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Apt pupil

27 April 2012 By Wayne Arnold

The Japanese may have pioneered the model of a vertically integrated electronics manufacturer, but Samsung looks to have perfected it. The Korean company started by pulling apart Japanese TV sets, then reverse-engineered the manufacturers’ business model. By avoiding their missteps, it’s driving them out of TVs and carving up the smartphone market with Apple. Now, as more business is coming from emerging markets, Apple needs to watch out for Samsung’s still-growing appetite.

Samsung, which made its name in televisions, is more of a smartphone company. Phones account for most of its sales, and earnings growth. It sells more of its Galaxy product than Apple does iPhones. Yet Samsung is still turning a profit on everything it makes. It has a larger share of the global TV market than Panasonic, Sharp and Sony combined, and is making money. It even makes money on LCD panels and memory chips.

Japanese companies say they are hurt by the rising yen, which erodes earnings abroad. Korea’s won has fallen 29 percent against the Japanese currency in the past decade. On average, though, the won has dropped only about 1.7 percent a year. The cheap won was probably most helpful to Samsung in the 1980s, when the price advantage gave it breathing space to make up ground on quality.

Samsung did learn from its neighbours’ mistakes, though. Japanese firms made their own parts, and avoided trading with rivals. Samsung is a major supplier of chips and screens to competitors like Apple. The Japanese cannibalised the TV market by developing both LCD and plasma-screen. Samsung bet on LCDs. The Japanese stuck to a more profitable home market for mobile phones. Samsung discovered a new world of profit overseas.

The problem for the Japanese – and Apple – is that Samsung can now outmuscle them. Sony spent only half the $2.4 billion Samsung shelled out on R&D last quarter. And though Apple’s investments are ample, it is having to turn to Sharp and Sony to reduce its reliance on Samsung for high-end components.

Samsung has also perfected the Japanese tactic of product differentiation, and offers several versions of its Galaxy at different prices. Added choice could help it extend its lead on Apple in fast-growing but more price-sensitive emerging markets like China. Even Apple, now, could get bitten.


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