Management localization and autonomy

In the early 1990s, Japanese subsidiaries in other parts of Asia were far less likely than their US counterparts to employ local managers, to employ local personnel in senior technical roles, or to have nationals of the host country on their boards. Even where firms employed local managers, they were often “shadowed” by Japanese personnel and relegated primarily to the performance of public relations roles for the company. In their study of Japanese subsidiaries in Australia, Nicholas et al. concluded that Japanese nationals dominated the upper echelons of management, and that “there was a systematic bias in favor of Japanese managers holding key management positions, especially those involving the implementation of the technology or human capital critical to the competitive advantage of the firm.” In part, the low levels of representation of local staff in management positions may stem from the replication of the lifetime employment system in overseas affiliates. This has two effects. First, if expatriates initially staff the subsidiary, any replication of the seniority system inevitably delays the transition to locally recruited managers—unless the senior staff are relocated elsewhere within the corporation. Even if such opportunities for transferring senior staff arise, however, many Japanese subsidiaries expect local recruits to complete a lengthy training and socialization period before they receive promotion. These company expectations generate the second effect: frustration on the part of locally recruited managers with their promotion prospects, which often leads to their seeking employment elsewhere. Several surveys of local managers in Trans-National Corporation subsidiaries in Asia report that Japanese employers were viewed far less favorably than their American or European counterparts Interestingly, in their Asian affiliates, Japanese firms seldom practiced the job rotation and quality-control circles for which they have won much admiration. Instead, a crude “Fordism” often prevailed. The replication of the seniority system in Asian subsidiaries constitutes a structural explanation for the low levels of localization of management in Japanese companies. In addition, the lack of familiarity of most locals with the Japanese language, with corporate culture and with the networks within which the company operates are barriers to localization. Undoubtedly, however, corporate preferences were also a powerful factor acting against localization. Companies see the employment of Japanese managers as facilitating central control over essential operations. They also fear that localization of management will increase the risks of leakage of commercial secrets to the local economy.ng of components and capital goods; replication of production networks; and distribution of R&D activities. Not only was the management in Japanese subsidiaries generally less localized than that of other TNC subsidiaries, but the management enjoyed far less autonomy in key areas of decision-making. Several studies have found that decision-making within Japanese TNCs tended to be hierarchical and centralized in the hands of headquarters. Managers of subsidiaries enjoyed little freedom of action on issues such as the sourcing of capital goods and components In Guyton’s  survey of Japanese affiliates in Malaysia, a majority of the Japanese companies reported that their parent companies dictated where machinery should be acquired The lack of autonomy for local management leads to a second significant difference between Japanese and US subsidiaries

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Growth of Singapore’s electronics industry

As described elsewhere in this article, several East Asian countries outside Japan have emerged as major production platforms for the global electronics industry since the 1970s. Driven by global competition, firms from advanced countries in general and US and Japanese firms in particular have increasingly extended their supplier bases and production networks to the various countries in East Asia. In 1993, the four Asian NIEs, ASEAN, and China together already accounted for 13 percent of global electronics production, or about 40 percent of Japanese output With nearly all these countries achieving double-digit growth over the last three years and Japanese production stagnating, the share of non- Japan East Asian output in global production has increased substantially since then. Along with rapid expansion in output, there has also been a significant transformation in the nature of activities being carried in these countries.

This article focuses on one aspect of this changing structure of Asian production networks for the global electronics industry—the emergence and growth of Singapore as a major hub in South East Asia. By examining the dynamics of growth of Singapore’s electronics industry over the last three decades, this article seeks to provide new insights into the shifting patterns of competitive interactions between US and Japanese production networks. In particular, we argue that the rise of Singapore is largely due to its ability to leverage the competing but overlapping production networks of major US and Japanese electronics firms. It is this ability to “ride the waves” of technological and organizational changes emanating from the United States and Japan that enabled Singapore to differentiate itself from other competing locations in East Asia —the North Asian NIEs of Korea, Taiwan and Hong Kong as well as the Southeast Asian “tigers” of Malaysia and Thailand.

