiaries increased substantially

compared with the 1980s when international production was limited to the assembly of

end-products. As well as branching out into different kinds of foreign investment

activities, namely, component manufacturing, design laboratories, acquisitions of foreign

firms, purchasing and management offices, Samsung' s international operation expanded

into Asia, America, and Europe (Table 5.17).

It was in this period that China emerged as a particularly important location for

Samsung. This overseas expansion is classified as global networking or linkage of value

119

added activities. It differs from the defensive nature of Sarnsung's intemationalisation in

the 1970s and 1980s. Sarnsung's intemationalisation in this period has been closely

associated with the 1993 organisational reform under which Sarnsung pursued

globalisation and multi-faceted integration in response to growing global competition

and the emergence of regional economic blocs.

Table 5.16 Local market share of Samsung brand products, 1991-94

Product Country Market Share 1991-92 1993 1994

% rank % rank % rank Microwave ovens Spain 4.5 5 11.1 1 n.a n.a Microwave ovens Netherlands 16.0 2 24.2 1 n.a n.a Microwave ovens Chile 40.0 1 26.0 1 n.a n.a Facsimile machines UK 15.0 2 21.0 1 n.a 1 VCRs Spain 10.7 2 16.6 1 n.a 1 Codeless phones Sweden 20.0 23.0 1 n.a n.a Audios Spain, Germany n.a n.a n.a n.a n.a 1 CTVs Chile, Hungary, n.a n.a n.a n.a n.a 1

Peru, Denmark

Source: Dong-A llbo (March 211994) and author's interviews

Regional economic blocs and global competition

Regional economic blocs

One of the significant changes in the international market in 1990s was the emergence

of regional economic blocs. These include the EU in Europe; NAFI' A in America; and

ASEAN Free Trade Area (AFTA) in Asia In December 1991, the members of the EC

decided to establish the EU as a single integrated market in 1992. The EU includes four

large member countries (the United Kingdom, France, Italy, Germany) and other

countries which will be joined in a monetary and political union. Subsequently, NAFI'A

emerged as the organisation for regional economic cooperation between the United

States, Canada and Mexico. It was preceded by the US-Canada Free Trade Agreement.

Each regional bloc is designed to make it harder for outsider firms (non-member firms)

to compete in the regional market. As a means of protecting insider fmns, the provisions

of each regional bloc provide for the phased elimination of tariffs and quotas among

120

member countries. In NAFT A, Mexico has more easily gained access to the US market

as a result of recent increases in the quotas for textiles and steel, generous tariff

preferences under the GSP and in-bound duty draw-back programs. Approximately 60

per cent of Mexican exports already enter the United States duty free. Effective tariff

rates are generally low: for example, the average tariff on textiles and apparel imports

from Mexico is in the 6 to 8 per cent range. In addition, most quotas are not binding,

although some important product categories are restricted (Schott and Hufbauer 1994:

290).

Table 5.17 Samsung's foreign production subsidiaries in the 1990s

Year Country Investors Products Share(%)

1990 Malaysia SED Colour picture tubes 100 Thailand SEM Tuners, FBTs, DYs, etc 100 Portugal SEM TV, VCR components 100 China (Dongguan) SEM Speakers, decks, keyboards 100

1991 Slovakia SEC Refrigerators 44.8 Indonesia SEC CDPs, VCRs 80

1992 China (Huizhou) SEC Audios 90 China (Tianjin) sc Rotary transformers 100 Malaysia sc Colour glass bulbs 100

1993 China (Shandong) SEC TDXs 46 US (Silicon Valley) SEC Semiconductors 100 China (Tianjin) SEC VCRs 50 Germany SEM Colour picture tubes 100 Germany sc Glass bulbs 100

1994 Portugal SEC Semiconductors 38

1995 China (Suzhou) SEC Semiconductors 100 China (Suzhou) SEC Microwave ovens, refrigerators, 80

washing machines Vietnam SEC CTV s, refrigerators 70 Malaysia SEC Computer monitors, PBAs 100 India SEC CTVs, 51 Brazil SEC CTVs, VCRs 100 UK (Wynyard) SEC Microwave ovens, computer 100

monitors Source: SEC (1995a; 1995b) and Jun and Kang (1994)

121

Regional blocs also tend to increase local content requirements. After NAFT A comes

into force, the overall local content requirement for automotive products will increase to

levels much higher than the previous 50 per cent requirement under the Canada-US

Free Trade Agreement (Schott and Hufbauer 1994 :292). The EU, as noted earlier,

increased local content requirements (40 per cent in 1989), extended dumping

investigations and VERs. Similarly, AFTA also provides for the phased elimination of

tariffs under the Common Effective Preferential Tariff (CEPT) observed by the member

countries.

Outsider firms, being particularly dependent on the global market, have to overcome the

trade barriers of these regional economic blocs. Foreign investment is a means of

gaining insider status. Japanese firms increased their FDI in the EC, North American

and Latin American regions because participation in these growing markets is

indispensable (Tejima 1994). This was in response to increases in voluntary export

restraints, dumping tariffs, and other trade regulations by host countries in the EU.

Japanese firms are also eager to strengthen their regional headquarters functions, to

expand their production bases and to produce higher value added products. Increasing

numbers of Japanese companies plan to establish research and development bases

overseas in an effort to develop products for local markets (Tejima 1994).

As Tachiki (1995) observes, Japanese firms have been shifting their market strategies

from export to international production under the pressure of global competition.

Korean electronics firms, like Japanese companies, lacked membership of those regional

economic blocs, and were in the same position as Japanese companies. The emergence

of regional economic blocs was a powerful driving force for Korean firms to undertake

foreign investment.

Liberalisation of Korea's electronics market

Liberalisation of the domestic market led global players to enter Korea, which had long

imposed barriers on the import of foreign electronics products. In 1989, import

restrictions on consumer electronics goods were removed, and from 1991 foreign retail

distribution outlets were allowed to be up to 670 square metres in size - far bigger

122

than the 32-45 square metres that local Korean outlets usually occupied (SEMM April

1991). By 1993 there was a plan to cut the average tariff rate to below 10 per cent for

all imported electronics goods (Bloom 1992).

The Korean electronics market was certainly affected by the increase in imported

products (Bloom 1992). In 1991 imported electronics goods accounted for 5 per cent of

the local market, but their share was soon expected to increase to 15 per cent (SEMM,

May 1991). Samsung (SEMM, April 1991) also estimated that 100,000 imported

camcorders were sold in 1990, which was three times the number sold by Korean

producers. This was a threat to Korean electronics firms, considering that Samsung,

Goldstar and Daewoo were competing to increase their market share by one or two per

cent per year.

In July 1993, Sony completed a market survey on entry into the Korean market, with the

intention of opening a sales outlet in 1993. Sharp also considered entering Korean

distribution channels. Thomson joined with Inkel to establish a new joint venture sales

subsidiary. Matsushita, Sanyo, Hitachi, Aiwa, Philips and Telefunken expanded their

service centres in Korea. Toshiba, Matsushita, Hitachi, Sanyo, GE and Philips planned

to establish their own sales outlets in Korea. Even Samsung doubted the security of its

position in the Korean market because of the inroads made by global players in Korea.

lnternationalisation process

There are three unique features of internationalisation by Samsung in the 1990s (1) an

increase in affiliated component subsidiaries, (2) the emergence of R&D seeking foreign

acquisition, and (3) regionally integrated production systems.

Samsung's affiliated components makers (SED, SEM and SC) moved into Asia where

end product makers, both SEC and Japanese firms, were already located or intended to

locate their production plants (Table 5.18 ). This is a kind of overseas linkage between

assembly and component manufacturing. In the AFTA region, SED set up a CPT plant

in Malaysia and SEM established a plant in Thailand: the Malaysia plant was able to

supply colour picture tubes to the Thailand-based plant which was manufacturing CTV s,

123

while the Thai plant delivered DYs to the Malaysia-based CPT plant, and FBTs and

tuners to the adjacent CTV plant. During 1992-93, Samsung Corning was further

engaged in foreign investment in Malaysia in order to supply colour glass bulbs to the

SED-run CPT plant nearby.

Table 5.18 Foreign investment by Samsung's component suppliers, 1995

America Europe Southeast China Asia

SEC Mexico UK, Turkey Thailand, Tianjin, (CTV, VCR, CDP, microwave Hungary, Indonesia, Huizhou, ovens, washing machines, Spain, Malaysia, Shandong, refrigerators, DRAMs etc) Czechoslova Suzhou

kia, Portugal

SED Mexico Germany Malaysia (CPT, CDT, electronic guns)

SEM Mexico Portugal Thailand Tianjin, (tuners, FBT, DY, speakers, decks, Guangdong cylinders, motors, key boards etc)

sc Germany Malaysia Tianjin (colour glass, rotary transformers etc)

Source: Company data

In China, Dongguan SEM and Tianjin SC were established. The former supplies its

components to the Huizhou-based SEC-run audio plant, while the latter delivers its

rotary transformers to Tianjin-SEM. In 1995, SED also decided to produce CRTs in

Shenzhen, possibly to be sold to TTSEC for the production of CTV s.

In the EU region, the Portugal-based component plant supplies the UK-based CTV plant

and the Spain-based VCR plant. The former was established in 1987 and the latter was

set up in 1989. In 1993 SED and SC acquired two foreign companies for the

production of cathode ray tubes and glass bulbs, both of which are based in Germany.

In the NAFT A area, SED and SEM recently started production of FBTs, tuners, DY s

and CRTs in Mexico. These components are being delivered to SEC-run subsidiaries in

Mexico and Brazil.

124

Samsung's intemationalisation is a strategic process of overseas linkage between

production and component manufacturing activities in response to the formation of the

regional economics blocs. International production by affiliated component

manufactures relies on the mature production capability which has been accumulated

through manufacturing of CRTs, glass bulbs, DYs, FBTs and tuners in the home

country.

Table 5.19 SEC's acquisition of foreign firms in the 1990s

Name of :finn

Array (US)

Harris Microwave Semiconductor (US) LUX(Japan)

Control Automation Inc. (US) ENTEL (Chile)

Integrated Telecom Technology (US) Integral (US)

AST Research

Year Scope and content

Apr. 1993 SEC acquires 20% of Array and establishes a cooperative arrangement in digital process chip technology used in multimedia products.

May. 1993 HMS specialises in gallium arsenide chips and is one of the world's leading makers of optical semiconductors.

May 1994 Acquisition (51%) of Japanese hi-:fi audio maker:

Jun. 1994

Sep. 1994

Dec. 1994

Jan. 1995

Feb. 1995

- LUX: development and sales - SEC: manufacturing and sales Acquisition (51%) ofthe CAD/CAM software technology company. Investment (15.1%) in one of the largest operators of telecommunications systems. Acquisition (100%) ofiTI, a specialist in ATN technology. Investment ( 4%) in shares in US based finn specialising in HDD technology; joint development of HDD products.

Investment (40.25%) in shares of US based computer company; broad range of commercial relationships including supply and pricing of critical components, joint product development, cross OEM -arrangements and cross­licensing of patents.

Source: SEC (1995a; 1995b)

R&D investment through foreign acquisition

In order to overcome 'access to technology constraints' and to offset the weakness of

technological capabilities, Samsung adopted a new strategy, of investing in R&D

125

through acquisition of firms (Table 5.19). Samsung acquired foreign firms, such as

Array and HMS in semiconductors; ENTEL and ITT in telecommunications; and Intel

and ASTin computer technology. In particular, SEC spent a huge amount on the

acqusition of AST, more than the net income it earned in 1992-93. SEC shares AST's

brand name, international marketing channels as well as securing captive customers of

DRAMs. At the same time, SEC set up overseas design centres: Osaka, San Fransisco

and Frankfurt (Table 5.20). It appears that this effort is to compensate for weaknesses in

design and product development, and also to strengthen global networking between

production, marketing and R&D activities through each regional trading bloc in EU and

NAFTA.

