January 21, 2020

Samsung assets and net profit margin of the company

Samsung
Electronics Corporation Limited, along with its subsidiaries, is dedicated to
consumer electronics, mobile communication, information technology, and device
solutions businesses around the globe (Yahoo Finance, 2017). As a diversified
electronics conglomerate, Samsung produces and sells not only smartphones, but
also telecom network equipment, medical equipment, home appliances, printers,
and semiconductor chips. In 2017, the return on assets and net profit margin of
the company are both higher than the industrial average (Morningstar, 2017),
showing sound financial performance.

Samsung has
engaged in aggressive global expansion over the years, and in 2001, its markets
have expanded to 46 countries, with 66,000 people being employed, making the
company become the biggest memory TFT-LCD producer around the world, as well as
a global leader in consumer electronics, semiconductors and digital convergence
technology (Samsung, 2001). The major international markets of Samsung are the
United States, Europe, China, and Japan. Around the world, the company has 15
listed affiliates and 43 non-listed affiliates. The regional headquarters of
the company are in North America, Africa, Middle East, China, Southeast Asia,
Southwest Asia, Europe and Latin America (Samsung, 2016). In 2016, although the
global market share of Samsung smartphones slightly declined, at 21.2% compared
to the 22.3% in 2015, it was still the global market leader as far as
smartphones were concerned. In India, Samsung led the smartphone market by a
26% market share (Rogers, 2017). As a representative of the Korean electronic
multinationals, Samsung has set up competitive leadership in international
markets.

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In this report,
the global expansion strategies of Samsung will be compared with other
industrial players in Asia, so that the related issues regarding the
international business models of the Asian electronic multinationals can be
explored and clarified.

 

The
FDI activities of Samsung compared to other companies

In 1970, Samsung
managed to successfully manufacture 12 vacuum tube black and white TV, and
afterwards, the company tried to improve the quality of the TV and export them
to Latin America. After 1974, the company began to export the AM/FM
radio-cassettes to the United States (Samsung, 2012). In the 1980s, Samsung
grouped together electronics and mobile phone sections and started to make high
investment in research and development, to smoothly expand to Texas, Austin,
England, Tokyo, New York, and Portugal. The company began to grow into an
international company in its real sense since the 1990s, with its construction
projects expanding to Malaysia, Taiwan, and UAE. In 2011, Samsung bought the
stake of Sony in their joint ventures to fully control the LCD panel
partnership. Apart from exports, joint ventures, and acquisitions, the company
also constructed a semiconductor production plant in Austin Texas of the US as
a greenfield investment (Burris, 2017).

Samsung follows a
stage-oriented process facilitated by isomorphic pressure and incremental
experiences, and tends to focus global expansion initiatives on culturally and
geographically proximate nations, which may be compared to Japanese
multinationals (Hemmert & Jackson, 2016). However, there are also
differences between the two, with Samsung and other South Korean companies
tending to be more risk-taking in global expansion, making more rapid
investment in emerging markets, which can explain the more successful business
expansion of Samsung in China than Japanese electronics companies (Hemmert
& Jackson, 2016).

Compared to
Japanese firms, Samsung entered international markets relatively late. For
instance, it started business operations in China as late as around 1992. The
entry into China is market-seeking, and joint ventures are the popular form of
entry mode, along with wholly-owned subsidiaries in the 1990s. Afterwards when
the company started to set up local production in China (Hemmert & Jackson,
2016), the nature of its Chinese expansion became one for resource-seeking,
mainly the cheap and abundant labor sources in China. Thus, market and resource
seeking may be two of the major motivations of Samsung to become
multinationals.

 

The
theoretical explanation of the FDI activities of Samsung

There may be many
FDI theories that can explain the Samsung’s activities. First, the Hymer’s Monopolistic
Advantage Theory indicates that incomplete competition, as a kind of market
structure deviated from complete competition, can help form monopolistic
advantage to become the determinant of FDI (Hymer, 1960; 1976). In this regard,
it can be judged that the investment by Samsung in the markets of developing
countries is based on its monopolistic advantages compared to local firms that
had not developed mature technologies, products and marketing experiences when
the Samsung’s FDI was made. In addition, Vernon’s product life cycle theory
(1966; 1979) can also be used to explain Samsung’s FDI; Vernon states that the
monopolistic advantage no longer exists during a product’s standardization
period whilst its cost and prices become more important. As a result of this,
the developing countries are highlighted as the best manufacturing locations
for multinationals due to their low-cost advantages. The manufacturing bases
established by South Korea in developing countries agree with this theory.
However, this theory cannot explain the factory built by Samsung in the United
States. The comparative advantage theory of Kiyoshi Kojima (1966) also cannot
explain the factory in the US, because there may be no comparative advantage for
Samsung given the fact Apple operates in America.  

