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Weekly Podcast: The Korea 9.9 with Daniel (May 24, 2010) - “Is Samsung too big to catch?"
The KBC 9.9 with Daniel
"Is Samsung too big to catch?"
Click the button to hear online our exclusive interview, or download the mp3 file to your computer (10:33 min. length).
Listen to the podcast below and then share your thoughts in the discussion below (Hint: We are looking for controversy in this discussion so don't hesitate to disagree with what other have said.)
For details on the new KBC 9.9 with Daniel podcast, check out this page: http://www.koreabusinesscentral.com/page/kbc-99-with-daniel
Daniel is already putting together his panelist list for next week. If you'd like to join, email Daniel directly at d.lafontaine@glomedics.net.
Full Transcript of Podcast
Daniel: Hi, this is KBC 9.9 with Daniel. I’m Daniel Lafontaine. Today, we’re talking about is Samsung too big to catch. But, first, before we get to the topic, I would like everybody to introduce themselves. Joon Kang, can you start this off for us?
Joon: Hi, this Joon, and I have a webpage www.rokchannel.com that I’m developing right now, and I also do trade.
Daniel: Okay, very good. Next person on the list, Mark.
Mark: This is Mark Bartholomey. I’ve been working with Korea and in Korea on and off for about the past decade and, right now, I work in the education consultancy field.
Daniel: Excellent. And Robert?
Robert: Hello, I’m Robert Eberenz. I went to University of Clemson University, majored in management. I currently operate and write analysis for www.diamondslice.com. It’s a financial market analysis webpage.
Daniel: Excellent. And Scott?
Scott: Hi, my name is Scott. I recently graduated from Tepper School of Business at Carnegie Mellon University with a degree in finance.
Daniel: Very good. So, what do you guys think? I’m going to open the floor very simply and very easily. Today, we’re going to talk about is Samsung too big to catch. Any thoughts? Who would like to start off.
Mark: This is Mark. I think it’s important, first, that we be clear what we mean by too big to catch. What’s the measuring stick? If we’re discussing the company share price, that’s one thing. But, if we’re discussing whether or not anybody can catch them in manufacturing overall and if there’s going to be another company that comes and sort of steals the reign in that environment, then certainly there’s a big challenge there. I’m not sure exactly what we should be talking about right now.
Daniel: Okay. Let’s just talk about the fact that, Samsung, is it too big to catch? What do you think, Robert? What would be the best measurement to talk about this?
Robert: In my opinion, the “too big to catch” phrase actually came from an article published by Bloomberg on the heels of, basically, their record profit in the past quarter. I think 18 trillion won in capital spending they’re planning on putting into their R&D department. They recently became the largest electronics manufacturer in the world by market share.
So, I think that, basically, the metric that was used when the phrase was coined was a matter of revenue, and whether or not they were going to be able to maintain the growth that they have.
Daniel: Okay. What about you? So, if we go this way by revenue, is there anybody out there in the next 5 years, next 10 years, next 50 years? When I think of too big to catch, I always thought about GM. GM, in 1930, was the biggest company and it stayed the biggest company for the next 75 years in terms of car manufacturing.
Joon: This is Joon. That’s a great point you brought up. Also, 20 years ago, we also said the same thing about Sony in the 80s. I don’t know how young or old you all are, but in the 80s, we were saying the same thing about IBM.
I think what we have to look at in terms of Samsung and Sony is that Samsung’s genius is in that they’re both a supplier and a competitor.
Daniel: That’s true. In many ways, if you read Samsung, a lot of stuff that Samsung makes, in terms of American business practice, a lot of times, you have a company who is really focused in one area like Intel. They still make lots of chips, and their specialty is chips. You know if you want to get an Intel chip, it’s going to be great; otherwise, Intel doesn’t go into other areas too much. Have you ever seen an Intel phone? It’s not possible. I just wonder, does the American business model allow itself to catch a company like Samsung? Any thoughts?
