Sony and Samsung's Strategic SplitMoon Ihlwan
This is a longer version of the story that ran in the Jan. 18, 2010 issue of Bloomberg BusinessWeek.
Samsung Electronics and Sony (SNE) both were set to unveil new 3D TVs at the annual Consumer Electronics Show in Las Vegas on Jan. 7. Similar products, similar strategy? Actually, no. Behind the scenes is a growing divergence in thinking at the two rivals.
The shift, simply put, is about making stuff. Sony increasingly believes hiring others to build its TVs will help it regain financial health, while Samsung continues to manufacture its own TVs. "Giving up manufacturing is tantamount to abandoning your brand," says Yoon Boo Keun, president of Samsung's TV business.
Sony co-founder Akio Morita once held manufacturing sacred, too, so why the shift? The Japanese electronics giant is headed for its first back-to-back annual losses since its 1958 listing—a total of some $1.9 billion over two years. Morita's successors believe their advantage is in games, movies, and music. "We would like to concentrate our resources on Sony-unique applications," says spokeswoman Sue Tanaka. This year Sony hopes to boost sales of its Bravia TVs by expanding services that give owners content, including streaming Sony films before their DVD or Blu-ray releases.
Less and Less ProductionNow Sony aims to outsource production of 40% of all TVs. On Jan. 1 it sold its biggest North American TV plant, in Tijuana, Mexico, to Taiwan's Hon Hai Precision Industry (2317:TT). Citigroup (C) notes the fastest growth in TVs is in low-end sets sold in China and other developing countries—production that can more easily be outsourced than that of sophisticated models. Another argument for outsourcing is that even when Sony builds its own liquid-crystal-display TVs, it relies on Samsung and Sharp for LCD panels, a key component. "It is like one football team depending on another team's coach to win the game," says Atul Goyal, an analyst with brokerage CLSA in Singapore.
In contrast, Samsung is becoming more like the old Sony. It's now the only major TV maker that produces the computer chips at the heart of new digital TVs. Samsung says that helps it introduce newfangled services more quickly, such as Internet access, turning TVs into the centerpiece of home entertainment. Owning its factories, Samsung says, also lets it reap all the benefit from new efficiencies.
Samsung's TV plant in Tianjin, China, increased productivity by two-thirds last year by standardizing parts and replacing conveyor-belt assembly lines with production in which each worker builds sets from start to finish. Using identical software, printed circuit boards, and virtually all other components has cut the time Samsung needs to roll out a model worldwide to one month, from 16 weeks four years ago. Television analyst Riddhi Patel at researcher iSuppli reckons such techniques have been instrumental in Samsung's success in TVs: "This lets Samsung react to market needs in a very timely manner."
Gaining the LeadSo far Samsung's approach has been more successful. On Jan. 7, the Korean giant reported its highest profit in five years and record revenue for 2009. In quarterly earnings guidance, Samsung said it had an estimated operating profit last year of $9.64 billion on record-high sales of $120.1 billion. The profit is the highest since 2004, when the company hit a record $10.38 billion in earnings.
Unlike Sony, Samsung is also winning market share. Samsung, neck-and-neck with Sony in their competition to sell LCD TVs until two years ago, has emerged as the clear leader. In the first nine months of 2009, Samsung accounted for 22.7% of all LCD TVs sold in the world against Sony's 14.4%, according to market researcher DisplaySearch. Samsung's TV business also posted a profit margin of nearly 10%, while all Japanese rivals stayed in the red.
Samsung isn't neglecting the importance of content, either. Samsung has already agreed to cooperate with DreamWorks Animation SKG (DWA) to promote 3D videos on its newest TVs. "You need a harmonious chorus of manufacturing, design, and marketing for a TV business," says TV chief Yoon. "But manufacturing remains the key."