Samsung’s network in China

Samsung’s network in China is actually divided into two relatively separate pieces, one of which is located at Tianjin, and the other in Guangdong Province. A new electronics complex has recently been announced for the Singaporesponsored Suzhou Township, located about halfway between Samsung’s southern and northern China plants. In the early 1990s, Samsung selected Tianjin, which is close to Korea, as a strategic FDI location. SEC rapidly set up integrated operations to build first VCRs then CTVs. Samsung Aerospace Industries joined in this location to produce cameras for the local Chinese market. 

Tianjin Samsung Electronics  was SEC’s fourth offshore VCR plant, and its second in Asia. It was established in early 1993 as a 50:50 joint venture with a state-run electronics firm. A total of US$64 million was invested in the vertically integrated project, which produces VCRs, VCR decks, and VCR drums.

In 1995 it produced 400,000 VCR sets. Half of its products are being sold locally,

and the remainder are going to Australia and the former Soviet Union. Just prior to the VCR affiliate, Samsung Corning set up a plant to produce rotary transformers for VCRs, a product it had made in Korea since the late 1980s  In late 1992, after the approval of Samsung-Corning’s US partner, SC-Tianjin started to produce rotary transformers with a capacity of 800,000 units, which was rapidly expanded in the following months. From 1993, it added more sophisticated products such as four-channel rotary transformers, in addition to the two channel type SC-Tianjin planned to expand to a capacity of 5 million units per year by 1995  In December 1993, SEM established Tianjin Samsung Electro-Mechanics, an 80:20 joint venture with one of the state-run electronics corporations, to manufacture a variety of components that could be used in the VCRs produced nearby and in the CTVs that were soon to be produced. The total investment required was US$60 million. Production started in May 1994 with the following capacities: 3.6 million TV and VCR tuners; 2.4 million VCR heads; 3.6 millionprecision motors; 600,000 computer spindle motors This is of course much more than can be absorbed by Samsung’s local affiliates. In 1994, SEC formed Tianjin Tongguang Samsung Electronics, a 50:50 jointventure with the same partner as the VCR plant, to produce color TV sets. 

SEC invested US$30 million for a production capacity of 1 million sets. It is the largest of Samsung’s overseas CTV plants, and recent annual output was 800,000 units, absorbing about one-third the tuner capacity of the nearby components plant. Samsung Aerospace Industries appears to have made an unrelated opportunistic investment by setting up a 50:50 joint venture to produce cameras with a large local camera manufacturer, Tianjin Camera. The total investment was a relatively small US$10 million. The target markets are China, Hong Kong, Thailand, and Singapore. Its future expansion will be mostly dependent on the marketing efforts of the Chinese partner. In southern China, Samsung established a smaller network for audio products. First came components, with Dongguan Samsung Electro-Mechanics, a wholly owned subsidiary in Guangdong Province. It was technically the first offshore plant of Samsung’s SEM branch, having been established in mid-1990, at the same time as several other Korean companies invested there, but production did not begin until 1992. An expansion in 1994 raised production capacity: from 400,000 audio decks to 800,000; from 1.8 million audio speakers to 4 million; and from 100,000 computer keyboards to 300,000. Most of the output is shipped to Southeast Asia, China, America, and Korea Starting in late 1992, SEM’s Dongguan affiliate began supplying audio components to Huizhou Samsung Electronics, another Guangdong affiliate. SEC owns 90 percent of the shares in this company, and its Chinese and Hong Kong partners hold 5 percent each. In November 1992, Huizhou SEC started production of audio products. Its capacity in 1994 was 540,000 units, and 15 percent of its production is sold on the local market. Samsung is also involved in the Chinese telecommunications market. 

Samsung Sandong Telecommunications was set up in 1994 to assemble time division exchange central office switches for local use, which had been developed by Samsung in cooperation with the Korean government. The joint venture with two local partners, one of which is a state-run telecommunications corporation in Sandong, represents an investment of US$20 million. It is currently producing 370,000 TDX switches.

This case study of Samsung reveals a dynamic interaction between firm capabilities and IPNs. In the early stage, when Samsung was building capabilities, foreign linkages were needed for technology and marketing. As the group’s capabilities grew, it ventured into international production. However, its capabilities in mass production were inadequate for ensuring the success of its initial efforts to bypass trade barriers in its major markets by building offshore production bases there. It was only following a reorientation of its international production to low-cost operation in peripheral areas that it was able to correctly match its current capabilities with its network structure. Meanwhile, it has reoriented the nature of its non-production linkages with foreign firms to help foster the development of the design and marketing capabilities it has lacked in the past, frequently through acquisition. Internally, the Samsung Group’s electronics activities have suffered from an almost complete de-linkage between production marketing and design and development  since the 1970s.

This is a tends to confirm the argument by Kogut and Zander   that the key to successful international production is “…to recombine the knowledge acquired at home with the gradual accumulation of learning in the foreign market.” Thus Samsung’s affiliates in Southeast Asia were gradually able to increase the percentage of output sold in the local market, relying at first mostly on exports. Yet the continued centralization of product development has slowed the learning process in offshore affiliates.

Given the weakness of product development in the Korean electronics sector, it is possible that centralization is necessary during the period in which major innovation capabilities are acquired. But we have already seen that this leaves offshore production centers vulnerable as they try to penetrate local markets in competition with rivals who use minor change capability to tailor products for local customers.

The different technology management pattern established by Samsung’s Japanese rivals seems to be relevant. The major Japanese consumer electronics firms have decentralized minor product change capabilities at many of their production affiliates in Southeast Asia, increasing the flexibility of their production networks and freeing up engineering resources in Japan for more valuable work.

Samsung’s IPNs are also different from those of Taiwanese firms. While Samsung tends to focus on economies of scale, largely in consumer electronics products manufactured in a vertically integrated system, Taiwanese firms focus on economies of networking in the region that permit a large degree of flexibility for adapting to the rapidly changing information technology market. Thus, we can note in passing that this research supports the idea that IPNs have developed in divergent, rather than convergent ways.38

Korean industrial policies have been important for facilitating, and even inciting, the firms’ international competitiveness by requiring foreign firms to transfer technology in exchange for market access, supporting exports, protecting the home market, and supporting research. However, policy errors have also occurred. The first was nearsightedness in creating a top-heavy industrial structure mimicking that of Japan but without that economy’s underlying dynamic of continuous upgrading of product design. The second involved the creation of a Korean innovation system with a relative weakness in basic research, which may prove a major problem as Korea nears the technology frontier and can no longer license or buy all it needs from more advanced countries.39

FDI has helped Korean firms maintain their competitiveness in low-end goods, but they have not completely succeeded the transition in to higher value production at home that is required after a massive relocation of productive resources. They have partly responded by finding new, more complex products to mass-produce, such as advanced flat-panel displays. But this merely postpones the transition to market-driven product development that will be necessary for continued competitiveness.

The recommendations of Ernst that the Korean government should shift from “export-led market expansion” to “FDI-led market expansion,” and national innovation policies from “sectoral targeting” to “diffusion oriented policies” appear sound. At the same time, the government must fundamentally change its traditional education system, which is extremely uniform and no longer relevant under the new competitive requirements in order to build up the creative capability of human resources as suggested by Kim

The challenge for Samsung in the

context of its IPN is to successfully develop and transfer adaptive product design know-how to its offshore affiliates. Improvement in the competitive advantage of overseas affiliates is directly dependent on how quickly a firm can create and diffuse required capabilities that properly adapt to changing conditions. Deeper linkages within Samsung’s organizational network both in Asia and around the world will be needed to face the next round of competition in the electronics sector.