Multi-faceted integration

In organising international production, Samsung' s top management framed two

important strategies: globalisation and multi-faceted integration. This was done as a

Table 5. 20 SEC's overseas R & D facilities

Location Activity Year of establishment

Tokyo Product design 1987

Osaka Product design of audio and visual products 1991

Germany Product design of audio, visual products and 1992 home appliances

USA Design of consumer electronics products 1994

Source: SEC (1995a; 1995b)

means of strengthening its technological capabilities and to regain its competitive

advantage.

Samsung selected several strategic locations with integrated facilities including

production, marketing and R&D, regional management office and service facilities. The

newly established regional headquarters15 have facilitated the integration of the Samsung

15 In early 1995 SEC established five regional headquarters (RHQ): the American RHQ consisted of five sales subsidiaries, two production subsidiaries and four branch offices; the European RHQ with eight regional sales subsidiaries, five production subsidiaries and five branch offices; the Chinese RHQ, which has two sales subsidiaries, four production plants and four branch offices; the Southeast Asian

126

group's affiliated production facilities and the production support system. One common

feature is that integrated facilities are also segmented according to regional economic

blocs, for instance, there is one each in the EU and NAFT A and two in Southeast Asia

and China (Figure 5.3).

Tijuana, Mexico

The Tijuana complex covers a land area of 600,000 square metres, equivalent to a

quarter of the Samsung Suwon electronics complex. Samsung is scheduled to build

this complex in 1996, investing $US 500 million. The complex is expected to contain

foreign subsidiaries of SEC, SED, SEM, SC and Samsung Aerospace Industry,

producing end-products and components. These product items are CTVs, microwave

ovens, washing machines, cameras, CPTs, computer monitors, tuners, DY s, FBTs and

glass bulbs.

Wynyard, the United Kingdom

This integrated complex is located in the northern England with an area of 750,000

square meters and is expected to be completed by 1999. Samsung plans to invest a total

of $US 720 million in the complex which will produce end-products and components

such as microwave ovens, personal computers, facsimile machines, cordless phones,

computer monitors and DRAMs. For the first stage, Samsung drew up a plan to

produce computer monitors and microwave ovens from September 1995, and to set up

an R&D centre and training facilities within the complex.

Sriracha, Thailand

Thai Samsung Electronics has been producing CTVs and VCRs in Sri Racha since 1989.

In August 1995 it established a new washing machine assembly line at the same

complex. Samsung plans to invest $US 10 million in the complex, which is capable of

producing 200,000 washing machines per year. Furthermore, Thai Samsung Electronics

intends to build an integrated complex to produce air conditioners and refrigerators,

with an additional investment of $US 20 million. This complex is expected to produce

RHQ, with two sales subsidiaries, four offshore production plants and eight branch offices; and the Japanese RHQ, consisting of one sales subsidiary and one branch office (SEC 1995a).

127

$US 100 million worth of goods annually and will employ 10,000 workers when the

integrated production system is fully operational. Samsung has announced that the

Thai complex will expand as AFT A goes into effect.

Figure 5.3 Samsung's regionally integrated production networks

EU region NAFTAregion

Asia

Suzhou, China

Construction of this complex began in November 1995. It was designed to produce

950,000 microwave ovens, 750,000 refrigerators, 300,000 air conditioners, and 300,000

washing machines per annum. By 1999, the plant will have turned out a total of 6 million

128

product units. The frrst stage of investment is $US 42 million and total investment over

the next five years will be $US 141 million.

Summary

In the 1990s, Samsung's way of accumulating and developing its technological

capabilities has changed. Strategic alliances became one of the importance sources of

learning and improving technological capabilities, which include joint development,

cross-licensing and joint production. To increase its strategic alliances, Samsung

exchanged its advanced DRAM technology for complementary frontier technology. In

addition, Samsung endeavoured to upgrade its major product change capability by the

establishment of design and development centres, and to improve its international

management capability by training its employees overseas. This is because Samsung

believed that its low performance in international production derived from the

weaknesses in these two areas.

The 1993 organisational reform saw significant improvement in Samsung's linkage

capability and this resulted in cooperative interaction between affiliated frrms. In

addition, advanced production capability of component manufacturing became a source

of SEC's competitiveness. As its foreign operations increased, its international

management capability gradually improved. In contrast, major product change

capability (of consumer and industrial end products) was far behind established MNCs

because creative design was not available in Samsung.

In response to regional economic blocs and top management's strong commitment to

globalisation and multi-faceted integration, the process of internationalisation

accelerated after 1993. Internationalisation, which became a feature of Samsung's

strategic behaviour, was a means of regaining its international competitive advantage. It

allowed a quick response to the rapidly changing global competitive environment, and

also combined and utilised its own resources and technological capabilities at the right

time. Thus, internal and external forces gave birth to Samsung's regionally integrated

production system.

129

Samsung's overseas multi-faced integration production networks also represent as

efforts to strengthen temporary competitive advantage in production capability, by

combining other resources and capabilities to sustain its competitiveness. In a sense, the

character of its intemationalisation is an attempt to build a 'difficult-to-imitate

technological capability'.

130

6 International production networks in the ASEAN region

The early expansion of international production activities in Southeast Asia was

constrained by weaknesses in Samsung's technological capabilities during the 1970s and

1980s. These weaknesses were in the areas of design and product development,

strategic marketing, and linkages with affiliated component manufacturers. Together

they inhibited the process of Samsung's internationalisation.

Samsung's poor performance in international production in the United States and the

United Kingdom in the late 1980s (see Chapter 4) discouraged most of its business units

from initiating foreign investment Affiliated firms were concerned about their own

needs and interests and lacked close relationships with other affiliates due partly to

inappropriate operation of the 'profit centre' system. To overcome difficulties caused

by tardy internationalisation, Samsung introduced a strategy of 'globalisation' in 1993,

driven by senior management's strong commitment to the 'new management'

movement

This chapter comprises six parts: (1) an overview of international production activities in

Southeast Asia; (2) a discussion of external factors motivating Samsung's international

production in the ASEAN region; (3) a description of key value-added activities of

Samsung's foreign subsidiaries; (4) a review of internationalisation of R&D by

established MNCs; (5) an assessment of technological capabilities and growth of

subsidiaries under global competition; and (6) a summary.

Overview of production networks in the ASEAN region

In 1985 Samsung first engaged in international production in Southeast Asia in

cooperation with Siong, a Malaysia-based company, which assembled Samsung's CTVs

for distribution to the US market (SEC 1989: 433). Samsung's foreign investment in

131

Southeast Asia took place about two decades later than that of its Japanese

counterparts.

Table 6.1 Samsung Electronics' manufacturing subsidiaries in Southeast Asia

Location Name of foreign Year of Samsung Products affiliates establishment & ownership

(operation) (%) Thailand Thai-Samsung 1988 51 CTVs, video cassette

Electronics Co., Ltd (1989) players and washing (TSE) machines. Refrigerators

will be produced in the near future.

Thailand Samsung Electro- 1990 100 DYs, FBTs, Tuners, oil Mechanics-Thailand (1993) condensers; DYs and Co., Ltd (SEM FBTs Thailand)

Indonesia PT Samsung Maspion 1990 50 Refrigerators Indonesia (SMI) (1991)

Indonesia PT Samsung Metrodata August 1991 80 VCRs and cassette disc Electronics (SME) (1992) players; CTVs have been

produced since 1995 Malaysia Samsung Electronics January 1991 100 Microwave ovens

Malaysia Sdn., Bhd (1991) (SEMA)

Malaysia (Samsung Electron- 1991 100 Colour picture tubes, Devices-Malaysia) (1992) computer monitors and SED Malaysia electronic p;uns

Malaysia Samsung Corning February 1992 100 Glass bulbs for colour Malaysia (SC (May 1993) picture tubes Malaysia)

Malaysia Samsung Electronics 1995 100 Computer monitors Display Malaysia Co., Ltd

Vietnam Samsung Vina 1995 70 CTVs Electronics

India Samsung Electronics 1995 51 CTVs India

Source: SEC (1995a; 1995b)

In 1987, SEC set up a Bangkok-based branch office and in 1988, the first production

subsidiary in Southeast Asia, Thai Samsung Electronics Co. was established. Since then

several affiliated companies have invested in the region. SEC-run subsidiaries

produce CTV s, VCRs, refrigerators and cassette disc players, while subsidiaries of

SED, SEM and SC produce CRTs, tuners, FBTs and glass bulbs. After 1992, Samsung

132

Figure 6.1 Samsung's production network in Southeast Asia

M3

~ Flow of com:rx:ments

.--i • •• : Plants under construction

Q Component subsidiaries

D End-product subsidiaries

M1: SED Malaysia (CPTs, 1991)

Q 1

1 Q

M2: SC Malaysia (CRT glass bulbs, 1992) M3: SEMA (microwave ovens, 1991) M4: SEDM (computer monitors, 1995) T1: TSE (CTVs, VCRs and washing machines, 1988) T2: SEM Thailand (CTV and VCR components, 1990) Il: SMI (refrigerators, 1989) 12: SME (VCRs and audio products, 1991)

, ..... .. . . --~ v : ..........

r • • .....

. . . . -~ . Ind: ...........

I2

I1

V: Samsung Vietnam Electronics (CTVs and refrigerators, 1995) Ind: Samsung Electronics India (CTVs, 1995)

Notes: 1. M = Malaysia, T= Thailand, I = Indonesia. V: Vietnam, Ind: India

Sources: SEC (1989, 1995a, 1995b); SED (1990); SC (1994); SMM (January 1988-December 1994); SEMM (January 1990-December 1994) and the author's interviews undertaken during July 1995

133

started to form regional production networks in Southeast Asia, linking end-product

subsidiaries with affiliated component subsidiaries. In 1989 TSE started CTV

production, and in 1992 SED Malaysia commenced production of CRTs for CTVs. In

1993, SEM Thailand began production of tuners, FBTs and DYs, core components for

the manufacture of CTV s. At the same time, SC Malaysia made glass bulbs for supply to

SED Malaysia (see Figure 6.1).

Establishing integrated production systems

As Samsung' s international production activities expanded, it tried to establish a

production support system in the region, in line with its strategy for globalisation and

integration. In 1990 SEC set up a Singapore-based international purchasing office which

bought low cost components for the Korean plants, and later supplied the components

to affiliated subsidiaries in Southeast Asia In early 1995 Samsung regional headquarters

was established in Singapore, managing and coordinating Samsung' s affiliated

subsidiaries located in the ASEAN region.

Investment increased among the existing subsidiaries, particularly after 1995. TSE in

Thailand took over its local marketing subsidiary which had been controlled and

managed by the joint venture partner, and installed a new washing machine assembly

line in 1995. SME in Indonesia built a new factory producing CTVs and set up a new

sales subsidiary for local distribution of CTVs. By the end of 1995, production networks

had spread to Thailand, Malaysia, Indonesia, Singapore, Vietnam and India.

The operations of Samsung's subsidiaries in Southeast Asia

Thai Samsung Electronics (TSE)

In 1988 SEC established a CTV manufacturing joint venture, Thai Samsung Electronics

(TSE), in cooperation with Saha Pathana, a Thai consumer goods distributor (SMM

March 1989). Before the establishment of TSE, SEC had experience of international

operations through two overseas manufacturing plants, one in Portugal and the other in

the United States. In 1995, TSE added a washing machine assembly line with an

134

investment of $US 2 million and was also scheduled to equip refrigerator assembly lines

involving an investment of $US 12 million.

