Back in the mid 1990s, when the bottom fell out of semiconductor prices amid too much supply and too little demand, South Korean electronics giant Samsung Electronics was caught in the squeeze. As a leading Asian manufacturer of commodity memory chips, called DRAMs, Samsung found itself in the middle of a downturn that was unusually steep even for that notoriously cyclical chip business. "It was a life-threatening situation," recalls Jim Sanduski, vice-president for marketing at Samsung's visual-display products group, which makes digital monitors and TVs.
Rather than simply ride out the storm or abandon the chip business, as some of its competitors did, Samsung treated the setback as a wakeup call. Over the next few years, it transformed itself into a diversified company that now depends less on semiconductors. As part of this strategy, Samsung also focused on creating a more recognized brand that stood for quality products sold at a reasonable price -- but not the lowest.
That plan has worked, judging from Samsung's place atop the 2002 BusinessWeek IT 100 -- a ranking of the world's best tech companies. Thanks in part to its expansion into mobile-phone handsets, Samsung has been able to keep the profits coming. In 2001, it earned net income of about $2.4 billion, on total revenues of roughly $26.4 billion. That's down roughly 54% from the $5.3 billion it earned on revenues of $27 billion in 2000, reflecting the depressed DRAM market in 2001. Still, it's an impressive performance during a year in which many other tech companies lost billions.
Samsung now boasts a market capitalization of roughly $43.6 billion, not bad for a company whose consumer-electronics products weren't even on the radar of many American shoppers five years ago but now account for about 37% of total sales. "Samsung has proven to the world that it has more than DRAMs," says Sun Chung, an analyst who follows it for Merrill Lynch in Seoul.
Investors have noticed. Samsung's shares still swing wildly because of its continuing exposure to the chip business. But they're currently trading on the Korean Stock Exchange at around $286, up from their 52-week low of $109. The stock isn't traded in the U.S., but investors can buy Samsung Electronics GDRs (global depositary receipts), which are traded on various Asian and European exchanges.
Samsung's mid-'90s overhaul wasn't pleasant. CEO Jong-Yong Yun slashed about 30,000 jobs out of a workforce of 75,000, as he spun off noncore assets and focused on technology products with the greatest potential. He "created a sense of urgency," says Sanduski, who is based at U.S. headquarters for consumer electronics in Ridgefield Park, N.J.
In addition to boosting margins, Yun's plan flattened Samsung's organizational structure so that key decisions could be made at lower levels, with less delay. This was a considerable achievement, given that it's part of Samsung Group, one of South Korea's leading conglomerates, or chaebols. These huge organizations have a reputation for being bureaucratic behemoths -- anything but nimble.
Samsung Electronics seems to be puncturing that stereotype. Sanduski, an eight-year company veteran who previously worked for Sony and General Electric, says even he's surprised by the amount of autonomy he has at a company of Samsung's size. "Decisions are pushed far down into the organization," he adds.
With a revamped structure in place, Samsung proceeded to diversify beyond chips. It helped that it had been making products such as TV, DVD player, and home appliances under other brands, which gave it a jumping-off point for making digital TVs and DVD players under its own name. Whle it was making this transition, Samsung expanded rapidly into mobile-phone handsets, which now account for 35% of its revenues.
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"Samsung Electronics continues to gain share in the global handset market, with a 9.6% market share in the first quarter (of 2002), vs. 6.2% a year ago," Bear Stearns noted in a recent research note. That leaves chips, its primary source of revenues as recently as 1996, to deliver 28% of sales.
As important to Samsung's diversification plan was its new marketing strategy. It plans to spend $250 million on global advertising this year. From mobile phones to DVD players, Samsung has been able to brand its products as higher-end goods, not a simple matter for a Korean company. In many instances, its goods have more features than comparable models from competitors -- which enables Samsung to charge as much as 30% more, says Merrill's Chung.
Its insistence on getting a premium helps boost profits, though it also sometimes has a downside. Merrill's Chung notes that recently Sprint PCS wanted to offer a new mobile phone from Samsung. But Samsung refused to meet Sprint's price requirement. Sprint eventually struck a deal with another South Korean company, LG Electronics, whose turquoise-colored, flip-top model is the new must-have phone this year.
If Samsung's strategy has any risk, it's the continuing exposure to the feast-and-famine semiconductor business. There's still a debate in the chip industry over whether DRAM prices have finally bottomed in the latest cycle. "We're on a rolling bottom, up and down," says Brian Matas, vice-president for marketing at IC Insights in Scottsdale, Ariz., a chip-industry consultant. "The worst of the decline in prices is behind us," he adds, noting that for most of 2001, the value of DRAM shipments ran 30% below the year-before level. "Now, we're trying to get some stability."
Goldman Sachs tech analysts in Asia note that the DRAM market is trending slightly weaker than originally anticipated, according to a recent research note. But Goldman's analysts, like some others who follow Samsung, argue that dips in its stock related to its DRAM exposure may represent a buying opportunity based on the company's overall growth prospects. Once DRAM demand and prices pick up, most likely later this year and in 2003, the most bullish of the analysts who follow Samsung Electronics see its shares approaching $400.
That's partly because they're counting on the idea that consumers will soon be seeing more of Samsung as its products become available at more and more U.S. retail outlets. And the company is counting on its flat-panel display business to duplicate the success of mobile phones. If it can pull off such feats, Samsung could be a household name for years to come.
By Heesun Wee in New York