This article is organized as follows. The first section profiles the historical growth of Singapore’s electronics industry, highlighting a number of salient features that distinguish it from other competing locations in East Asia. The second section analyzes in more details the competing yet overlapping contributions of major US and Japanese firms to the development of Singapore’s electronics industry, and the salient differences in organizational characteristics and strategic orientations between US and Japanese operations in Singapore. The third section examines the recent emergence of indigenous electronics firms in Singapore and their changing roles in the US-Japan competitive nexus. Finally, the fourth section examines the contributing role of the state in promoting Singapore as a regional hub for electronics, and provides some concluding observations

concerning future directions of US-Japan competition in electronics, and their implications for Singapore in particular and Asian production networks in general.

The rapid growth of the electronics industry in Singapore

Since the late 1960s, when electronics firms from the United States and Japan first began to redistribute production to Asia, Singapore has been a major node in the production networks of the global electronics industry. Despite the continuous spreading of the US and Japanese production networks to other countries in East Asia in general and Southeast Asia in particular, Singapore has continued to maintain an eminent, though changing, position in Asia. Indeed, successive waves of investments by multinational corporations from the United States, Japan, and Europe have intensified Singapore’s integration into the global production networks of these firms. The aggregate electronics industry output reached S$63 billion in 1996, constituting over 52 percent of the total manufacturing output in Singapore, making it by far the largest industrial sector in Singapore today. Along with quantitative growth, Singapore’s electronics industry has also

undergone tremendous qualitative transformation. Between 1970 and 1995, the industry has moved from simple technology, labor-intensive operations to highly automated, skill-intensive operations, as reflected by an average increase in labor productivity of over 5 percent per year during the 25-year interval. Reflecting the significant rise in capital and technology intensities over the years, fixed asset per worker also increased dramatically  The qualitative transformation of the electronics industry can also be seen in the shifting sectoral composition of the industry over the years    Although consumer electronics and basic electronics component assembly and testing activities dominated in the earlier years, the growth of the industry over the last decade has been fueled mainly by the manufacturing of computer related products  and more advanced electronics component-manufacturing operations.

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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.

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Samsung’s production networks in Asia

Asia has been an important destination for Samsung’s direct investment for a number of reasons. In addition to the company’s interest in recovering cost competitiveness by utilizing the low-cost resources available in Southeast Asia, it was also pursuing some of the major customers for its components as well as some of the world’s most dynamic markets.

A Singapore based purchasing office was established in 1991 to speed up the internationalization of production, in part by being a supplier of low-cost parts for Korea-based production sites. Ironically, the purchasing office has directly bought components from Korea-based components suppliers because it is cheaper than going through SEC headquarters in Korea. The office has grown dramatically since its creation and was eventually able to satisfy Singapore’s requirements for the preferential tax treatment granted to regional headquarters. The vertically integrated operations in China were set up more quickly than those in Southeast Asia, possibly reflecting the firm’s increased confidence in overseas production. Since 1994, Samsung has announced the creation of other integrated production complexes in its strategic markets.

To date, interaction between Samsung’s two Asian subnetworks has been mostly limited to CRTs sent from Malaysia to a China CTV affiliate and Chinesemade VCR components sent to a Thai affiliate. This is because the two subnetworks were originally designed to serve two largely separate Asian markets. The key intermediary is the Singapore-based purchasing office, which purchases and distributes a huge amount of components among the Samsung affiliates and those of their Japanese counterparts in the regions.33 However, the most important intra-firm transactions are still highly centralized, occurring between the affiliates and the Korea-based product division, or between the affiliates and the Korea-based global marketing division

The separateness of the two subnetworks may prove a competitive disadvantage. Japanese producers in the region usually divide their product mix geographically according to the subsidiary’s technological capability, facilitating the achievement of scale economies. By comparison, Samsung’s production networks in Asia are still at a primitive stage, incorporating certain redundancies.

The weakness of Samsung’s performance in the consumer goods sector meant that it found itself with excess capacity in its overseas plants. In practice, this has meant that the offshore plants are underutilized—in spite of their vocation to improve cost-competitiveness—because Samsung’s employee evaluation system is oriented to performance at the plant level, making employees resistant to transferring production overseas when no activity would fill the void at the Korean plant.