When the
internalization theory of Rugman is applied, there may be a certain kind of explanation
for the FDI made by Samsung in the developed countries, namely, because the initial
cost of R&D into product research is high, the best way is to create an
internal market within the firm in an artificial way to cover the rent expenses
(Rugman & Verbeke, 2003). According to Rugman and Oh (2008), the R&D
expenses of the largest 10 Korean companies account for 70% of the total among
the biggest 550 firms in the country. The three biggest companies; Samsung, LG
and Hyundai account for 51% of the overall R&D expenses of the 550 biggest
companies in South Korea (Rugman & Oh, 2008). The R&D investment of
Samsung is huge. Thus, to protect its intellectual properties and interests,
Samsung invests in the US to eliminate the uncertainty between the buyers and
the sellers, as well as eliminate the adverse influence of the market. In
addition, the company can also avoid the intervention by the government,
transfer capital, or even evade taxes. In this way, Samsung tried to establish
its global competitive leadership.

In this sense, it
can be judged that the entry into the Chinese market by Samsung may be market
and resource seeking, while the entry into the US market by the company may be
efficiency seeking. However, the FDI by Samsung may not be for technological
asset seeking. This is different from the multinationals of some developing
countries such as India which acquired foreign assets to help themselves access
new technologies and products to overcome their restricted product development
capabilities (Pradhan, 2010). Samsung possesses relatively mature,
independently-developed products and technologies, and it does not need to
engage in aggressive technological-asset seeking FDI. Samsung is also different
from Chinese multinationals that have been always motivated to make investment
in specific locations to seek assets, such as the natural assets in Latin
American and Australasian countries. However, Samsung may be similar to those
Chinese MNEs which seek strategic assets in North America and relational assets
in Asia (Liu & Scott-Kennel, 2011).

As mentioned
above, compared to Japanese MNEs, Samsung and other Korean MNEs engaged in FDI
activities relatively late. But Korean MNEs began foreign expansion earlier
than Chinese MNEs. Regarding strategy and entry mode, Korean MNEs preferred
sharing control rights with a local partner if their affiliate was in a
resource-based industry; or if they entered a nation that had a big black
market; or if there were big socio-cultural difference between the home country
and South Korea (Chun, 2009). On the other hand, in high-income countries,
Korean multinationals would set up their affiliate production bases to evade
the trade restrictions (Lee, 2004). Lee et al. (2011) also found that South
Korean MNEs favored a new business establishment when they entered a foreign
market, namely, to set up a wholly-owned subsidiary. There is similarity
between South Korean MNEs and Japanese MNEs in terms of the preference of
greenfield investment to acquisition, since greenfield investments could help
Japanese firms eliminate or reduce future protection in the US and European
market, such as “quid pro quo investment” to prevent the backlash by acquiring
a local company (Yamawaki, 1994).

 

The
OLI or the LLL factors of the FDI by Samsung

In terms of the
successful factor of Samsung’s engagement in the FDI, they can be explained
better by the OLI framework, namely, ownership, location and internalization
(Dunning, 1981), rather than by the LLL paradigm, consisting of linkage,
leverage and learning (Mathews, 2006). This is because the LLL paradigm may be
more appropriate to explain the FDI by developing country’s MNEs such as
Chinese, Indian, Russian and Brazilian companies to benefit themselves by
accessing advanced technologies through imitation, so that the property gaps
could be reduced between them and the developed countries. However, for Samsung,
this LLL theory may be not that proper since before engaging in FDI, Samsung
would generally develop an advanced technology or product first and then move
into foreign markets. Samsung has ownership advantage in the OLI theory, and it
is mainly seeking locational advantage and internalization by carrying out FDI.
For instance, it invests in China to seek the location advantage such as huge
markets and cheap labor, while it enters the US to pursue the advantage of
internalization.