The production of TSE's CTV sets grew slowly: 100,000 units in 1990; 200,000 in

1991; 300,000 in 1992; and 400,000 in 1993. During the first three years of operations,

TSE had to import a large proportion of components from SEC Korea, where the cost

of imported components was usually 10 to 15 per cent higher than locally or regionally

sourced ones. By 1993 TSE was able to purchase CRTs made by SED Malaysia. The

CRT is an important CTV component which accounts for over 40 per cent of the

production cost of a television set. It also purchased tuners and FBTs made by SEM

Thailand. Due to the contribution of its affiliated component subsidiaries, TSE' s local

content ratio increased to 65 per cent in 1993, but most of the ICs used for printed

circuit boards were imported from Korea and Japan.

TSE' s twin objectives were to distribute CTV s to the global market while gradually

breaking into the local market. TSE' s intention was to distribute 50 per cent of its total

production to the local market, and to export the rest to the United States and the EC

through SEC's international marketing subsidiaries (SEC 1989: 626). TSE's OEM

production only accounted for about five per cent of total exports in 1995. In July

1995, TSE's CTVs were exported to the United States, Australia and Japan.

With a relatively small local market, Saha Pathana distributed CTV s and VCRs until the

end of 1994. The local market share had only increased incrementally to seven per cent

(video cassette players) and ten per cent (CTV sets) by July 1995. After the 'new

management' movement was launched in 1993, TSE placed more importance on the

expansion of local and regional markets. In December 1994, TSE decided to take over

the local sales operation which had been carried out by its joint venture partner. In

addition, SEC Korea decided to provide TSE with financial assistance for the promotion

of the Samsung brand in local and regional markets. This change was due to the

expansion of the local market and plans to extend into the new regional markets of

Myanmar, Laos, Bangladesh and Sri Lanka.

135

As of mid 1995, no design and development activity was carried out within TSE.

Instead, TSE worked with SEC-Korea whenever minor modification of previous

product models was necessary. For this product adaptation for the local market,

engineers from SEC-Korea visited TSE at irregular intervals to discuss local customers'

preferences. Samsung's approach to product innovation differs from that of

Matsushita, whose subsidiary in Malaysia conducts independent design and development

activities.

PT Samsung Maspion Indonesia (SMI)

In 1990 SEC established two foreign production subsidiaries, both of which targeted the

local market. One was in Czechoslovakia and the other in Surabaya, Indonesia. SMI, a

50:50 joint venture, was established in cooperation with Maspion in Indonesia, with a

capacity of 60,000 sets per year. The need for international production of refrigerators

was not as strong as that for CTV s, VCRs and microwave ovens. SEC claims that this

foreign investment was motivated by its market research which suggested that local

market demand had increased and its Japanese counterparts' profits in Indonesia were

growing consistently (SMM March 1989).

During the first three years of operations, SMI's production grew very slowly, utilising

less than 30 per cent of its initial production capacity. This was because local market

share did not increase as much as expected. Eventually, SEC Korea's marketing

department distributed SMI-made refrigerators to the global market and SMI's

Indonesian partner, Maspion, concentrated on the local market. As of July 1995, SMI

did not include a design and development function. To intensify SMI's product

innovation and development, SEC Korea appointed a new senior executive manager,

with experience in the design and development of refrigerators in Korea.

Samsung Electronics Malaysia (SEMA)

During the late 1980s, SEC gained experience m the international production of

microwave ovens in the United Kingdom. The UK-based plant was later replaced by

CTV assembly facilities. In order to offset Samsung's declining home-based locational

advantage, SEC moved to Malaysia to compete with its Japanese counterparts, Sharp

(in Thailand) and Sanyo (in Singapore). Malaysia provided SEC with cheaper

136

components and generalised system of preferences (GSP), as the Korea-based plant had

not been competitive in exporting microwave ovens to the EC market since January

1988 due to the EC's abolition of GSP. In January 1991 SEMA, a wholly-owned

subsidiary, was incorporated to oversee the export of all microwave ovens. To make

SEMA's operations effective, SEC allied with three small and medium-sized Korean

component suppliers.

SEMA's production increased to 300,000 units in 1991, 700,000 in 1992 and 800,000 in

1993 (SEMM January 1993), and reached over 1 million sets in 1994. Its production

growth was high relative to TSE and SMI. SEMA sent 60 to 70 per cent of its

supervisors to SEC Korea for three to five months' training. By July 1995, only 10 to

20 per cent of the overseas-trained employees remained with SEMA, while the rest had

left the company. More recently, SEMA has trained local supervisors in problem­

solving techniques, encouraging them to communicate directly with SEC Korea. A

Process Innovation Team often visits SEMA to introduce innovations to the production

system, transferring up-to-date knowledge from SEC Korea. Samsung does not exactly

transplant its Korean system, but modifies it for the local situation. SEMA's production

system is different from that in Korea in two main ways. One is that SEC Korea uses

subcontractors for some of the assembly process, whereas SEMA does not. The other

is that components used by SEMA are different from those in SEC Korea. In an

interview (10 July 1995), one of the Korean managers said that modification of the

production process is required because a considerable proportion of components is

sourced from local or regional suppliers.

Initially, the proportion of SEMA's exports to Europe was high, but in 1995 most

products were distributed to the United States and Australia due to the EU's increasing

protectionism. Exports to the EU are expected to cease from early 1996 as aUK-based

subsidiary is scheduled to produce the products formerly exported by SEMA. In the

beginning, SEMA's OEM ratio reached 30 per cent and this increased to about 45 per

cent by mid 1995. As the local and regional markets became more important, SEMA

intended to sell microwave ovens locally, and considered the manufacture of

magnetrons as well.

137

The continuous evolution of the global market environment has required SEMA to

develop a product delivery system. For instance, General Electric (GE), which sells

nearly 50 per cent of SEMA-made microwave ovens in the United States, requested that

SEC ship multiple models in small lots. The reason behind this request was that GE

intended to respond flexibly to changing customers' tastes by carrying a number of

model products and to reduce its logistic costs by maintaining the lowest possible

warehouse stock. In spite of SEMA's cost advantage as a result of GSP, GE preferred

products supplied by SEC Korea because SEMA was unable to meet GE's

requirements.

To meet GE's requirements, SEMA upgraded its production support systems including

its logistic, marketing and component sourcing by July 1995. The new system requires

close cooperation between the different business functions within SEMA. One of its

operating managers in the purchasing department commented on the importance of close

cooperation between the different business functions within the subsidiary (author's

interview, 10 July 1995).

In order to secure core components such as high voltage transformers, doors and other

metallic press materials, SEMA allied with three component manufacturers (Dongyang

Junwon, Y ounglim Junja and Daeil Junja) and they set up near the SEMA plant. These

moves helped SEMA to increase its local component sourcing. By mid 1995, no design

and product development function had been established within or near SEMA. This was

partly because SEMA was oriented towards the global market, and design and product

development activity was entirely initiated by SEC Korea.

PT Samsung Metrodata Electronics (SME)

In August 1991, SEC established PT Samsung Metrodata Indonesia, an 80:20 joint

venture with Metrodata Indonesia, SEC's former distributor. Samsung invested $US 8

million and Metrodata invested $US 2 million in the production of VCRs and compact

disc players. In early 1994, SME established a PCB assembly line both for its own use

and for the Spain-based VCR subsidiary (SESA). In 1995 a new CTV plant was built

138

and started production aimed particularly at the local market. The establishment of the

new CTV plant was inspired by Golds tar's successful operation in Indonesia, where it

had taken about 20 per cent of the local CTV market share. Subsequently, SEC also set

up a new local marketing subsidiary for the distribution of CTV s in cooperation with

Metrodata, a 52:48 joint venture. The initial VCR production capacity was 600,000

units per year. Production increased gradually and the plant utilisation ratio reached 80

per cent. SME's performance does not match that of Sanyo, which uses its plant in

Indonesia to capacity. Unlike SME, Sanyo's VCR plant operates two or three shifts and

exhibits superior international management capability.

In mid 1995, the production system at SME differed from SEC Korea. SME used more

labour than the Korea-based plant: SME had 28 workers per production line compared

with 16 workers at SEC Korea. There were also slight differences in productivity: in

July 1995 SME produced 160 VCRs per production line while SEC Korea produced

180. Information from interviews (14 July 1995) indicates that despite using the same

machinery, nearly 20 per cent of SEC Korea's production system had to be modified for

use in Indonesia. At the start of the operation, all local production line workers were

sent to Korea for training. Machine operators continue to be sent to Korea for regular

training periods from 40 days to 3 months. In addition, instructors from Korea come to

train local workers whenever a new product model is introduced in SME.

In 1992 SME's local content ratio was low: 15 per cent for audio components and only

five per cent for VCR components. By the end of 1994, the local content ratio of VCRs

had increased to 35 per cent and there was a further increase to 45 per cent by July

1995. This is a bit lower than that of the China-based VCR subsidiary (TSEC), whose

local content ratio reached 50 per cent after less than two years' operation. SEM does

not produce VCR core components such as VCR drums, heads, and related motor

components in Southeast Asia. Components are mostly imported from SEC Korea and

the Singapore-based purchasing office. As of July 1995, VCR drums, heads, and motors

have not been directly supplied from China, where Tianjin SEM produces VCR

components and ships them back to Korea. Instead, there are close links between the

Singapore-based purchasing office and SME. A computerised on-line system

139

contributed to the ability of SME and the Singapore office to manage component

purchasing and delivery properly.

SME's VCRs were exported to the United States, Europe, Asia and the Middle East,

while compact disc players were exported mostly to Europe and Asia. According to

interviews conducted by the author (6 July 1995), about 40 to 50 per cent of the total

VCR production was sold to GE, Thompson and RCA under the OEM arrangement,

whereas the rest was distributed directly to SEC's own marketing channels under the

Samsung brand. SEC had a long-term relationship (over ten years) with GE and RCA in

VCR transactions (Domicity 1988). From early 1995, SME started to distribute CTVs

to the Indonesian market.

Like SEMA, SME's design and development activities were entirely dependent on SEC

Korea because all VCR and CDP products were exported to the global market. Design

and development became increasingly important from 1995 when CTV products began

to be distributed on the local market. SME planned to coordinate with SEC Korea's

design and development department for minor modification of existing product models.

Samsung Electro-Mechanics, Thailand (SEM Thailand)

In November 1990 SEM invested $US 25 million in its wholly-owned subsidiary,

Samsung Electro-Mechanics Thailand Co. The subsidiary began production in 1993,

producing core components for CTV s, VCRs and audio products such as tuners, DY s

and FBTs (SMM September 1989). SEM Thailand substantially increased its monthly

production capacity during 1993-95: from 80,000 to 300,000 tuners; from 130,000 to

360,000 DYs; from 160,000 to 540,000 FBTs; and from 200,000 to 700,000 high

voltage condensers.

SEM Thailand has grown substantially over the past three years (Table 6.2). It also

started to produce tuners, DYs, and FBTs to be used for computer monitors. In

addition to SEM' s initial investment of $US 25 million, SEM Thailand has

continuously increased its capital investment since 1993: $US 9.7 million in 1994; $US

24 million in 1995; and $US 8.2 million in 1996 (see Table 6.3). Due to intensive

140

training of local employees, the defect ratio of SEM Thailand in 1995 is similar to that in

Korea. SEM Thailand sent key members of production lines to Korea for three months'

training, and Korean technical instructors were also dispatched to Thailand to train local

employees. Sixty employees in 1993 and another 60 in 1994 were sent to Korea for

training.

