Internationalization of production

Although Samsung’s organizational strategy for the 1990s revolves around consolidation, the strategy for its physical production facilities involves increasing movement offshore

Samsung’s earliest overseas production efforts were a Portuguese joint venture  operation started in 1982, a US subsidiary established in 1984, and a subsidiary set up in Mexico in 1988. They had competencies in the production of CTV sets and many core components. By the end of 1988 it also had twelve sales subsidiaries outside Korea.

After unsatisfactory results with US production, Samsung focused more intensely on establishing low-cost manufacturing plants in Mexico, peripheral Europe, and Southeast Asia. Several factors stimulated this move. We have already discussed above the various factors eroding Samsung’s competitiveness, including market saturation, loss of preferential tariff status, and appreciation of the won. But an important motivation may have come from the strategies of its rivals.

Moves by Japanese and other Korean electronics firms seem to have induced Samsung to adopt a “follow-the-leader” strategy.29 In the mid-1980s, Japanese companies such as Matsushita, Toshiba, Sony, and Sanyo started to move into Southeast Asia to establish production subsidiaries. For instance, Matsushita’s foreign investment projects in Southeast Asia and China numbered five in 1987,four in 1988, three in 1990, four in 1991, three in 1992, and eight  in 1993

The consumer electronics goods produced by Japanese overseas affiliates started to penetrate into the low-end global market where Korean firms had predominated  until the late 1980s. Here was a strong challenge for Samsung. The Japanese brand products made in the ASEAN region were cheaper than the products made in Korea. In the case of microwave ovens, the cost of the Sanyo product, manufactured in Southeast Asia for the OEM market, was 13 percent cheaper than that made in Korea.

The same is true for the components. Matsushita started to produce CRTs and tuners in Southeast Asia, and expanded into China

Sony built a color CRT plant in Singapore  Toshiba, Matsushita, and Hitachi also established CRT production in the United States. Similarly, Asahi Glass and Nippon Electric Glass set up overseas operations.

Strategies based on international production were also adopted by Samsung’s Korean rivals. In 1988, Goldstar signed a contract with the Chinese government to acquire 165,000 square meters of land in the Zhuhai Economic Zone for the construction of a manufacturing plant to produce CTV sets and audio equipment to be sold on the Chinese market Around the same time, Goldstar moved into Thailand with Samsung right behind.

Finally, it should not be overlooked that Samsung’s recent thrust into offshore production was enabled by its successful accumulation of technological capabilities which could now be transferred. Nearly all of Samsung’s foreign affiliates are engaged in the production of standardized products, utilizing mass production capability transferred from Korea. It has been able to build on its initial forays into foreign production. Recently SEC transferred Park Byung Moon, who had been a head of an Indonesian affiliate for a couple of years, to India, where it is setting up a new CTV plant.

Samsung’s highly centralized structure has limited the transfer of technological capabilities to overseas affiliates, even as they face new competitive requirements. Samsung’s affiliates have been forced to interact with a growing variety of economic actors, including those within the group. Hence, each organization in the network requires greater autonomy to avoid bureaucratic paralysis in the network as a whole. In early 1995, shortly after a wave of administrative consolidation had swept over its Korea-based operations, Samsung extended the concept to its offshore production networks by designating five regional headquarters around the world.30 Of the five, two were in Asia. Their locations— Singapore and Beijing—reflected the relative separateness of the two offshore production networks that had been created by Samsung in the region.

In particular, SEC’s in-house R&D operations have continued to be highly centralized. The hierarchical integration has failed to provide researchers and engineers with satisfactory R&D circumstances. According to company surveys Samsung engineers complained most about an unsatisfactory R&D working environment being overloaded with projects insufficient time for the feasibility study of future projects and being overwhelmed with documentation and paperwork requirements

Many of the organizational problems that hindered the development of effective product innovation in the past continue to plague SEC.  reported that production departments are seldom involved in the early stages of new projects, that projects were chosen by the corporation on the basis of their expected short-term impact on individual strategic business units, that projects reflecting a longer term outlook were likely to be suppressed by marketers