Joon: Well, I think we shouldn’t look at America. I think we should look at what’s coming up within Asia or Canada. Nobody knew about RIM before, so there may be a company in China that we don’t even know about, or India that we don’t even know about right now.
Daniel: Exactly. So, what do you think, Robert? When I think about China, China is a billion people. Do you think there could be a company in China today that might blow everybody out of the water in the next ten years?
Robert: I think that China is probably the place that you would look for that kind of company because what really benefits Samsung is the pricing of their products. They’ve been able to essentially replicate technology from innovators throughout the world at cheaper prices, and make it basically just as good or higher quality.
This was mentioned on the discussion forum on KBC that they really need to define themselves as an innovator. When you look at companies like Lenovo that used to make the laptop computers for IBM, they learned to do it just as good as IBM, then they bought the rights from it and now they’re operating on their own.
With the Chinese economy and how cheap labor is there, that’s probably where you’re going to see a company that would be able to ride up and rival them as far as price competition.
Joon: I kind of disagree. I don’t think the next innovation will come from China. I think the next innovation will come from India because Northeast Asian countries, as a whole, they tend to play the “follow me” game.
So, they’ll find an innovative product, as you stated earlier, make it better, just as good or better at a cheaper price; whereas India sociologically or historically tends to be more innovative. As we look at Silicon Valley, a lot of the innovators are Indian, not Chinese, or Korean, or Japanese.
Daniel: What about you, Scott? What do you think about that? Do you think the biggest innovator will be coming out of China or India? What about America? Do you think America still has what it takes to make a great company? Scott?
Scott: Yeah.
Daniel: What do you think in terms of China, in terms of India, in terms of America? America has great people, great finances, great financials. Do you think America has what it takes to create a new company that can rival Samsung?
Scott: I think American companies have the potential to raise more capital than companies in other countries. For example, Cisco, it’s leveraged enough its position and it’s leveraged enough its operations bringing in a higher ROI than any other company in its field. So, I think if it’s a company, it should be an American company.
Mark: I think everybody, we can speculate on where’s the disruptive innovations going to come out of whose basement, or whose Silicon Valley incubator or what have you. But, no matter what business or anything that anyone’s in, there’s going to be that risk of the unseen competitor.
In terms of what they’re doing right now, they’re spending as they normally do in times of consumer pain apparently, is tossing, throwing down billions, I think over $20 billion or something like that in CAPEX.
To any foreseeable ends that they know at the very frontier of manufacturing technology, they’re just ready to put all of their chips in as much as they possibly can.
Daniel: Very good. Our time is almost up. Any last thoughts, everyone? I’ve got to give you 20 seconds each. Joon Kang, what do you think?
Joon: Well, I think that Samsung, I think what they have to do is create a new, innovative technology where they can stay ahead of the game instead of keep throwing money at R&D to make things cheaper, and better and all that. So, they should start focusing on innovation.
Daniel: Very good. And Mark, what do you think?
Mark: I agree. But, I think they’re also tossing a ton of money on innovation as well. So, I think one major thing that they should look to do – and maybe they’re doing it already; I might just not be knowledgeable of it – is massive internal education and rewarding independent thinking.
Daniel: Very good. And Robert?
Robert: I agree that they’re throwing the money at the innovation, but sometimes that kind of thing comes best out of a startup. And when it comes to Samsung, I think their biggest headwind is basically the currency as Korea becomes a more developed country and the prices of labor force them to not have as competitive priced products.
Daniel: That’s true. And Scott?
Scott: Well, on a financial perspective, when Samsung turns to the other side and starts leveraging up its operations, it’s… so you can increase dramatically leading to a higher than ever profit. So, I think Samsung is still on the rise and will continue to be popular around the world.
Daniel: Excellent. Thank you very much, everyone. I hope you enjoyed our discussion. This is Daniel at KBC 9.9. I hope to hear you next week. Have a nice day.
Replies to This Discussion | 이 토론에 대한 답글들
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Permalink Reply by Steven S. Bammel on -
Great discussion guys!