Table 6.2 Production by product line: SEM Thailand (thousand units)

Product

Tuners Diode yokes FBTs High voltage capacitors

Source: Author's interview, 4 July 1995

1993

200,000 256,000 462,000 581,000

1994 1995

1,349,000 4,431,000 1,800,000 3,159,000 2,957,000 5,411,000 4,250,000 7,152,000

In July 1995, SEM Thailand supplied TSE with only about ten per cent of its total

products, while about 80 per cent was distributed to non-Samsung buyers in Southeast

Asia. Of these, 80-90 per cent of components was dispatched to Japanese manufacturers

such as NEC, Orion, Toshiba and Sharp. SEM Thailand delivered components to two

affiliates in ASEAN countries, the Malaysia-based microwave oven plant (SEMA), and

an Indonesia-based affiliate, PT Samsung Metrodata (SME).

Table 6.3 SEM Thailand's additional investment plan (thousand $US)

Product 1993 1994 1995 1996

Tuners 2,195 3,024 4,316 3,300 Diode yokes 1,033 2,100 3,932 1,311 FBTs 3,677 3,200 1,018 2,500 High voltage capacitors 2,258 1,200 2,589 133 Others 12,166 231 12,185 1,000 Total 21,329 9,755 24,040 8,244

Source: Author's interview, 4 July 1995

Samsung Electron-Devices Co., Ltd, Malaysia (SED Malaysia)

In 1991 SED Malaysia, Samsung's first foreign investment project, was set up with an

annual capacity of 1.7 million CRTs. In 1993 SED Malaysia expanded its production

141

capacity as its sales grew. It is claimed that the increase in production was partly due to

the high quality of its CRTs (SEMM October 1993). In October 1993, SED Malaysia's

CRT production capacity doubled to 3.4 million units, after the updating and automating

of the existing plant. This expansion induced SC to locate its glass bulb plant in Malaysia

(SC 1994: 565). SED's aim was to meet the demand of Japanese CTV makers

operating in Malaysia and Singapore. SED Malaysia expanded its production capacity to

6.5 million units by 1995, and it made a profit after only six months' operation. Initially,

less than 20 per cent of SED Malaysia's CRTs was sent to TSE while the rest was

delivered to non-Samsung manufacturers such as Sanyo, Funai, PTI, Thomson and other

companies1 • Long-term relationships established with Japanese TV manufacturers since

the mid 1980s have provided a strong impetus for SED to move into Malaysia where a

number of Japanese subsidiaries are located.

Figure 6.2 Trend of sales destination of CPI's and electronic guns

1992 1993 1994 1995 Malaysia .;:7 .# "'=' Singapore .;:7 ~ .# Indonesia .# ~ ~

Thailand ~ ~ ~

ASEANtotal .;:7 ~ ~

China "'=' ~ ~

Asia Total ~ ~ ~

Europe total .# .# .#

America Total n.a .# .#

Note: The arrows indicate the trend of an increase or decrease of sales to countries or regions, compared with the previous year. The trend in 1995 is based on forecasts by SED Malaysia.

Source: Author's interview, 6 July 1995

In July 1995, SED Malaysia sold nearly 90 per cent of its CRTs to non-Samsung buyers,

an increase of 80 per cent on the 1992 figure. At the beginning of SED Malaysia's

operation, its CRTs were sold to ASEAN countries and China, but the distribution of

sales to these regions gradually decreased and reached about 60 per cent in 1995.

However, ASEAN was the major market for SED Malaysia, with 70 per cent of sales in

1 This information is based on interviews undertaken in July 1995; see also Jun Yongwook and Sungyoon Kang (1994: 15-21).

142

1992 and 50 per cent in 1995. As SED Malaysia increased production, its dependence

on ASEAN gradually declined, while sales to NAFTA and the EU rose steadily.

In 1993, no CRTs were exported to NAFTA and the EU, but by 1995, SED Malaysia

distributed about 25 per cent of its total production to these regions, where SEC-run

CTV subsidiaries were operating in the United Kingdom and Mexico. Matsushita was

the biggest Japanese buyer. The supply of CRTs to the leading four Japanese

subsidiaries of Matsushita, Sanyo, Funai and Sharp increased dramatically. Sales to

these companies rose more than tenfold from about 150,000 units in 1992 to nearly

2,000,000 units in 1995.

SED was the first Korean CRT producer in Southeast Asia, although others are

expected to produce the same product items as Samsung's subsidiaries in the region.

Competition among Korean subsidiaries in Southeast Asia in the production of

components is unavoidable. It is expected that exports to NAFT A and the EU will

decrease when SED's CRT plant in Mexico begins full operations. Similarly, exports

to China will decrease when SED's Shezhen-based plant begins operations.

Samsung Corning, Malaysia (SC Malaysia)

SC Malaysia, which was established after SEM Malaysia, was SC's first FDI project. To

reduce the risk, SC proposed that Asahi Glass set up a joint venture company in

Malaysia, but Asahi Glass decided not to go ahead with the project (SC 1994). SC

eventually decided to build the plant by itself, investing $US 25 million in the venture. In

February 1992 Corning Glass Works of the United States, the joint venture partner in

Samsung Corning, approved the project and SC Malaysia started production in May

1993.

The glass bulb assembly plant was built in Negeri Sembilan, the industrial complex

where SED Malaysia was located. Initial production capacity of the plant was 2.5

million CRT glass bulbs. SC's investment decision was determined by the fact that SED

Malaysia planned to expand its production to 3.4 million by 1993. In addition, SC

143

forecast that other Korean CPT manufacturers such as Orion and Goldstar would move

into Southeast Asia in the near future.

SC Malaysia extended its product lines from 14 inch glass bulbs to 20 and 21 inch glass

bulbs. It also plans to introduce more sophisticated processes and build a new glass

fusion plant (SC 1994:316). The products of the new plants will be exported to

Vietnam, where an Orion CRT plane to produce colour picture tubes and black and

white CRTs is under construction (SC 1994: 561); and to Indonesia, where Orion and

Goldstar are planning to build CRT plants. SC Malaysia planned to expand its

production capacity to 3.6 million units by 1995, investing an additional $US 200 million

(SEMM August 1992). The high growth of CPT production by SED Malaysia

motivated SC Malaysia to expand its capacity. Further expansion is anticipated when

the new Orion and Golds tar CRT plants in Vietnam and Indonesia start production.

SC was the first of the Korean glass-bulb producers such as Goldstar and Orion to move

to Southeast Asia, but it was behind Japanese makers such as Asahi and NEG. Before

operations started, SC Malaysia sent local technicians to Korea for training. In August

1992, five Malaysian students who had graduated from Korean colleges were trained in

Samsung's Suwon Factory in Korea and subsequently, in December 1992, seven

Malaysian technicians were trained in Korea. In January 1993, the fifteen technicians

working in the production department of SC-Malaysia were dispatched to Korea for

training (SC 1994:315).

External factors motivating international production

A key feature of Samsung 's international production in ASEAN is the defensive nature

of its strategic move into the region which was strongly influenced by changes in the

external environment. This is similar to the pattern of Samsung' s foreign investment in

2 In January 1993 Orion Hanel Picture Tube Co Ltd was incorporated in Vietnam with a production capacity of one million colour picture tubes and 600,000 black and white CRTs. Production was scheduled to start in December 1995. Goldstar also plans to set up a colour CRT plant in China (EIAK 1994).

144

the United States and Europe during the mid 1980s. A number of changes in the

external environment motivated Samsung's foreign investment in Southeast Asia from

the late 1980s to the mid 1990s.

Cost factors and &follow-the-leader,

From 1986, two developments affecting home-based production were the appreciation

of the Korean won and the globalisation of Japanese electronics firms. The won

appreciated 30 per cent during 1986-88 from 890 won to the US dollar at the beginning

of 1986 to 684 at the end of December 1988 (Domicity 1988). As a result, the home

base locational advantage decreased drastically. Samsung had to accept a 30 per cent

drop in revenue or raise the price of its export products. Given that the OEM margin

was about three per cent of the export price3 , Samsung's profitability declined rapidly,

particularly during 1989-90 (see Figure 5.1 in Chapter 5). This was despite the fact that

losses incurred in the export market were offset by profits in the highly protected

domestic market (see Bloom 1992: 104-106). Of the affiliated electronics companies,

SEC faced the most severe cost pressures. Consumer electronics products

manufactured by Japanese overseas affiliates started to penetrate the low end global

market where Korean firms had dominated until the late 1980s. Here was a strong

challenge for SEC.

SEC's Japanese counterparts were increasingly transferring their home-based production

facilities to Southeast Asia. As a result of these strategic moves, SEC desperately

needed to establish its own low cost manufacturing bases. Japanese firms' investment in

Southeast Asia increased dramatically after the 1985 Plaza Accord and the appreciation

of the yen. Sharp and Sanyo set up microwave oven plants in Thailand and Singapore

respectively. Mitsubishi, Sony and Matsushita established export-oriented CTV plants in

Malaysia, while Toshiba and NEC set up plants in Singapore. The Japanese brand

products made in the ASEAN region were cheaper than products made in Korea. In the

case of microwave ovens, the cost of Sanyo's OEM products manufactured in Southeast

Asia was 13 per cent cheaper than those made in Korea.

3 Author's interview with one of the senior managers in SEC's global marketing department, November 1994.

145

SED, SEM and SC were not as sensitive to these cost factors as SEC because they

were involved in the capital-intensive end of manufacturing. As Japanese end-product

manufacturers moved to Southeast Asia, SED and SEM had to meet the growth in

demand of Japanese customers in the region. From 1991 to 1993, small CTV production

increased significantly in Singapore and Malaysia; Sony and Matsushita substantially

raised their CTV production capacity in Malaysia and Toshiba; and NEC also expanded

its production in Singapore.

In addition, Japanese component manufacturers increased their foreign investment in

Southeast Asia In the late 1980s, Matsushita planned to produce CRTs and tuners in

Southeast Asia and Sony decided to build a colour CRT plant in Singapore (Nihon

Keizai Shimbun, 27 November 1989). One of the Taiwanese CRT makers, Chunghwa,

also moved to Malaysia. Matsushita and Hitachi were making components such as

tuners, FBTs, and audio and visual components in Malaysia. Similarly, Japanese CRT

glass bulb makers planned to move overseas. Asahi Glass decided to place substantial

investment overseas (Nihon Keizai Shimbun, 6 Apri11989) and Nippon Electric Glass

(NEG) was scheduled to produce CRT glass bulbs in Malaysia (Nihon Keizai Shimbun,

14 May 1991). Asahi's CRT glass bulb subsidiary also increased its output in Thailand

(Nihon Keizai Shimbun, 8 June 1994).

Japanese manufacturers in ASEAN countries were interested in purchasing Samsung's

components produced in the region because of the cost efficiency of standardised

components. SEM' s motivation for investment in Thailand was to sell components to

Sharp, Orion and Thompson, companies which did not own their own component

subsidiaries in the region. SED's investment in Malaysia was motivated by the proximity

of potential buyers including Matsushita, Sharp, Sanyo and Hunai. Another advantage

for Samsung was that from the mid 1980s, SED and SEM had maintained long-term

relationships with Japanese buyers. For example, SED had previously supplied

components to Japanese manufacturers operating in Japan including Orion, Sanyo,

Sharp, NEC, Hitachi and Matsushita. SED Malaysia was thus able to meet the product

quality required by Japanese customers in Southeast Asia (SEM 1990: 238).

