How Samsung Plugged into China

It's finally making gains by selling high-end products

China used to be the shortcut to hell for ambitious managers at South Korea's Samsung Electronics Co. (SSNLF ) Like executives at other consumer-appliance giants, they believed China and its swelling middle class spelled limitless opportunity. Division after division set up factories and nationwide sales operations in the mid-1990s, hawking everything from washing machines to VCRs. One by one, they racked up steep losses.

So, soon after Yun Jong Yong took the helm at Samsung Electronics in 1997, just as Korea was heading into crisis, he cleaned house. The no-nonsense CEO dumped most of the conglomerate's China managers, shut all 23 sales offices, and declared that each of the seven mainland factories would have to become profitable on their own if they were to survive. Henceforth, Yun declared, Samsung would stop pushing entire product lines. It would carefully select products and then support them with intense marketing. Samsung also focused on 10 major cities instead of the whole country.

The focus seems to be paying off. Last year, Samsung sold $1.81 billion worth of consumer electronics in China, a fivefold increase since 1998. And profits soared 70% for the year, to $228 million. In 1998, the China operations lost $37 million. "Samsung is proving a Korean company can build up a brand image through a top-down marketing strategy," says Choi Dong June, managing director at Appeal Telecom Co., a Korean affiliate of Motorola Inc. (MOT ) that competes with Samsung in wireless phones.

Samsung's ambitious goal is to triple its sales in China by 2005, to $7 billion, and achieve a rank alongside Sony (SNE ) and Motorola as marquee brands. It has a ways to go. Half its sales in China still consist of basic washing machines, TVs, refrigerators, and boom boxes. And since most of its factories are joint ventures with Chinese enterprises, it will be difficult to wind down production of conventional home appliances, where competition from both domestic and foreign electronics makers is fierce.

But Samsung is showing surprising success with top-of-the-line digital phones, MP3 music players, and projection TVs selling for up to $2,400. It also has a growing business selling high-end displays used in notebook PCs. Samsung is moving upmarket in conventional appliances as well. In refrigerators, for example, it now focuses on big, two-door machines. Company execs figure high-end products will account for 70% of sales in two years, as it launches a new generation of digital devices being tested in Korea. It plans to make many of these gadgets in China. "In the past, we did not have China in mind when we rolled out state-of-the-art products," says Phillip Chung, a Samsung vice-president. "Now, China is at the top of the priority list."

Samsung's success tells a lot about the growing sophistication and wealth of the China market. It shows that, at least in major cities, China now has millions of consumers who have enough money to spend on quality and style. For many multinationals, it's becoming much more profitable to target these consumers than to fight it out in the mass market. "We are seeing the beginning of real market segmentation in all kinds of consumer products, especially in electronics," says Tony Perkins, managing director of McKinsey & Co.'s Beijing office.

Samsung learned this lesson in the eastern city of Suzhou, where it makes washing machines. In 1998, the plant lost $2.1 million, five times as much as the previous year. Sales had more than doubled, to 32,000 units. But one-third of the plant's capacity was idle, and unsold inventory piled up. After laying off 300 of its 900 workers, the plant in 1999 launched a stylish, pricier model that ran more smoothly and had a see-through top. In 2000, the plant sold 170,000 machines and was profitable. "That sent a strong message that you should be different to be successful," says Samsung Greater China strategist Kim Soo Bong.

No product hammers home the point better than mobile phones. In April, 2001, Samsung introduced the A-288, a brightly colored, ultralight handset with a small display on the outside that identifies callers. Despite prices of $360 and up, analysts estimate Samsung has sold 300,000 A-288s--many to young professional women. Recently, it began selling its $420 N-628 phone. Among other things, users can pick among 16 ring sounds, from bird songs to pop music. This summer, Samsung plans to sell Nexio, a powerful Net-enabled handheld, in China. Starting price: $800. The approach fits Samsung's strategy in all of Asia, where cell phones are fashion items, of rolling out a new model every few months.

Loyal distributors also are key to Samsung's China success. Margins for Samsung's sales agents can be nearly double those for other phone makers because prices are 60% higher on average than Nokia Corp.'s (NOK ). Distributors caught unloading phones cheap are cut off. The high prices "created a top-class image for our phones, which then increased sales," says Park Sang Jin, senior vice-president for global telecom marketing. BDA China Ltd., a Beijing consultancy, figures Samsung's cell-phone market share in China reached 8% last year. And its share could rise further: The Chinese government has agreed to adopt Qualcomm Inc.'s (QCOM ) CDMA standard for wireless phones--a standard Samsung excels in.

Reaching the next level won't be a snap. To get beyond a 10% market share in cell phones, "one has to have major investment in China, both in people and production facilities," contends Nokia Mobile Phones China Managing Director David Hartley. "They also need to expand their whole service and support network." Samsung makes cell phones in China for export, but is awaiting Beijing's permission to legally sell those phones domestically. Execs say they expect approval soon.

Meanwhile, Samsung keeps burnishing its brand image. One way is by cashing in on the growing popularity of Korean popular culture in China. After running TV ads featuring Korean soap opera star Ahn Jae Wook, a favorite in China, its sales of computer screens and monitors leapt 50%, to 1.6 million, last year. "Samsung has its own style," exclaims Tian Tian, 20, a Beijing college student who already owns a Samsung color TV and Samsung monitor and hopes to soon buy a Samsung phone. "It has unique style and personality." By going for quality over quantity, Samsung not only found a way to recover from crisis: It also may have found the key to success in China.

By Moon Ihlwan in Seoul, with Dexter Roberts in Beijing

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