Note that this episode of the KBC 9.9 with Daniel was inspired by the recent discussion posted by Robert Eberenz at this link: http://www.koreabusinesscentral.com/forum/topics/bloomberg-reports-...
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Permalink Reply by Steven S. Bammel on
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Another way to interpret the "Is Samsung too big to catch?" question is to wonder if Samsung's behavior as a Korean corporation is controllable within Korea? The book "Thinking Samsung" portrays a company that may be "too big to catch" in this sense.
I posted a photo link here: http://seongpodong.koreanconsulting.com/2010/05/thinking-samsung.html
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Permalink Reply by Mark B on -
Things like inefficient use of capital... and currency headwinds... those would all be reason to argue for downward pressure on the share price and for reduced multiples and such. I don't think these come close to unseating Sammy as the head of the manufacturing technology pack. Look at the American military - I would argue that their ROI is horribly inefficient, yet I would doubt any other military will come close to leading the pack anytime soon.
Let's assume every dollar Sammy spends on R&D generates 50% of the ROI they'd get if they were operating at some universal level of maximum efficiency. Another company would have to be nailing an ROI equivalent to 100% of that universal maximum - and they'd have to have spent US$10bn this year - to keep pace with Sammy's >$20bn.
So maybe Samsung could be more efficient with their spending, but I doubt their inefficiency is enough to allow any major competitors (in manufactured inputs - not in assembled consumer products) to catch up.
I think the more interesting question here is: Can Samsung (and Korean companies for that matter) successfully switch from being an imitator (and iterative innovator) to being a true innovator?
It's been years since Lee Kun Hee announced - both externally and internally - that the 21st century would be the century of design. “Intellectual assets will determine a company's value in the 21st century, the ‘era of culture.’ The age when companies simply sell products is over. In the new era, enterprises have to sell their corporate philosophy and culture. An enterprise's most vital assets lie in its design and other creative capabilities. I believe the ultimate winners in the 21st century will be determined by these skills.” As Korean exporters' input cost advantage continues to whittle away (to which Rob eluded in the voice discussion) they will have to increasingly add value through other means to keep overall margins up.
I have extremely strong doubts about Samsung's ability to develop a position of global leadership in the realm of design and creativity. Not to say they can't. but it would appear that Korean companies - particularly big ones with track records of success - will resist making the internal changes necessary to truly foster a culture that welcomes creativity and innovation.
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Permalink Reply by Steven S. Bammel on
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I agree with you Daniel. If you look at the trajectory that Samsung's on, it's only a matter of time before they address many of the concerns mentioned above. If the environment would remain static for them, they'd really have a heyday; the problems will come when a disruptive technology or business model comes along to knock them off their perch.
Even cheaper and more dynamic Chinese companies will be strong competition too.
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Permalink Reply by Robert Eberenz on -
It's hard for me to buy in to your point on the U.S. military. It's a public institution where funding comes through policy change, enacted by a select few individuals (politicians). Furthermore, revenues are forced payments from taxpayers and contracts are bid on by 1-3 players who have contributed to the campaigns of the politicians who award the deals. The U.S. military is as large as it is purely due to the amount of capital that has been injected into it for such a long period of time. Private institutions don't have shareholders or customers who are willing to subsidize an inneficient enterprise unless it were one that was propagated as the one force between them and an enemy bent on bombing their neighborhood, as is the view of many pro military tax payers towards our armed forces. Alas, that's getting into the fear mongering which has kept the U.S. military and the semi-private contractors who supply them, in charge for so long, and I digress.
Long story short, we can't make theories about the success of a tech giant based on a military track record on the other side of the planet. Not by my standards anyways...
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Permalink Reply by Mark B on
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At that level of detail, obviously the analogy is ridiculous and makes no sense. But I think you're giving my analogy too much credit for complexity. My point was to say the US military is a world-leading organization, it is inefficient, yet regardless of such inefficiencies, is not likely to be challenged by another nation's military anytime soon, because it can lay out so much cash.