146

Changing locational advantage in the ASEAN region: AFTA and the growing importance of local markets Samsung's FDI in the ASEAN region during the late 1980s and the mid 1990s passed

through three phases. Firstly, Samsung established end-product subsidiaries exporting

standardised consumer goods to Europe and the United States. Secondly, affiliated

manufacturers began production of standardised components that were sold mostly to

end-product manufacturers located in the ASEAN region. Finally, the end-product

subsidiaries increased their investment, producing consumer products for local markets.

These developments were closely related to changing patterns of locational advantages

in the ASEAN region.

As Ryou and Song (1993: 14) argue, the most important factor in the decision by the

Korean firms to undertake FDI in Southeast Asia was its relatively cheap labour. The

abundance of low-wage workers was one of the major motivations behind Samsung's

decision to invest in the ASEAN region. The average wage level of unskilled labour in

the region was about 7 5 per cent lower than in Korea, while labour productivity was 30

per cent less than that of Korean workers (Ryou and Song 1993: 14). At the same time,

ASEAN countries shifted their industrial policies from an inward-looking import

substitution policy to a more outward looking export orientation approach (Sekiguchi

1991: 8-12). They also relaxed foreign investment regulations and encouraged export­

oriented FDI (see Table 6.4). During 1988-92, Samsung invested in Thailand (TSE),

Indonesia (SME) and Malaysia (SEMA) to utilise these advantages in exporting CTVs,

microwave ovens, audios and VCRs to the global market (see case studies of TSE, SME

andSEMA).

The second phase of Samsung's FDI was realised during 1992-93. It was, to a large

extent, motivated by progress towards the formation of AFTA. The Prime Minister of

Thailand called for the creation of AFTA at the 1992 Singapore Summit on regional

economic integration. This concept was strongly supported by Singapore, but Indonesia

proposed the Common Effective Preferential Tariff (CEPT) concept which would cut

· tariffs in stages, maintaining that it was premature to establish a free trade area in the

region. In the end, broad agreement was reached on the AFTA concept proposed by

Thailand incorporating Indonesia's CEPT proposal (Takeuchi 1993).

147

Table 6.4 Foreign investment policy of ASEAN countries

Year of policy chan e

Indonesia

December 1987

December 1988

November 1990

June 1991 July 1992

October 1993

June 1994

Malaysia

1986

1988

1993

Thailand

1983

1987 1989

1990 1993

Philippines 1983 1991

Major policy measure

Opened participation in exporting industries to foreign fmns; relaxed the regulation on the ratio of foreign equity and obligatory localisation of equity capital; abolished import restrictions for companies exporting 65% or more of their products; liberalised the hiring of expatriates by companies exporting 65% or more of their products. Lowered the minimum required amount of foreign investment from $US 1 million to $US 200,000. Approved the establishment of 100% foreign capital. However, 5% of the equity had to be sold to local entities within five years of the commencement of production. Lowered import duties and import surcharges. 100% ownership was permitted in three types investment projects worth at least US$ 50 million; projects located in primarily in Eastern Indonesia; projects worth less than US$ 50 million and located outside one of 14 provinces but situated in bonded zones with 100% of production to be exported (Tan 1995:62).

Further relaxed ownership restrictions, by lowering the investment threshold for 100% foreign-owned companies from US$ 50 million to US$ 4 million, provided that these companies produced inputs or components for other industries (Tan 1995:62).

Abolished the need for a minimum amount of foreign investment capital; foreign ownership of up to 95% is allowed in public sector projects such as telecommunication service, potable water supply and ports (Business Times, 2 August 1995).

Amended incentive measures for investment and exempted companies from obtaining a license for expanding export-oriented production. Relaxed hiring of expatriates. Approved 100% foreign ownership of companies selling to the domestic market. Extended the approval of 100% owned fmns to 1992. Trade and investment liberalisation was launched as well as the domestic investment initiative (Tan 1995:63).

Strengthened incentives for labour-intensive export-oriented industries (approved 100% foreign ownership of companies). Exempted import duties on imported machinery and parts. Revised the priority area system, and implemented incentives for part -producing industries. Relaxed the regulation of foreign exchange controls. Adopted a new policy of strengthened preferential measures aimed at encouraging foreign companies (The Daily Yomiuri, 8 August 1995).

Approved 100% foreign ownership of export oriented companies. Approved 100% foreign ownership of companies in areas other than specified industries.

Source: Compiled from Sekiguchi (1991:13-16) and Tan (1995:62-63)

148

Like NAFI'A and the European Union, ASEAN firms have a trade advantage because of

tariff reductions among AFI' A member countries. The CEPT is the main mechanism for

trade liberalisation in AFTA, consisting of two programs: a fast-track program to reduce

tariffs over a period of seven to ten years; and a standard program. The fast-track

program covers a total of 15 sectors, including electronic appliances, cement, fertilisers,

leather goods, pulp, textiles, jewellery, and wooden furniture. The CEPT started in

January 1993 and tariffs on items in 15 sectors were scheduled to be reduced to 0-5 per

cent within ten years for items subject to tariffs of 20 per cent or more, and within seven

years for items subject to tariffs of less than 20 per cent. At the same time, the

regulations stipulate a local content ratio of at least 40 per cent for ASEAN products

(Lee 1994: 322-23).

One ofthe AFT A's prime objectives is to improve the investment competitiveness of the

ASEAN region. AFTA seeks to promote the efficiency of the region as an export

production location by taking advantage of each country's comparative advantage (Lee

1994: 322).

It was not unti11992 that Sarnsung was actively involved in component manufacturing

in Southeast Asia (Table 6.1) despite the fact that several end-product assembly plants

were located in Indonesia, Thailand and Malaysia. Significant reduction of tariff

schedules under the CEPT carried strategic implications for Samsung. The

establishment of separate affiliated component companies was no longer necessary.

Instead a single plant could be set up in the best location to achieve economies of scale.

In this way components could be exported to other countries in the area without the

burden of tariff payments in the short or long term.

Samsung specialised in the production of components by utilising its advanced

production capability for the manufacture of standardised components. This was one of

Samsung's strengths. It set up SEM Thailand and in 1993 it began production of CTV

and microwave oven components because it could easily gain access to low cost skilled

labour capable of producing FBTs, DY s, condensers and tuners. These products are

not only consumed in Thailand, but also supplied to Malaysia and Indonesia (Figure

149

6.1). In 1992-93, Samsung established two subsidiaries, SED Malaysia and SC

Malaysia, producing glass components for CTV s and computer monitors, which require

plenty of water and a high quality electricity supply (author's interviews with SED

Malaysia, 6 July 1995). CRTs made in Malaysia are distributed in the local market, as

well as being sold to Thailand and Indonesia (Figure 6.1).

The third phase of Samsung's FDI, which began in 1995, is related to the growing

importance of the local market. SEC-run subsidiaries produce consumer products which

are targeted at the fast growing local markets. One of the major motivations for

additional investment in existing plants is to make maximum use of the low cost

components supplied by affiliated companies in the region. New consumer products

made by subsidiaries and distributed within local markets are: washing machines in

Thailand (TSE); microwave ovens in Malaysia (SEMA); and refrigerators and CTV s in

Indonesia (SMI and SME). All subsidiaries, except for SMI, began production after

1995.

Foreign subsidiaries' key value-added activities

The key functional value-added activities of Samsung's subsidiaries in Southeast Asia

include production, component sourcing, marketing and design, and product

development.

Production of end-product subsidiaries

Samsung's production capability was a source of international competitiveness during

the home-based production phase (see Chapters 3 and 4), but Samsung's subsidiaries in

Southeast Asia faced problems in maintaining their competitiveness. Samsung's

subsidiaries grew slowly relative to their Japanese counterparts in the region because of

under-utilisation of Samsung' s plant capacity in the early stages of production.

Although TSE was the only plant in the low labour cost economies of Southeast Asia

operating with a production capacity as high as 500,000 CTV s, production grew only

incrementally (see SEMM December 1993; case study of TSE). SMI, whose plant is

located at Surabaya in Indonesia, faced serious production difficulties for the first three

150

years of operation, and it took several years to achieve economies of scale in producing

refrigerators (see case study of SMI; SEMM, January 1993). By 1995, SME had not

fully utilised its original plant manufacturing VCRs, unlike its Japanese counterparts in

Indonesia (author's interview, 14 July 1995).

This poor production performance shows that previous foreign production experience

gained in Portugal, the United States and the United Kingdom (see Chapter 4) had not

been properly transferred to the Southeast Asian subsidiaries. Samsung also faced

difficulties in applying the experience it had gained in the fields of component sourcing,

management of local workers and coordination between headquarters and subsidiaries to

different socio-economic environments in Southeast Asia (author's interviews, 4, 5 and

15 July 1995).

Lack of coordination between headquarters and subsidiaries

Samsung' s subsidiaries endeavoured to upgrade their production capability by improving

the relationship between headquarters and subsidiaries. However, the Southeast Asian

subsidiaries were unable to improve their production capability quickly, and

headquarters failed to transfer capability to the subsidiary at the right time. According to

an interview conducted by the author in November 1994, one manager who worked for

headquarters acknowledged that 'it was quite difficult for headquarters to allocate a

large production volume to the subsidiaries because headquarters was unable to ensure

that the subsidiaries were able to meet the standard for export quality'. In turn

subsidiaries, which were dependent on headquarters' decisions, had no choice but to

increase production volumes incrementally.

Samsung's subsidiaries in Southeast Asia had no prior experience in operating and

managing foreign subsidiaries in the region, and they also lacked international

management capability. This was in stark contrast to Japanese firms such as Matsushita,

which commenced operations in the region in the 1960s and gained extensive experience

in the management of their foreign subsidiaries (see Table 6.5).

151

As explained in Chapters 3 and 4, a key to the enhancement of Samsung' s production

capability was intensive training of its employees. Samsung's subsidiaries trained local

employees in the region, many of whom were sent to Korea. For instance, 60-70 per

cent of SEMA's line supervisors were trained in Korea for three to six months. The

Table 6.5 Matsushita's foreign investment in Asia in the 1970s

Host countries Year Type of operation Products

Thailand 1961 Production TV, radios, electronic fans, parts 1970 Sales Batteries 1979 Production Home electronics

Malaysia 1965 Production Home electronics 1972 Production Air-conditioners 1973 Production Electronics parts 1976 Sales Electronics products 1978 Production Electronics parts

Singapore 1972 Production Compressors for refrigerators 1974 Management office Supervision of Asian production 1977 Production Audio products

Philippines 1967 Production Home electronics

fudonesia 1970 Production Home electronics

Source: Complied from Toyokeizai Directory of Overseas Corporations, cited in Itoh and Shibata (1994)

same applied to all subsidiaries. This is exactly the same strategy as the one Samsung

adopted during the 1970s when many of its line workers and supervisors were sent to

NEC and Sanyo in Japan for training (see Chapters 3 and 4).

Workers in Southeast Asia did not share the strong firm loyalty of Korean workers and

moved freely to other companies when there were opportunities in the local labour

market (author's interviews with managers of TSE, SEMA and SME, 4-6, 10,14 July

1995). Frequent loss of the skilled labour with a couple of years' training meant that

Samsung's subsidiaries were hampered in accumulating and improving their production

capability.

152

Major changes in the production process

More recently, changes in the competitive environment have required subsidiaries to

acquire more sophisticated technology. This represents a major change capability in the

production process. The production system, which used to focus on mass production

of limited product items, has gradually shifted to one emphasising small lots and

multiple product lines. This derives not only from the needs of global distributors such

as GE (see case study of SEMA), but is also linked with Samsung's new strategy to

penetrate local markets as their market demand increases as a result of the rising income

level of customers. In this transition, Samsung's end-product subsidiaries had to meet

both export and local market demands simultaneously (see case studies of SEMA, SME

and TSE).

