Samsung Case Analysis: Key points
Q1: How attractive is the DRAM industry?
The DRAM industry is unattractive and will be increasingly unattractive for incumbents going forward. The average industry profitability has been going down over the years and most incumbents have left the industry or have been acquired after a string of heavy losses.
Profit potential in the industry will increasingly be under pressure due to on‐going fierce industry rivalry as high fixed costs and excess capacity leads to price cutting and incumbents cannot shield themselves from price competition because product differentiation is difficult on standard products. Future investments in Fab capacity will disrupt industry supply and demand further and will ultimately lead to further price cutting which will put significant pressure on industry profitability. Incumbents will face further pressure from the rising relative bargaining power of suppliers who will pass on increasing R&D costs to incumbents.
At the same time, entry barriers that have shield incumbents before from entry will be ineffective at stopping large scale entry from Chinese companies seeking a strategic foothold in the semiconductor industry and will use their large access to cheap financing and relatively cheap but skilled labour to seek a low cost competitive position which will depress prices further. Whilst there are few effective substitutes, developments in ‘hot’ areas such as flash memory are displacing DRAMS in selected products and there is always the possibility that a disruptive technology can spring up. Given the poor outlook for the
DRAM, I expect to see further consolidation within the industry and an increase in strategic alliances between the west and the east as incumbents seek to take full advantage of opportunities in the emerging markets.Q2: How is Samsung positioned relative to its