Josephine Moulds talks to Samsung Electronics chief executive, JongYong Yun, about format wars and the upcoming challenges of convergence

It was only a couple of months ago that the chief executive of Samsung Electronics, Jong Yong Yun, said he did not expect to have to deal with another price-fixing scandal after the consumer electronics giant was fined $300m (£152m) for its part in a memory chip cartel.

'On a rare visit to Europe for the World Cyber Games in Milan, he said: "We are taking measures to prevent this from happening again through our training and education of the sales force, and we will make sure that price-fixing never becomes a problem.

Oops. Last week Samsung and the other two top LCD panel makers, LG Philips LCD and AU Optronics, announced they were being investigated by authorities in the US, Europe, Japan and South Korea for "possible anti-competitive conduct".

If found guilty, the LCD makers could be fined up to 10pc of the sales generated from price-fixing in Korea, or up to 10pc of global turnover by the European authorities. Luckily for Samsung and its rivals, analysts have dismissed the case as regulatory nonsense.

Paul O'Donovan, a principal analyst at Gartner, says: "I think the investigations are ludicrous. The so-called price-fixing – that there were alleged production-limiting agreements to counter price declines – this would be an act of gross stupidity by LCD manufacturers.

"The industry is trying to change consumers from one display technology to another. The only way to do that is to push them out at an ever-decreasing price. The idea of trying to limit production does no good whatsoever."

That said, any investigation could be a long and expensive process. O'Donovan says: "These guys have got to put some money aside for the possibility of any fines to arise out of these investigations. For the big multi-product companies like Samsung, that shouldn't be such an issue."

Yun has so far stayed shtum on the latest price-fixing allegations. It's another irritation for Samsung, which has been struggling with slowing sales growth despite its leading position in a number of its markets, which range from semiconductors to microwave ovens, flash memory and networking switches.

Muttering in guttural Korean translated by a chirpy female translator to somewhat surreal effect, Yun says: "Generally speaking, once sales numbers hit $70bn or $80bn usually the sales growth rate starts to fall down unless there is a breakthrough product in the market." But he admits there are other forces at work. "As you know, recently the prices of digital products are going down. For example if you look at the prices of LCDs or DVDs for the past two or three years the prices have more than halved.

"So production amount is going up but the prices keep dropping very, very fast so the growth rate is not as high as we would like. In the past five, six years we have never cut down our margin on purpose to increase market share. However, competition is very fierce and sometimes we had to keep up with the trends."

He concedes that Samsung has actively pursued a deflationary strategy in some areas. "In the handset business we used to focus on the mid to high-end products. However, the technology is taking some time to go from the second generation [simple voice and text] to the third generation [video calls and high-speed internet access] and the market share is not increasing as rapidly as we want. So in order to recover the market we are trying to focus on the low-end and the handsets in the emerging markets."

Otherwise, Yun says, it is a question of staying ahead of technology but recognising the importance of marketing and "brand equity".

It is somewhat of a departure for Samsung to emerge from the technical labs to focus on the marketing of its technology but recently it has done just that. Yun explains how the handset business, for example, has a close relationship to the company's image. In addition to the high-volume low-end phones, Samsung has thrown money at an advertising campaign to promote its stylish Ultra series. It has also sponsored a number of sporting events, such as the Olympics and the World Cyber Games.

He says: "In the past we did not make enough effort to add value in the market. We needed to do more in order to enhance loyalty. Largely we try to put smart products in the market. And we paid a lot of attention to our distribution channels. We made sure we used the high-end channels."

Marketing will no doubt play a significant part in the battle to produce the successor to the DVD format. Just 25 years after the showdown between VHS and Betamax, the electronics giants have constructed a high-definition sequel of the format war.

Samsung is pushing Blu-ray technology together with rival Sony, which has integrated a Blu-ray player in the forthcoming PlayStation 3. This technology is up against HD DVDs, backed by Toshiba among others, which now have about 10 playback devices including a $200 add-on to Microsoft's Xbox 360 games console.

Both formats store more data than standard DVDs on the same amount of physical space and so are more suited to high-definition video. The Blu-ray format has higher storage capacity than HD DVDs; while HD DVDs can also be played on old DVD players.