So forget the US military thing entirely, it was included to illustrate my point about how to evaluate the competitive position of companies: though an organization may be inefficient, its inefficiencies don't inherently mean it is in a weak competitive position. So whether Sammy can squeeze a higher ROI out of its capex spending might be something of interest to investors evaluating relative share performance, but in terms of production and operations, they can operate by blunt force (of sheer cash) and continue to dominate. A billion dollars spent inefficiently is likely to trump a hundred million dollars spent with maxed-out ROI.
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Permalink Reply by Robert Eberenz on
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I gotcha Mark,
I guess I just don't get excited about companies nearing the peak of their business cycle. That's kind of what you're suggesting. They are large, their scope and scale allows them to use aggressive pricing and cap ex to force as many small guys out of the water as possible, but eventually there has to be organic growth.
A perfect example is the healthcare industry in the U.S. Pfizer spends billions on scale with "Sammy" in the healthcare industry and they'll still be churning out new drugs for a while, but nothing they really have grown in house. Instead they have to pick off startups at a massive premium and make everyone who invested in those firms filthy RICH. From an investors standpoint, and potentially a nationalists standpoint, a firm that represents a large portion of growth should be regarded with a long term perspective. Crappy ROI is a very very bad omen for a firm like Samsung, because that's the exact virus that brought Sony to it's lackluster current reality.
Maybe a good path for samsung would be to start picking off startups and then developing the technology through production on a large scale. I'm not so sure how Samsung would feel about that however...
There's some interesting stuff going on in the fiber optics and chip sectors in Korea and I think the innovation is certainly possible for Samsung. It will be interesting to see just what comes out of this 18 trillion won investment from their in house R&D.
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Permalink Reply by Mark B on
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I'm not even saying anything about the biz cycle. My sole point was that inefficient use of cash does not necessarily imply a weak competitive position.
Regardless, I never really thought of the whole in-house vs outsourced innovation issue before. Definitely an interesting point to raise. It is certainly better for Sammy to earn the same amount by spending less, so any innovation that happens outside the company walls could turn out to be a direct, potentially-massive hit to revenue and market share, or could be an expensive future acquisition.
That said, the price of an expensive acquisition might not turn out to be all that expensive when you consider other options. If a company funds 20 R&D projects over the course of 2 years and none of them bear much fruit, that's money that could have been spent on acquisitions.
If Samsung wants to develop in-house, the issue for Samsung and any other company is to offer an environment for the innovator/creative class that makes them want to think of ideas that benefit Samsung rather than Nokia, Apple, Google, or their own startups.
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Permalink Reply by Joon Kang on -
Sounds to me you have anti-Korean sentiments based on reading all of your posts and that only Westerners have the right and only answers. Android OS is an iPhone OS imitator, Windows is an Apple OS imitator, all the computer animated movies are Pixar imitators, learn business industry before you start spouting off at the mouth and saying only Asian companies are imitators when there are plenty of other companies that are also imitators outside of Korea.
MANY FORTUNE 1000 COMPANIES RESIST MAKING INTERNAL CHANGES, SO STOP APPLYING THE RESISTANCE TO CHANGE TAG TO ONLY SOUTH KOREA.
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Permalink Reply by Mark B on
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I would invite you to point out where I said or implied "only Asian companies are imitators" or said that Westerners have the right and only answers. I didn't do so. You are looking at this board through a prism of negativity.
I joined this board to have productive discussions. I have no need for these ridiculous ad hominem accusations that I have anti-Korean sentiment. I have no patience for people I don't know to make patronizing comments that I need to "learn business industry".
Best of luck, everyone.
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Permalink Reply by Steven S. Bammel on
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Here's a pretty pertinent article in the San Francisco Chronicle about innovation at Samsung:
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2010/09/04/BUV01F6...
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Permalink Reply by Steven S. Bammel on
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Yeah, that comment caught my eye too. Maybe they mean there aren't "Korean" guideposts out there since a Korean company has never been this far out in front before.
That's what innovation is all about though...
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