This has been much less of a concern in the case of plants producing components, which have been able to sell the majority of their output to other firms operating in the region, particularly Japanese affiliates. Samsung’s Asian networks have thus been able to build on the company’s past history of OEM relationships with Japanese companies. For example, two component-producing.

In fact, Samsung’s Asian television production network has been deeply enmeshed virtually from its inception with those established earlier by Japanese firms. For example, not only does the CRT producer SED-Malaysia sell the bulk of its output to nearby Japanese affiliates of Sanyo, Matsushita, Sharp, and Funai, it also sources about a third of its total components from mostly Japanese suppliers such as NEG and Asahi.34 Clearly, the establishment of offshore production has led to complex interdependence between Samsung and its Japanese competitors.

It was the presence of its Japanese customers that permitted Samsung to reduce the risk inherent in starting capital-intensive production overseas. For example, having already become a successful supplier of CRTs to Japanese CTV producers, SED could be reasonably certain that its Malaysian affiliate could meet demanding Japanese quality assurance requirements SED-Malaysia fills a specific role in the regional division of labor of Japanese firms; by providing 14- inch CRTs, it permits the component subsidiaries of Japanese producers to specialize in larger, more higher value-added picture tubes.

Samsung’s production presence in Asia is increasingly connected to marketing objectives. To that end, the firm has established ties with mainland and overseas Chinese partners, typically as a prerequisite for market entry, in addition to establishing its own distribution channels. Its local joint ventures are thus the mirror of those it established in Korea in the 1970s with Japanese partners, trading production know-how for market access—only now the know-how is Samsung’s.

In at least one case, an affiliate established for the local market  was forced by poor performance to shift to exports. But more generally sales were able to shift from export to local markets.

So far these locally oriented operations have achieved local and even regional linkage between production and marketing activities, but design and product development activities still belong to organizations in Korea: “…we continue to move Korea-based manufacturing sites overseas. Instead, leave the concept of design, development, research institutes at home” But this has left a void in affiliates for which the local market is important. For instance, the Indonesian affiliate distributing CTVs to the local market is searching for locally marketable products that differ from the products designed in Korea for global markets.

In early 1995 SEC formed a new product planning post at its Singapore-based regional headquarters. The team was to concentrate on supporting product design and development activities targeted to the Asian regional market. Yet, there is no sign that this team has actively interacted with the group affiliates  Yet SEC is under pressure to carry out product design closer to individual markets as Japanese and European rivals have increasingly done, frequently co-locating product design with offshore production. Recently, a new executive officer who had worked for the department in charge of product

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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

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Samsung in the 1990s: challenge and response

The 1990s have presented Samsung with a number of challenges requiring adaptive strategies. The key strategic shift is from “quantitative” to” ‘qualitative” growth. This has been manifested in a series of organizational reforms and in new approaches to technology management. Another major thrust of recent years has been an increasingly aggressive globalization of production.

Declining competitive advantage leads to organizational Restructuring

In recent years, Samsung has had to cope with a very changed environment from the world it faced twenty years earlier as it entered the electronics business. On the one hand, its investments in semiconductors paid off handsomely. But on the other hand, its traditional cash-generating product lines—in which it has considerable sunk investments—began to face serious challenges in both foreign and domestic markets. In 1993 Samsung Chairman Lee Kun-Hee described the electronics business as suffering from cancer. One aspect of this decline is a series of changes that have occurred in the markets which Samsung serves. First, Samsung’s major export markets for consumer electronics in the United States and Europe have become saturated. The reduced growth in demand has severely increased price competition, and has increased the importance of smaller markets with specialized demand —turning Samsung’s marketing weakness into a major problem  Second, Korea’s domestic electronics market, which had long been protected from foreign competition, has been liberalized as Korea prepares to join the ranks of industrialized nations, eroding an important source of profits. Liberalization of imports by the Korean government has led global players to enter the Korean domestic market, which had long been protected from foreign electronics products. In 1989, import quotas on consumer electronics goods were removed. From July 1991, foreign retail distribution outlets were allowed to possess up to ten stores with less than 1,000 square feet in size —far bigger than the 100–130 square feet that local Korean outlets usually occupied By 1993 there was a plan to cut the average tariff computer products was much higher than that of Taiwanese firms.27 Its position in computer systems outside of Korea was particularly weak. The recent major investment in AST Research provides Samsung an alternative means of overcoming its internal weakness in the computer business.28 The agreement enables Samsung to share the AST brand name and to sell memory chips to AST. SEC is actually not entitled to be directly engaged in AST’s management for the first four years of acquisition However, Samsung’s acquisition of foreign firms   was not aimed at ameliorating Samsung’s internal weakness in product design and development, but at acquiring frontier technologies seen as essential to the production of next generation products.