But the most significant difference between the two is the content available on both formats. Universal has opted for HD DVD, while Sony will only release on Blu-ray. Warner Bros offers far more titles on HD DVD and it remains to be seen on which side of the fence the other studios will fall.

This, however, is but a minor issue when you consider the challenges thrown up by the apparently inevitable trend towards convergence of different technologies. Yun says: "Convergence technology will become ever more important. In the past TV was simply a TV, camcorder just a camcorder. It is converging slowly now but in the future it will be even more so.

"In the past competitors usually meant companies in the same industry but in the future we will have competition from different industries as well. For example [Hewlett Packard] has jumped into the TV market and Apple is in the consumer electronics industry with us."

As a result Samsung is now competing with many of its major clients, such as HP which buys many of its components from Samsung.

Yun says: "It is an issue because they are our clients, but if you have to compete you have to compete. And when you have to co-operate you have to co-operate."

The trick, as the regulator will no doubt point out during its price-fixing investigation, is not to confuse the two.

Samsung Electronics DMC Outlines Aggressive Strategy for "High-Speed Growth";

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Saturday, December 31st, 2011

Kim Jee-hyung ([email protected])

 

Choi Gee-sung, CEO of Samsung Electronics, Digital Media Communications

SEOUL, KOREA -- The global economic recession does not seem to daunt Samsung. In fact, the company is determined to use its current position as a world leader in electronics in order to outproduce and outsell its competitors in the year ahead.

In mid-December, Samsung announced a widely anticipated reorganization, which addresses the conflict of interest among its many tentacles in the backdrop of the company's ongoing patent war with Apple. Samsung Electronics is now divided into Digital Media Communications (DMC) which will oversee finished, consumer goods such as smart phones and tablets, and Devices Solutions (DS) for its component products such as LCDs and memory chips. CEO Choi Gee-sung, who previously headed the entire company, will now oversee the DMS division.

At its recent global strategy meeting where its new chief management was present for the first time, CEO Choi Gee-sung outlined an aggressive strategy for ‘’high-speed growth’’ for 2012, at a rate much higher than what the market expects. The company plans to double its production of smart phones and smart pads, and has set a milestone for producing not less than 50 million units of television sets for 2012. With the industry on a tireless march towards convergence, Choi was quick to point out the significance of the reorganization to the employees. “With the proliferation of smart devices, the reshuffle in the electronics industry is expected due to the break-down of barriers. We must prepare for the uncertainty of the ongoing global recession, with firm market leadership and risk management.” Choi also emphasized Samsung’s successes in 2011. “Despite the global recession, we were able to maintain satisfactory growth, especially in smart phones, which made significant growth in sales in emerging markets in Africa and the Middle East.”

In cell phones, the company has set a sales target of 450 million units, up from 120 million in 2011. Samsung became the most profitable mobile phone maker by revenue in the third quarter surpassing Apple, but still trails Nokia by volume. If it reaches its target, Samsung will also overtake Nokia’s lead. For the fourth quarter of 2011, cell phone sales are expected to reach 100 million units. The company announced on December 29 that it has already sold more than 1M units of Galaxy Note, launched just two months ago. Samsung projects that 40 percent of its sales in cell phones in 2012 will be from smart devices, an increase of 125 percent from 2011.

For smart pads, the sales target is 250 million units, up 150 percent from 100 million units in 2011. After redesigning its Galaxy Pad, Samsung regained entry into Australia at the end of November, a major victory for its tablets against its ongoing patent war against Apple. Germany is also likely to favor Samsung’s redesigned Pad, where a new hearing is scheduled for February 9.

As for TVs, Samsung aims to grow its sales by more than 10 percent, where the company is the undisputed leader. Yet this goal is extremely ambitious considering current market conditions. Samsung will be looking especially towards expanding its sales of smart TVs, and will be focused on refining premium TVs such as OLED, Google, 3D, and LED TVs.

For 2012, Samsung’s priorities are: to create more value through product differentiation, to strengthen its competitiveness through expansion, and to improve its risk management of uncertain economic conditions. The DMC division will look especially towards developing its software business by building its own operating system for its hardware and will be recruiting the world’s best developers. Samsung will continue to expand its mega-enterprise, through exploring early entry opportunities into multiple sectors: medical equipment, B2B solutions, services and marketing, just to name a few.