This new production system requires changes to subsidiaries' production processes.

Compared with Japanese subsidiaries in Southeast Asia, Samsung subsidiaries lacked the

experience to undertake new production processes due to their relatively short period of

foreign operations. In addition to GE's requirement for the shipping and delivery of

small lots and multiple products of microwave ovens, SEMA wanted to distribute its

products to local Malaysian customers. Therefore, SEMA restructured its entire

production system coinciding with the author's visit in July 1995. In 1995, SME also

introduced the production of multiple CTV models for sale to Indonesian customers

while producing CTVs and VCRs for export (see case study of SME). In addition to its

export production lines of CTV s, TSE has recently established a new washing machine

production line for the local market in Thailand (see case study of TSE).

Component sourcing

In the early stages of operation, Samsung's end-product subsidiaries experienced

difficulties in purchasing components locally because their affiliated component

manufacturers in the region (SED, SEM and SC) had come to international production

relatively late. In particular, TSE had to wait for three to four years to link with SED

Malaysia and SEM Thailand (see Table 6.1). To avoid difficulties in purchasing local

153

components, SEMA allied with three small and medium-sized Korean component

suppliers who intended to move to Malaysia (see case study of SEMA).

Unlike the end-product subsidiaries, Samsung's component subsidiaries achieved

optimal production within a relatively short period of time, and were thus able to

Figure 6.3 Component sourcing networks of Samsung's Southeast Asian subsidiaries

Ml: SED Malaysia (CPTs, 1991) M2: SC Malaysia (CRT glass bulbs, 1992) M3: SEMA (microwave ovens, 1991) M4: SEDM (computer monitors, 1995) Tl: TSE (CTVs, VCRs and washing machines, 1988) T2: SEM Thailand (CTV and VCR components, 1990) Il: SMI (refrigerators, 1989) I2: SME (VCRs and audio products, 1991) Cl: Tianjin SC (rotary transformers, 1992) C2: TSEC (VCRs, VCR decks and VCR drums, 1993) C3: Tianjin SEM (VCR drum motors, 1993) C4: Huizhou SEC (audio products, 1992) C5: Dongguan SEM (speakers, keyboards etc., 1990) C6: TTSEC (CTVs, 1995)

Notes: M = Malaysia, T= Thailand, I = Indonesia.

Sources: Author's interviews with Samsung's Southeast Asian affiliates, from 1 July to 15 July 1995

154

provide low cost, high quality components (Figure 6.3). SEM Thailand and SED

Malaysia maintained their cost leadership in manufacturing in the region and

continuously expanded their production capacity4 to meet increasing demand (see Table

6.6).

Table 6.6 Expansion of SEM Thailand's monthly production capacity, 1993-95

Products

VVC tuners for CTV s Diode yokes for CTV s FBTs for CTVs TM-blocks for VCRs High voltage capacitors for microwave ovens

July 1993

80,000 130,000 160,000

200,000

Source: Author's interviews, 4 July 1995.

June 1994 January 1995

160,000 300,000 200,000 300,000 320,000 540,000 60,000 160,000

450,000 700,000

Although the plant expansion growth rates for SEM Thailand varied by product item

during 1993-95, they increased substantially within a short period of time (see Table

6.6). SED Malaysia also grew dramatically due to substantial initial and subsequent

investment. Investment increased from $US 80 million for the first production line to

$US 120 million for the second production line and to $US 250 million for the third and

fourth production lines. Production capacity rose from 1.5 million CRTs to 6.5 million

CRTs. This enabled production of 5 million CRTs for CTVs and 1.5 million CRTs for

computer monitors, in addition to the production of 18 million electronic guns.

The achievement of high production growth was due partly to the linkage with Japanese

manufacturing subsidiaries in the region. A common feature of Samsung's component

subsidiaries, with the exception of SC Malaysia, is that they supply the majority of their

components to non-Samsung subsidiaries, mostly to Japanese affiliates in the region. In

4 SED Malaysia's first and second production lines produce 14 inch CRTs for CTVs, while the 3rd production line is for 20 and 21 inch CRTs for CTVs. The 4th production line is for CRTs of 14 inch computer monitors.

155

the case of SEM Thailand and SED Malaysia, this amounts to more than 80 per cent of

their total products. Thus, Japanese subsidiaries producing CTV s and VCRs in the

Figure 6.4 Regional linkages with Japanese production networks- SED Malaysia

SEC's subsidig

0 Sanyo 0

Funai

Matsushita 0 Sharp 0

Asahi

D Samsung Production Networks

Q Japanese Production Networks

Note: SED Malaysia has supplied colour picture tubes to Sanyo, Funai and Matsushita from the beginning of production in 1992. NEG and Asahi also supplies glass bulbs to SED Malaysia.

Source: Author's interviews with Samsung's subsidiaries, 1-15 July 1995 and Jun and Kang (1994: 17-20)

ASEAN region directly contributed to the high performance of Samsung' s component

subsidiaries. In contrast to the relatively poor growth performance of Samsung's end­

product subsidiaries in Southeast Asia, affiliated component subsidiaries has been able to

achieve economies of scale, supplying their components not only to Korean affiliates but

also to Japanese affiliates in the region (see case studies of SED Malaysia and SEM

Thailand). This suggests that the competitiveness of Samsung's end-products

manufactured in Southeast Asia is largely dependent on the low cost components

produced by affiliated subsidiaries in the ASEAN region.

156

Marketing activities

The early stage of Samsung' s production in the ASEAN region focused on the global

market, mostly exploiting cheap labour. Between the late 1980s and the early 1990s

nearly all CTV s TSE produced were exported. At the same time SEMA distributed all

the microwave· ovens it produced in Malaysia to the global market. All CTV s and

audios assembled by SME in Indonesia were also exported to the global market.

Samsung's international marketing division initiated global distribution activities on

behalf of its subsidiaries in Southeast Asia. Distribution to local markets was not a

priority for Samsung during the early stage of operations.

However, Samsung's strategic change from a global to a combined global and local

orientation began in response to the growing importance of local markets from the mid

1990s. Most of Samsung's end-product manufacturers in Southeast Asia now distribute

their products to the local and global markets simultaneously.

TSE installed a new washing machine production line in 1995 and planned to produce

refrigerators from 1996. Local and regional markets were the targets for both products.

To intensify local marketing activity, TSE took over the existing sales subsidiary

managed by its joint venture partner (see case study of TSE). SEC Korea also supported

TSE' s marketing activities, providing a special fund for the promotion of Samsung

brand products. In July 1995, SME started to manufacture CTVs, particularly to the

local market where Goldstar had seized more than 20 per cent of the CTV market share

in Indonesia (see case study of SME). Although the export market for SMI was more

important than the local market untill994, this had changed by 1995. More than half the

refrigerators made by SMI in Indonesia were sold to the local market. All SEMA

products were exported to the global market up until July 1995, but it was expected that

microwave ovens would be distributed to the Malaysian market by the end of 1995.

At the same time, changes in global distributors' preferences have also taken place.

Instead of large lots and standardised products, which require a simple production

process, global distributors require suppliers to maintain a flexible production system

capable of delivering small lots with multiple products (see case study of SEMA).

157

Continuously changing market circumstances made it necessary for subsidiaries to

initiate not only local marketing but also global marketing activities.

As the target markets of Samsung 's subsidiaries have diversified into .the local markets

in the region, the importance of local market development has increased. Accordingly, it

has become essential to establish local distribution systems and to strengthen

coordination among manufacturing, marketing and design and development functions in

the ASEAN region, in order to compete with similar consumer products being

manufactured and marketed by both local indigenous firms and established MNCs in the

region. However, there are some weaknesses in Samsung's local and global marketing

capability.

Initially, Samsung aimed to cooperate with overseas Chinese business networks with

local marketing channels in the region. This was an effort to offset Samsung' s weakness

in Southeast Asian market development. With the exception of subsidiaries producing

components, Samsung set up joint venture companies with local partners rather than

wholly owned subsidiaries. They were SMI (50:50); SME (80:20) in Indonesia; TSE

(49:51) in Thailand; and Samsung Electronics India (51:49). These subsidiaries were

established not only because of the foreign investment policy of local governments

which encouraged joint ventures, but also because of the high cost of establishing

distribution channels in the region (author's interviews with managers of TSE, SMI and

SME: 4-6, 13, 14 July 1995). These cooperative joint ventures are examples of

Samsung's strategic alliances which combine Samsung's advanced production capability

with the partners' local marketing skills.

Although Samsung chose overseas Chinese marketing networks as joint venture

partners, not all the partner firms were capable of distributing electronics products. For

instance, TSE's Saha group, one of the biggest conglomerates in Thailand, had not been

a distributor of electronics products, but a marketer of consumer goods such as

cosmetics and garments before it became SEC's joint venture partner. By early 1995 no

significant effort had been made by Saha to expand its local distribution channels to sell

TSE's CTVs and VCRs (see case study of TSE). The local marketing activity of TSE

158

and SMI was entirely initiated by SEC's joint venture partners, Saha and Maspion, while

Sarnsung concentrated solely on production (see case studies of TSE and SMI).

Metrodata of SME in Indonesia, which had sold Samsung' s office equipment products,

was the only partner experienced in distributing electronics goods. However, as of

1995, Metrodata's local marketing capability had not been utilised because all SME's

products were exported. SEMA, which had exported all its products, started to

establish local marketing channels through which microwave ovens would be distributed

to the local market from mid 1995. But no significant effort had been made to upgrade

the local and regional marketing capability of the end-product subsidiaries run by SEC in

the region. This is in contrast to Japanese counterparts such as Matsushita which

established local manufacturing subsidiaries in the 1970s and developed local and

regional markets intensively, selling their own brand name products.

Lack of global marketing capability on the part of the subsidiaries became an obstacle to

flexible adaptation to the changing needs of customers. For more than a decade, SEC

Korea's marketing department rather than subsidiaries' marketing arms had initiated

international marketing. Subsidiaries rarely had the opportunity to interact directly with

Sarnsung' s foreign sales subsidiaries and OEM buyers overseas. This situation brought

with it the requirement for Samsung to change its traditional mass production marketing

system established during its home-based production phase and called for a linkage

between international marketing, production and design and product development

functions.

Design and product development activities

None of Sarnsung's subsidiaries in Southeast Asia has design and product development

functions within their subsidiaries. Despite eight years' operation in Thailand, by July

1995 TSE still did not carry out design and product development activity. This is in

contrast to Matsushita whose Malaysia-based CTV manufacturing subsidiary was

established in 1989 and began product design and development activities from 1990,

employing highly-skilled local R&D staff.

159

Decentralised interaction between headquarters and subsidiaries

Regardless of whether products are distributed on the local or global markets,

Samsung' s subsidiaries are dependent on SEC Korea for product development and

modification (see the case of TSE and SME). To introduce new products suitable for

the local market, SEC Korea's engineers and designers visit its subsidiaries whenever

necessary to make minor changes to product models which are produced for the export

market (see case study of TSE).

Although there was close cooperation between SEC Korea and its subsidiaries in

product innovation, by July 1995, there were still no relationships between its

subsidiaries in Southeast Asia and the overseas design centres. This is partly because

Samsung's attempts to establish foreign design and product development centres only

began in the early 1990s. A Japanese adviser working at SEC's Tokyo-based design

centre acknowledged that 'it is essential to maintain relationships between design and

development personnel working in different geographical locations. Close interaction

benefits them by allowing exchange of information about design and customers'

changing preferences in each location. The interaction also provides global training

(author's interview at SEC Tokyo Office, 1 November 1995).