In terms of
production and operation, Samsung has big, complicated and worldwide supply
chains in most produced products, and takes broad advantage of SCM process
innovations and solutions to improve and support its operations, such as
advanced planning and scheduling systems. The company has been selected as the seventh
best company around the world in supply chain excellence. In addition, the
adopted Six Sigma methodology enables Samsung to have excellent product quality
(Yang, et al., 2007). In terms of R&D and innovation, Samsung has more than
50,000 employees working in 42 research centers around the world (Samsung,
2017), and the company uses a systematic method to innovate, laying the
foundation for its success (Shaughnessy, 2013). On top of that, the company excels
in multiple other aspects such as marketing, product design and branding (Yoo
& Kim, 2015). These internal capabilities and resources are the ownership
advantage possessed by Samsung making it unnecessary to pursue leverage and
learning by carrying out FDI. Instead, the company only needs to take advantage
of its ownership advantage to further seek the location and internalization
advantages of FDI.

 

Management
and organization

Regarding management
and organization, it’s known that Samsung is a family-owned firm. This means
the company has a centralized organizational structure which may lead to the
negative effects such as sibling rivalries, succession battles, espionage and
sabotage (Shen, 2015). The company does not possess the public corporate
organizing structure of most companies in the US and Europe. The management of
the company is divided into three business divisions, Device Solutions,
Consumer Electronics, and IT Communications (Samsung, 2015). Despite
the concentrated ownership structure, the company has a set of affiliated
businesses and subsidiaries generally using the brand name of Samsung
(Nordqvist, 2014). Therefore, the level of centralization may be high if seen
comprehensively from the perspective of Samsung Group. However, from the
subsidiaries and affiliated business perspectives, the global operations and
management of Samsung may be a decentralized one. This can be explained by the
internalization theory of Rugman, namely, using the combination of a
centralized group structure and a decentralized subsidiary structure,
internalization can be achieved to form an internal market to prevent the
losses of technological advantage. It is also used to meet the needs of special
product transactions, to pursue economies of scale, to obtain high monopoly
advantage, avoid foreign exchange control, and avoid taxes by taking advantage
of internal transfer prices (Waheed, 1992).

 

 

The
role of government

From the
perspective of the South Korean Government, as the most powerful family in
South Korea, Samsung is supported by the national Government in its global
expansion (Harlan, 2012). It was reported that in 2012, the Korean Government
endowed Samsung more than $155 million in subsidies directly, despite the
criticism that national subsidies would be more effectively utilized to assist
in SMEs rather than large companies (Lee & Ryu, 2014). Therefore, the
outward FDI by Samsung is under the strong support of the South Korean Government.
Regarding the internalization and locational advantage pursued by Samsung in
foreign markets, the role of foreign Government in stimulating inward FDI is significant,
such as the Reform and Opening-up Policy of China.

 

Conclusion

In conclusion, as
the representative of South Korean multinationals, Samsung’s FDI activities
which allow it to compete globally may have some similarities to those of
Japanese companies, such as stage-oriented process facilitated by isomorphic
pressure and incremental experiences, focusing of global expansion initiatives
on culturally and geographically proximate nations. However, there are also
distinctions between South Korean, Japanese and Chinese MNEs in their outward
FDI, such as different time periods to start and surge, different entry modes
and strategies. During the 1980s, the Asia-Pacific multinationals engaging in
FDI were mainly from Japan, followed by the South Korean multinationals in the
1990s, and the Chinese MNEs since 2000. Such sequences can be better explained
by the product life cycle FDI theory by Vernon. In a series of FDI theories,
apart from the OLI paradigm by Dunning, other theories either cannot explain
the FDI motivations of Samsung, or can only partially explain them. OLI, as a
comparatively comprehensive summary of existing FDI theories, can explain the
ownership advantage possessed by Samsung to help it gain global competitive
leadership. On the other hand, the LLL theory cannot explain well Samsung’s
global leadership, since the company has fostered a set of internal
capabilities that can enable it to bypass the learning and leveraging purposes
when engaging in FDI which is insightful for the companies that expect to gain
global presence and competitive advantage via FDI initiatives.

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