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TECHNOLOGICAL CAPABILITIES AND SAMSUNG ELECTRONICS (2)

Samsung’s vertical integration strategy was extended quite early to embrace semiconductor technology, which was to be SEC’s key focus in the 1980s. In 1974, Samsung acquired Korea Semiconductor Company  a joint venture between Korea Engineering & Manufacturing Co. and Integrated Circuit International, a US firm that manufactured simple ICs for electronic watches. This time, Samsung acted well ahead of its rival Goldstar, which entered the market by acquiring Daehan Semiconductors in 1979. The firm hoped that internalization of core components technology would reduce its heavy dependence on Japanese suppliers SEC suffered from the outside purchase of core components because its production quantity of CTVs and VCRs was limited by component availability. In the late 1970s, Kim Kwang-Ho [chief executive officer of the electronics division], who had

The OEM trap

Because of the drain on resources inflicted by the IC operation during much of the 1980s, other divisions and affiliates had few strategic options except that of exploiting the company’s previously developed strength in production. Except for a short-term investments generating immediate cash, other investments were strictly controlled by the chairman’s secretariat. Relatively little effort was spent on product development or strategic marketing, and Samsung’s emphasis remained on the mass production of relatively low-end products. Another important characteristic of the group’s operation in the 1980s was the internal production of core components. SED became one of the world’s largest producers of CRTs. The strategy was extended to newer products such as VCRs and microwave ovens, for which Samsung produced most of its own magnetrons. The development of product design capabilities was undermined by the company’s major commitment to ICs. Of course, SEC had a minor change

Nevertheless, Samsung slowly built an institutional infrastructure to increase its internal technological capability. Three directions were pursued. First, it acknowledged that the objective was to set up an integrated R&D organization, and then the company expanded Korea-based R&D centers involved in the assimilation and adaptation of acquired foreign technology. The Samsung Advanced Institute of Technology  was created to interlink several affiliates, but, at least initially, it was unable to transcend the demand for projects which were commercially exploitable in the short-term  Second, Samsung established foreign-based R&D centers that could provide it with new technologies, up-to-date information, and training for Korean R&D personnel. These were used mainly for ICs and, starting in the late 1980s, for computer-related technologies.19 The third form of effort was continued collaboration between SEC and its affiliated components suppliers.

The ability to use R&D to build new capabilities was constrained by accounting perspectives. Research projects were held to extremely short-term objectives, preventing the development of know-how beyond what was needed for simple adaptation to mass production requirements.

Another victim of Samsung’s concentration on ICs may have been its international marketing capabilities, which remained weak. Samsung started distribution of its own brand products making minor changes from models it had built from designs provided by Japanese customers, but success was limited. SEC gradually established a network of foreign sales affiliates. It would typically set up a foreign branch office, and then the office turned into a sales subsidiary when it had accumulated a certain degree of foreign market knowledge. However, the hierarchically integrated organization structure restricted the interaction of its own foreign sales channels with Korea-based production sites, limiting feedback from customers to factories. Accordingly, OEM channels remained dominant in the company’s sales.

Samsung maintained close relationships with OEM buyers such as JC Penney, Sears Roebuck, GTE, Toshiba, IBM, Hewlett-Packard, RCA, and Crown Corporation. However, its clients were generally not providing Samsung with leading-edge product design, and Samsung did little to upgrade its internal capabilities in this area, confining itself to low-end market segments.

In the early 1980s, the US market was by far the most important for Samsung, but by the end of the decade it had greatly increased the geographic diversity of its distribution channels, particularly in Europe and Southeast Asia

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