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What’s behind Samsung’s Profitable Growth? May 5, 2003 Samsung Electronics announced last week that its profit dropped 41 percent during the first quarter of 2003. In response, Samsung increased its already aggressive investment budget to $5.65 billion, nearly two-thirds higher than last year's. New York Times, 25 April 2003 (my italics)
For most companies, these two sentences would not fit together – a decline in profit doesn’t usually stimulate an increase in investment. Samsung Electronics, however, has been investing successfully and aggressively for many years, during both profitable and unprofitable times.
The company’s resulting performance has been very strong:
Ø Last year, Samsung was the world's third-most-profitable electronics company, after General Electric and Microsoft.
Ø Its market capitalization is now bigger than Sony. On 24 April, Sony announced a profit on sales of 1.5 percent for the fiscal year, compared with 17.5 percent for Samsung last year.
Ø Samsung is now the world's largest producer of memory chips and flat screens. Ø In mobile phones, Samsung has become the fastest growing of the world's big three manufacturers — the other two being Nokia and Motorola. In the last two years, Samsung has doubled its share of the world market. It sold $10 billion of mobile phones in 2002.Samsung’s top spokesman, Chang Il Hyung, recalls being asked by an American: "How did Samsung become so successful in less than 10 years?" The answer he usually gives: "Before [the financial crisis of 1997], we looked at market share, not profit. Now, profit and market share are important." This explanation is repeated in many stories on the company. It seems a bit simplistic – a company becomes one of the world’s leaders in a highly competitive global industry by deciding to focus on profit as well as market share. But this may be a good example of the kinds of simple rules that enable a large organization to move quickly in volatile markets. With a company this diverse and dynamic, simple rules and explanations may be the best ones to cover the array of businesses that fit under the Samsung umbrella. For example, the emphasis on profit as well as market share can explain Samsung’s decision to place a large number of bets on a variety of specialty chips. Niche products like graphics chips for game consoles and flash-memory chips for cell phones and hand-held computers have helped Samsung make money in an industry plagued by overcapacity and declining demand. As Kenji Tokuyama, who heads NEC's DRAM venture with Hitachi, noted in late 1999: ''This is a company that is investing in technology and new equipment to stay ahead. We regard it as a formidable competitor.'' At this point, less than four years later, Samsung has pulled far ahead of its Japanese chip making competitors. The nearly $500 million in profit recorded in the first quarter of this year by Samsung's semiconductor division is about equal to the forecasted combined profits for Japan's five largest chip makers — Toshiba, NEC, Hitachi, Mitsubishi Electric, and Fujitsu. Samsung also continues to invest aggressively in chips. It plans to invest about $3.4 billion in new chip plants and equipment this year. By contrast, the total investment plans of Japan's five largest chip makers add up to about $2 billion.
For additional information on Samsung’s current and historical performance, see:
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