Samsung's strategy deals heavy blow to competitors

At Samsung Electronics Co. Ltd, executives speak little about boosting depressed DRAM average selling price.

That goal, which they admit will benefit the entire memory component market and is critical to profitability in the embattled sector, will come later.

Samsung is piling on the pressure in Q2 with a flood of investments—7.3 trillion Korean won or approximately $7 billion—migrating into advanced geometries to further reduce costs and proposing a hefty 100 percent jump in DRAM bit shipment and 130 percent for NAND memory components.

"We plan to make massive investments and try to expand our market share through implementation of aggressive investment plans and migration into advanced geometry," said Yeongho Kang, VP of the semiconductor business at Samsung in a presentation to the investment community following the release of the company's Q1 results.

"We will accelerate our efforts to strengthen our competitive edge and continue to widen the gap with our competitors to achieve further growth and profitability," added Kang.

Playing catch up
Aside from the normal pricing as well as demand and supply imbalance that the memory market has always had problems dealing with, Samsung is also the main reason its main DRAM rivals appear so disorganized in their response to the industry's most challenging profit problems.

That's because the company's margins remain positive while the rest of the field is selling products well below cost. The overall impression is that Samsung has not only managed the crisis better but is also able to benefit from the discomfort of rival memory manufacturers.

It's not that Samsung is not hurting. In Q1, for instance, Samsung reported operating margin of 4 percent, down sharply from 9 percent in the preceding quarter and 12 percent in the comparable 2007 quarter.

Though disappointing, the results were vastly better than figures reported by rivals, including fellow Korean Hynix Semiconductor, which said gross margins slid to minus 11 percent and operating profit margin was negative 30 percent for the quarter.

The situation was only mildly better at Micron Technology Inc. The company reported gross profit margin of -3 percent for its latest quarter ended February 28. Operating profit margin during the same period fell to -57 percent, worse than at Hynix.

This pattern is forecast to continue in Q2 with some relief coming perhaps in the second half of the year when back-to-school sales and a snapback in demand is expected to improve prospects for higher pricing.

Until then, Samsung is going to pile on the pressure through a combination of technology initiatives, product differentiation and a willingness to absorb more body blows related to lower pricing, according to Woosik Chu, VP of investor relations at Samsung. "In the second quarter, we expect weakness to continue and any meaningful improvement would have to wait until the second half of the year," Chu said. "In particular the memory market is expected to continue to experience difficulties due to lack of demand and supply overhang."

With the problem so clearly defined, it would seem obvious that Samsung would work towards reducing supply—for instance by reducing production—and insisting on firmer pricing at OEM customers.

Jacking up production
While this might seem counterintuitive, however, the company is heading in a different direction. It expects to jack up production sharply in the quarter, well above industry average, according to semiconductor unit head Kang.

The company also said it would increase investment further to separate itself from the competition. The strategy is based on the belief at Samsung that victory in the bruising memory market war will depend not merely on achieving improved demand and higher ASPs but on forcing some vendors to abandon the business. The only way Samsung can achieve the long-term goal of winnowing the DRAM field is to improve its ability to withstand further price weakness by lowering production costs through technology improvements, according to company executives.

"We expect the memory market will remain weak but we are taking market leadership as capacity increase and the market recovery is delayed," Kang said. "2007 was a very challenging year for the memory market but our competitiveness has been very distinguished. We will try to increase our current memory market share through the most competitive cost structure and expansion of differentiated products."

It's a strategy that has so far worked for Samsung and while executives said the memory division might join rivals in posting negative gross margin in Q2, the company is unlikely to abandon the stealth move to deliver an eventual TKO to weaker competitors.

- Bolaji Ojo
EE Times