Two other factors have caused Samsung's subsidiaries to conduct R&D activities near

the plants. The first is an increasing degree of local component sourcing. By mid 1995,

the local (including regional) component sourcing ratio of Samsung's end-product

subsidiaries in the ASEAN region was quite high, between 50-70 per cent. This means

that the need for at least mechanical design in the region has been growing, given the

fact that components produced in the region differ somewhat from those sourced in

Korea.

The second factor is that production of standardised, low end-products is no longer the

best strategy for Samsung's subsidiaries due to the heterogeneous demand patterns of

the local and regional markets in Southeast Asia. In other words, product adaptation

according to specific customer preferences is essential. High dependence on the United

States and European markets during the 1970s and 1980s disadvantaged Samsung's

subsidiaries in learning about customer preferences in Southeast Asia. The project

160

manager of SME distributing CTV s in Indonesia commented that 'we used to develop

product models mostly for the United States and Europe, but the products we distribute

to the local Indonesian market require modification because local consumers tastes are

entirely different from those in the United States and Europe. Although consumers in

the United States and Europe take picture quality into account, Indonesian TV

consumers tend to be more concerned about sound quality' (author's interview with

SME , 14 July 1995).

A similar situation applies to Samsung's component manufacturing subsidiaries. SEM

Thailand often faced difficulties in the proper supply of its components to Japanese

customers. SEM Thailand required at least two months' delivery time when they placed

an order for new products from existing product lines in the subsidiary. This long

delivery time was inevitable because the subsidiary was not capable of carrying out even

minor product changes since it had no product development function. By contrast,

Matsushita, which is located adjacent to Samsung, only took about three weeks to

deliver a new product because its subsidiary carried out design and development

activities independently.

In July 1995, Samsung established a new product planning team at its Singapore-based

regional headquarters. In terms of R&D internationalisation in Southeast Asia, Samsung

is ahead of other Korean companies, but lags far behind its Japanese counterparts. In

July 1995, the new product planning team was about to implement market research into

consumer electronics such as CTV s. This will take some time if the new team is actively

involved in design and product development activities.

An obstacle to the establishment of a design and development function within or near

Samsung's subsidiaries is that all end-product subsidiaries, except SEMA, are

incorporated as joint ventures. Additional capital is required to establish design and

development sections and both joint venture partners have to reach consensus and share

the same interest in any additional investment. Local partners, in general, are financially

weak relative to Samsung and appear to be reluctant to establish the R&D functions

because this may have an adverse effect on the subsidiaries' short-term performance

161

(author's interviews with TSE, SMI and SME, July 1995). Headquarters may also be

reluctant to incur the risk associated with transferring core technological capability to a

joint venture company, rather than to a wholly owned subsidiary.

R&D internationalisation by established MNCs

Established MNCs' R&D activities in the region

Samsung divides the world market into four major regional segments: America, Europe,

Southeast Asia and China. All Samsung subsidiaries are oriented towards the local

market (see case studies of TSE, SEMA, SME and SMI) while exporting their products

globally. It was unavoidable that Samsung products made in the region would face

increasing competition from those produced and distributed by established MNCs in the

region with superior technological capabilities5 • Samsung's high dependence on its

production capability has been challenged because of its weakness in product design and

development capability relative to that of established MNCs (see Table 5.5 and Figure

5.2 in Chapter 5).

Samsung's Japanese counterparts have increasingly carried out design and product

development activities within or near their manufacturing subsidiaries in the region.

Tables 6.7 and 6.8 indicate that a significant upgrading in the product design capability

of major Japanese subsidiaries is expected over next three years (see also Table 5.2).

This applies to all sectors of the Japanese electronics industry.

In Thailand, Malaysia and Singapore, major Japanese MNCs have actively engaged in

design and product development activities6 • These include NEC in telephone switching

product design; Sanyo in refrigerator product design; Sharp in air conditioner

development; NC in audio product design; and Aiwa in the design and product

development of audio and visual headphone stereos and CD radio cassettes.

5 Philips, Thompson, Panasonic, National, Sony and General Electrics are all strong in product design and development and in their brand images as well as possessing well-developed marketing channels in the region.

6 For detailed information, see Tsuda and Shinada (1995) and Baba and Hitashima (1995).

162

Japanese subsidiaries also conduct basic design activities. Toshiba and NC7 are

engaged in VCR design: the former is working on the mono-sound type VCR and the

latter is concentrating on the regional VCR version (Nikkei Industrial News, 27 May

1992). Component development is no exception. Matsushita focuses on the basic design

of refrigerator components, and applied design of display monitors and TV components.

Matsushita in Malaysia designs TV parts for use in TV sets sold in Southeast Asia

(Nikkei Industrial News, 30 April 1993). Hitachi opened a new $US 7 million R&D

centre in Singapore for the development of CRTs and computer monitors (Business

Times, 8 December 1994). In addition, Toshiba, Hitachi and Sharp carry out integrated

circuit design activities in the region.

Table 6.7 Changing patterns of design activity by major Japanese electronics companies in Asia

Product lines Product design conducted in Both product design and parts Japan, parts procured from procurement conducted local sources locall~

percent

1995 1998 1995 1998

Audio/visual equipment 50-74 50-74 25-49 75-100

Audio/visual parts 25-49 50-74 1-24 25-49

Home appliances 25-49 50-74 25-49 50-74

Electronic calculators/parts 25-49 50-74 25-49

Office equipment/parts 50-74 50-74 25-49

Source: Compiled from Japan Machinery Exporters' Association, 1994 Waga kini kikai sangyo no ajia ni okeru seisan bungyo jittai ni tsuite (On the production and division of labour in Asia by Japanese machinery industries), cited in Takayasu and Ishizaki (1995)

One important feature of major Japanese MNCs' R&D activities is that they have good

coordination between subsidiaries located in different regions and efficient interaction

7 NC's Yokohama factory undertook VCR design but has gradually transferred its design activity to Malaysia (Nikkei Industrial News, 27 May 1992).

163

between production, marketing and design and development within firms in the region.

In order to reduce its dependence on expertise from its parent company in Japan,

Matsushita Electronics Singapore (MESA) invested $US 36 million in R&D into digital

audio and audio products at its Bedok plant to undertake product planning, costing and

industrial design in the region. It is expected that MESA's R&D staff will increase to

120 scientists and engineers in the next five years, with R&D focusing on radio

cassettes, mini-compact disc players, hi-fi systems and future audio products (Straits

Times, 24 August 1995).

Technologically strong MNCs from America and Europe have also actively undertaken

R&D activities in Singapore. Although Motorola has its own R&D laboratory in

Singapore, it was scheduled to establish another research centre, partially fmanced by

a grant from the Singapore National Science and Technology Board. While Motorola

also operates a number of research centres in Australia, India, China and Singapore, it

transfers knowledge and product information gained from the centres to its business

divisions worldwide. For example, the Motorola-Tianjin subsidiary producing

telecommunications products (cellular phones) was set up using technology acquired in

Singapore and this technology was further transferred to Bangalore, India (Business

Times, 5 October 1995). More importantly, Motorola reinforced the product

development activities of value-added products by transforming its Asia Pacific product

division into a regional product development centre (Business Times, 9 May 1994).

Philips8 , Thomson9 , Texas Instrument and Arrow Electronics10 have also been actively

involved in R&D activities in Singapore. They closely interact and coordinate with local

8 Philips Singapore plans to set up two R&D centres for its cordless phones and cellular systems, investing $US 35 million. The centres are expected to undertake sales, product planning and product development. They are expected to be partially funded by Singapore's research incentive scheme (Business Times, 31 August 1995). The number of Singapore-based R&D staff in video development exceeds that of Europe (Business Times, 26 October 1994).

9 Thomson Multimedia plans to establish a multi-purpose research and development laboratory in Singapore as an interactive organisation which can be accessed by various product development groups, including audio, TV, video, and communications (Straits Times,ll September 1995).

10 US-based Arrow Electronics has undertaken product development activities in electronics and systems applications in Singapore, in cooperation with the School of Engineering of Temasak Polytechnic (Business Times, 29 November 1993).

164

R&D institutions in Singapore (Business Times, 9 August 1993). Their approach to the

establishment of regional R&D centres shows that they do not totally depend on their

home-based R&D. It is clear that the aims of technologically strong MNCs are to

intensify their design and product development activities in the modification and

development of products for the local and regional markets, taking advantage of low

cost R&D resources and capabilities provided by the region.

Table 6.8 Japanese electronics firms' design and development activities in Southeast Asia

Singapore Malaysia Thailand

Comprehensive Toshiba, Hitachi, Mitsubish Electric, NEC

Consumer NC,SONY, Matsushita Electric, San yo Matsushita NC, Sony, Sharp, Refrigeration San yo

Audio-visual Aiwa

Components Nemic-Lambda, Nemic-Lambda, TDK, Matsushita Matsushita Denshi, Omron Denshi Kami Electrics Industry, Taiyo Yuden

Source: Compiled with data from Jukagukogyo Tsushinsha (1992) Asia no denshi kogyo (Electronics Industry in Asia), 1993 edition, cited in Baba and Hatashima (1995)

Established MNCs have improved their product innovation capability in order to

respond flexibly to a rapidly changing global competitive environment, through intra­

firm and inter-firm interactions and cooperation. This presents a competitive challenge

for new MNCs like Samsung, which are weak in design and product development

capability relative to established MNCs. Samsung's subsidiaries in Southeast Asia are

capable of assembling standardised products but they are at a primitive stage in the

establishment of local and regional R&D networks to improve their product change

capability relative to Japanese MNCs (see Tables 6.7 and 6.8). This is because

centralisation of R&D by Samsung 's headquarters, particularly in design and

165

development activities, continues to play a dominant role (see case studies of TSE,

SME, SMI and SEMA), although headquarters' R&D activities have become

internationalised since 1995 thanks to the establishment of the Southeast Asian regional

headquarters in Singapore.

All Samsung's manufacturing subsidiaries have to compete with established MNCs

which produce similar product lines. This places Samsung under strong pressure to

undertake design and product development activities within or near its production

subsidiaries in the region.

Technological capabilities and foreign subsidiaries' growth

As illustrated earlier, Samsung's international competitive advantage decreased

drastically during 1989-93 (see Figure 5.1 and Chapter 5). Samsung has three strategic

weaknesses in its technological capabilities: its failure to establish early linkages between

end-product and component subsidiaries; the lack of coordination between headquarters

and subsidiaries; and the lack of product change capability.

