Samsung Electronics (SSNGY) has pulled off a coup in the cutthroat electronics industry. Until around 2000, Japanese companies ruled the consumer-electronics world, particularly in the television business where Sony's (SNE) Trinitron models dominated for decades. No more. Now the South Korean company is at the top of the pecking order.
In a recent report on the $99 billion industry, market researcher iSuppli noted that Samsung, which has achieved premium, global-brand stature only in this decade, kept its lead in the second quarter of this year with a 12.4% share in the world TV market. Korean rival LG Electronics , was the runner-up with 11.4%, followed by Dutch group Philips (PHG) with 7.1%, and Japan's Sanyo Electric (SANYF) with 6.3%.
"Samsung's leadership is going to continue in the future," reckons Riddhi Patel, principal TV analyst at iSuppli. "In the past few years, Samsung has done a great job in improving its brand image."
Samsung's advantage could widen once traditional, picture-tube TVs are phased out. In the high-tech segment of flat-screen TVs using svelte plasma or liquid crystal display (LCD) panels, Samsung has been the top player for the last seven quarters. In the April-to-June period, its flat-panel share of 17.3% was a whopping 6.3 percentage points bigger than second-place Sharp's (SHCAY) 11%.
This is no small achievement for the Korean company, which in the 1980s and 1990s absorbed the needed technologies from its Japanese mentors before seeking out the innovations to beat them at their own game. Samsung first leapfrogged its rivals in the 1990s in memory chips. Early this decade, it did the same in cell phones and flat-panel displays.
Capturing Customers with a "Smart Package"
Now Samsung wants to stake out a leadership position in digital TV—an anchor product in the age of the networked digital home.
"We've targeted digital TV as our flagship product in consumer electronics," says Chu Woo Sik, Samsung's executive vice-president. "In this age of digital convergence, consumers tend to ask for a total solution for their entertainment, education, and security at home and we can provide a smart package." Samsung is talking to leading content providers in the U.S. for a tieup to provide such services, according to Chu.
It's part of Chief Executive Yun Jong Yong's plan to bolster Samsung's digital media unit, which has long lagged behind the chip and cell-phone divisions in terms of generating revenues and profits. Last year, Samsung became the world's first company to top $10 billion in revenues from TVs alone. "We have for years braced ourselves for a paradigm shift from analog to digital technology and our efforts are beginning to pay off," says Kang Young Kie, the vice-president in charge of charting long-term strategy for Yun. "Spillover effects from our TV brand will be significant."
Rollout for the New Bordeaux
To prepare itself for a digital TV future, Samsung has made sure it has an ample supply of flat panels. In 2003, it began a $20 billion project at Tangjeong, south of Seoul, to churn out LCD TV panels measuring 40 inches or larger diagonally. Two of the three LCD panel factories are owned and financed by a joint venture with Sony (BusinessWeek.com, 11/28/06).
For plasma technology, Samsung gets its supply from affiliate Samsung SDI, which is one of the world's three largest makers of plasma panels.
In the summer of 2005, Samsung formed a task force to unleash innovation and differentiate its TVs from rival brands while also cutting production costs. A group of 11 product planners, designers, programmers, and engineers spent six weeks together at the company's so-called Value Innovation Program Center (BusinessWeek.com, 6/22/06) to dream up R7, the company's signature LCD TV, also known as Bordeaux TV.
Surveys showed that consumers buy a flat-screen TV as much for its look as a piece of furniture as for its technological capabilities. So the group cut corners on some high-tech features to spend more to make a TV that looks good even when it is switched off. Its minimalist design is in sync with a leading trend in interior design. The company's initial target was to sell at least 1 million sets, but since its rollout last year some 5 million Bordeaux TVs have been sold. This year Samsung introduced R7's upgraded version, called R8, by adding features such as ultracrisp images that don't blur during fast-action scenes.
Highest Margin in TV Industry
The success of flat TVs provides a breathing space for Samsung, which was hit badly by crashing memory chip prices. In July it posted its smallest quarterly operating income since 2001 (BusinessWeek.com, 7/30/07), just below $1 billion. Its chip business, which last year accounted for more than 70% of the company's total earnings, dropped 67% year-on-year in the April to June quarter (BusinessWeek.com, 6/15/07) to $360 million, for a margin of only 8%, down from 22% a year earlier.
Sure, the profit margin is smaller in the fiercely competitive TV business, but at around 5%, Samsung's profit performance is better than any other TV maker in the world. Also, those margins represent a significant improvement from a few years ago, when Samsung was lucky to break even in its TV business. "We are confident our TV revenue growth this year will be more than 30% and our margin will stay the industry best," says a Samsung manager.
Samsung's objective is to sell superclear, high-definition TVs to the masses. But unlike Sony and Sharp, which focus on LCD, or Matsushita Electric Industrial (MC), which places emphasis on plasma technology, Samsung and its compatriot LG use both technologies to appeal to a wider spectrum of shoppers.
A Secure Supply Chain
Many tech analysts say the Korean makers have an edge over their Japanese rivals because they have been more aggressive in building flat-screen plants to have a better grip over prices and supply (BusinessWeek.com, 7/10/07). "With LCD panel makers limiting their expansion in the wake of a supply glut last year, LCD panels will likely be in short supply next year," says Daniel Kim, Hong Kong-based display analyst at Merrill Lynch (MER). "And the key issue for set makers will be how many panels they can procure in time."
LG, which has been following in the footsteps of Samsung to boost its brand image in the U.S. and Europe, also harbors ambition to outshine its Japanese rivals. "Our immediate goal is to be one of the top three in both LCD and plasma TVs next year," says LG spokesman Park Seung Koo. LG is already the No. 3 producer of plasma TVs.
The battle for market share should also be waged with Chinese rivals and startups such as Vizio, which grabbed the No. 1 position in North America in the second quarter of this year. Yet with LCD TVs gaining popularity and the prospects of tight supply in LCD panels looming, the Koreans, with stable internal supply, have a fighting chance to maintain their global lead.