Table 6.9 Foreign subsidiaries' operation: Samsung (TSE in Thailand) and Matsushita (MTV in Malaysia)

Production capacity (million sets)

Plant utilisation ratio (%)

Local linkage with core components

Design and development

1st year S M 0.5 1.5

n.a n.a

No No

No No

Note: S= Samsung; M= Matsushita

s 0.5

25

No

No

Source: Crum (1994) and author's interview, 5 July 1995

3rdyear M s 1.5 0.5

70 80

Yes Yes

Yes No

5th year M 2.0

Capacity to be expanded

Yes

Yes (nine Japanese and 50 local employees)

166

A lack of strategic linkage and cooperation between affiliated companies

Table 6.9 indicates that Matsushita's subsidiary, which possessed superior technological

capability, performed better than Samsung's. There are two important factors explaining

Samsung' s internationalisation and the slow growth of its foreign subsidiaries. The

first is that Matsushita transferred advanced technological capabilities to its foreign

subsidiary more quickly than Samsung, shifting from a centralised to a decentralised

relationship between headquarters and the subsidiary. More specifically, Matsushita's

subsidiary established links with affiliated local component suppliers soon after

production started. Samsung failed to do this due to the lack of a cooperative

organisational culture between the end-product manufacturer (SEC) and the component

manufacturers (SEM and SED) (see Chapters 3 and 4). This led to slow technology

transfer, despite the fact that the locational advantage of Korea-based production

decreased drastically, losing international competitiveness. For example, it took three to

four years for TSE to purchase low cost components from SEM Thailand and SED

Malaysia in the region11 • Given the fact that the international competitiveness of

Samsung's end-products came from cheap, good quality components made by three

affiliated companies (see Chapter 5), TSE faced problems in gaining international

competitiveness without the support of component affiliates. Without links to key

component suppliers in the region, TSE was obliged to import expensive components

from headquarters until early 199012 •

In addition, there was very little strategic cooperation between affiliated companies in

the early stage of operations. TSE's initial CTV production capacity was 500,000 units

without any specific expansion plans, while SED and SEM were uneasy about following

SEC in the region because of the high capital investment needed for the establishment of

their plants. It is necessary to have over one million units of production capacity for a

CRT plant to achieve economies of scale. The same is true for the VCR plant (SME) in

Indonesia. With an initial capacity of 600,000 units, it was difficult for SME to establish

11 This is despite the fact that SEM began producing tuners and FBTs in 1993, and SED started making CRTs in mid 1992.

12 Japanese components suppliers mostly did not supply components to outsiders (see Ernst 1994c).

167

a deck assembly line near or within the plant because the scale economies for a deck

assembly line are about one million units per year.

It can be assumed that SED and SEM also doubted SEC's international management

capability13 • They were aware that the SEC-run CTV manufacturing subsidiary in the

United States had suffered from low performance for several years and that the plant

had eventually closed down (see Chapter 4). Thus, as a single profit centre, each

affiliated component company was extremely reluctant to take the same risk, especially

if they had to rely on SEC as their only customer. Hence, SEM and SED placed

importance on relationships with non-Samsung buyers who could purchase components

in the region. The relationship between SEC and SED was often competitive because

they produced the same CRTs for export (see Chapters 3 and 4). As a result,

cooperation between SEC and SED and SEM was not very effective. Problems in

Samsung's organisational culture, which had developed during the 1970s and 80s,

became an obstacle to the timely organisation of international production in the ASEAN

region in the 1990s.

Production capability and the headquarters-subsidiary relationship

The second reason for the slow growth of Samsung's subsidiaries arose from SEC's

lack of coordination between SEC Korea and its subsidiaries in Southeast Asia. This led

to Samsung's failure to exploit its Samsung's advanced production capability in a timely

manner.

Samsung's Korea-based plants faced two problems. There were no high value-added

products because of the concentration on the production of low end-products. In

addition, Samsung's Korea-based plants had to concern themselves with product quality

to assure OEM buyers that products manufactured by foreign subsidiaries would be of

13 Although SEC invested in Thailand in 1989, SEM and SED did not follow SEC inunediately in undertaking foreign invesbnent. Despite that fact that SEM planned to invest overseas in early 1990, FDI in Thailand was only realised in 1993 (see Table 6.1). Given that SEM observed the low growth of Thailand SEC's subsidiary (see case study of TSE), it was unlikely that SEM would invest in Thailand without buyers to purchase their components.

168

an acceptable standard, due to their lack of experience in foreign production. Thus,

SEC Korea was reluctant to allocate sufficient product volume to the foreign

subsidiaries. Thus TSE, the only available CTV production plant in the low labour cost

economies in Southeast Asia in the late 1980s, failed to utilise its capacity able to

produce 500,000 CTV s (see case study of TSE).

SEC concentrated on its home-based production rather than making optimal use of

overseas subsidiaries located in low labour cost economies in spite of their rapid

decreasing locational advantage from the late 1980s (see case studies of TSE and SMI).

It is probable that FDI was only undertaken as SEC's strategic counteraction against its

rival, Goldstar. In addition, the role of overseas subsidiaries was underestimated and

there was a failure to attract the special attention of top management Samsung' s foreign

based subsidiaries lacked production capability during the early phase of production, a

strength limited to the Korea-based plant Until the early 1990s, Samsung's plants in

Korea endeavoured to produce and supply their products to OEM buyers, reducing

costs through offshore component sourcing. A prime objective of the Singapore-based

purchasing office was to buy and deliver low cost components to Korea, rather than to

supply the Southeast Asian subsidiaries (author's interview with Singapore Purchasing

Office; 11-12 July 1995).

In addition, Samsung's subsidiaries faced problems in improving production capability

quickly because their operations were entirely subject to an international management

capability that was inferior to that of established MNCs. In other words, the foreign

subsidiaries failed to exercise their bargaining power in interacting with the hierarchical

and centralised headquarters, and they lacked international production experience,

particularly in Southeast Asia (see case study of SMI). Interestingly, the heads of

foreign subsidiaries in Southeast Asia, particularly SEC's subsidiaries, were mostly

appointed from the ranks of operational managers, not at the executive director level14 •

There is no doubt that the bargaining power of the subsidiaries was weak relative to

headquarters, where the senior executive directors were former departmental or division

14 All the heads of TSE, SEMA, SMI and SME, who were first appointed by SEC Korea, were senior level managers. From the mid 1990s, SEC Korea has gradually replaced them with executive level directors.

169

heads. This led to a vertical interaction between headquarters and foreign subsidiaries.

In particular, the hierarchical organisation of headquarters certainly hindered the

managers of foreign subsidiaries in improving their production capability quickly. The

Indonesia-based refrigerator plant (SMI) presents a case in point. SMI's top manager,

whose position was equivalent to general manager in SEC Korea, could not properly

exercise bargaining power in negotiating with headquarters. For the frrst two years of

operation (1990-91), no assistance was given to SMI by headquarters' export marketing

department, despite the fact that the local market-oriented production was inadequate

and there was an urgent need for international marketing assistance.

Product change capability R&D internationalisation

International market conditions have changed constantly and a further challenge is the

action by established MNCs to give priority to product innovation and development so

that they can respond flexibly to growing local markets and to a changing global market.

From the mid 1990s, Samsung's end-product subsidiaries began to sell their products on

the local market. This means that additional technological capability is required, for

example, product change capability.

As shown in Chapters 4 and 5, SEC faced problems in the improvement of its product

change capability due to its concentration on DRAM production and its high OEM ratio.

Samsung maintained cost leadership, selling standardised products internationally

through the utilisation of its superior production capability until the late 1980s (see

Figure 4.1, Chapter 4). Alliances with OEM partners offset Samsung's weaknesses in

design and product development during the home-based production phase (see Chapter

4).

Unlike Matsushita, Samsung's subsidiaries did not have their own design and

development function. This was reflected in the difficulties Samsung subsidiaries faced in

upgrading their product change capability through cross-functional interaction between

production, marketing and design and product development.

170

There are two possible reasons why headquarters' design and development functions

were not decentralised and internationalised. First, in addition to the conservative nature

of R&D organisations, there might have been no mature design and development

capability which could be transferred to overseas subsidiaries. This is because

knowledge accumulation was marginal in the 1970s and 1980s due to the technological

development trajectory at that time (see Chapters 3 and 4). As explained earlier, little

emphasis was placed on improving product design and development capability until the

end of the 1980s.

The second reason is that all end-product subsidiaries (except SEMA) are joint ventures.

There are two weaknesses in the establishment of new product development function

under a co-ownership structure. One is that it is difficult for Samsung to transfer its

core technology- design and product development capability- into the joint venture

subsidiaries. Another is that the establishment of product development function hinders

the efficiency of production for the subsidiary, caused by the increase of capital

investment. Because each Samsung's subsidiary in Southeast Asia was an independent

profit centre, it was extremely difficult to make the decision to establish a design and

development department at the subsidiary level. The evidence is that Samsung's

Southeast Asian regional headquarters was just about to embark on a program of

establishing a design and product development function at the regional headquarters

level in 1995.

So far, the competitiveness of Samsung's end-product subsidiaries has depended largely

on the cost efficiency of its component subsidiaries (see case studies of SEM Thailand

and SED Malaysia), whose production growth in the region has increased dramatically.

SED Malaysia and SEM Thailand grew dramatically and achieved maximum economies

of scale in the manufacture of standardised components. Low cost CRTs made by SED

Malaysia are delivered to TSE in Thailand and SME in Indonesia, while cheap, high

quality FBTs, condensers and tuners are supplied to SEMA in Malaysia and TSE and

SME as well (see Figure 6.1). In addition, low-cost 14-inch CRTs made by SED

Malaysia are also sold to an affiliated subsidiary operating in China, a Tianjin CTV

manufacturer (TSEC). Basically, Samsung's competitiveness stems from its advanced

171

production capability in the manufacture of standardised components, an 'easy-to­

imitate capability' rather than its capability in product innovation and development, a

'difficult-to-imitate capability'.

Thanks to the 1993 globalisation strategy under the 'new management' movement,

Samsung started to improve its subsidiaries' product change capability by the

establishment of a product planning team in Singapore in 1995. However, the pace of

R&D internationalisation in its Southeast Asia-based subsidiaries was slower than that of

its Japanese, American and European counterparts. This also reflects Samsung's

immature capability in product innovation and development, as opposed to its mature

production capability.

Summary

Samsung's international production in Southeast Asia passed through three stages. In

the frrst stage, Samsung increased the number of end-product subsidiaries to which SEC

Korea transferred its subsidiaries. These were in the areas of CTV, VCR and

microwave oven production capability, which were based on over two decades of

production experience in Korea. Foreign investment was undertaken in response to the

decreasing locational disadvantage of Korea, pressure from Japanese MNCs and

Golds tar's move to Southeast Asia In the second stage, Samsung concentrated on the

establishment of component manufacturing subsidiaries, which followed their customers

overseas in the region, and were set up nearby to supply components to them. In the

third stage, Samsung established a regionally integrated production system in line with

its' multi-faceted integration' strategy, while Samsung's subsidiaries introduced multiple

products.

Initially, end-product subsidiaries mostly concentrated on the global market and

international marketing, and design and product development were dependent on either

SEC Korea or their joint venture partners. After 1995, a significant change took place;

end-product subsidiaries started restructuring due to increasing local market demand and

172

a rapidly changing global market environment. With this shift, Samsung's marketing

strategy has changed from a totally global focus to both a global and a local orientation.

Samsung' s subsidiaries mostly focused on the improvement of their production

capability through methods such as the training of their technicians. This had been the

experience in the 1970s when Samsung learnt its production capability from NEC and

Sanyo. Upgrading production capability was the top priority in the early stages of

operations. Since 1995, however, as a result of the growing demand of local markets

and a rapidly changing global market, Samsung's innovation strategy has gradually

changed towards upgrading the product and the process change capability, responding

to global and local needs simultaneously. Faced with a changing market environment

and strategic moves by established MNCs to establish regional R&D bases, Samsung

faces strong pressure to internationalise R&D from headquarters to the subsidiaries.

During the early stage of operations, end-product subsidiaries faced difficulties in

achieving economies of scale mainly because of slow linkage with affiliated component

subsidiaries nearby. Production capability improved only slowly. In contrast, component

subsidiaries grew dramatically from the beginning of operations because they could

easily achieve economies of scale in the production of standardised components, and

they were able to supply to Korean and Japanese end-product subsidiaries operating in

the ASEAN region. From this perspective, the international competitiveness of end­

products made by Samsung's subsidiaries in the region was largely derived from cost

efficiencies gained by its affiliated component subsidiaries

173