hdds are barely mentioned in this week's barrons article on samsung and its units:
First-Tier Ambitions
Interview With Jong-Yong Yun, Chief Executive, Samsung Electronics
By LESLIE P. NORTON
SINCE JONG-YONG YUN, AN ENGINEER, BECAME chief executive of Samsung Electronics in 1997, earnings have jumped almost 4,000% and the company's market capitalization has quadrupled. Late last week, the stock traded at 664,000 Korean won, or 12 times 2007's expected earnings, still cheap by the standards of global investors eager to buy fast growth. Yun, 62, joined Samsung in 1966, becoming chief of its video business in 1981, of its consumer-electronics group in 1990 and of Samsung Japan in 1993. His most significant accomplishment is overhauling Samsung after its financial troubles following the '98 Asian currency crisis, and then shepherding the company into the current era, where it dominates semiconductor, cellphone and flat-panel-display production. More recently, he guided the company through a semiconductor price-fixing scandal. Samsung said it has established safeguards to avert a repetition.
Recently, a Barron's panel posed a wide range of questions to Yun in a rare face-to-face interview, interpreted by Samsung's investor-relations chief, Woosik Chu. Our panel included Managing Editor Rich Rescigno, Senior Editor Bill Alpert, researcher Jen So and me, Barron's Asia editor.
Barron's: Last year you set two goals for Samsung Electronics for 2010: to double the 2004 revenue forecast, and to have 20 products with a No. 1 market share globally. Is this still possible with slowing sales growth, and the cellphone and liquid-crystal-display markets past their peaks?
Jong-Yong Yun
Yun: That's a difficult question. I can't be certain what will happen in the next five years. The goal you mentioned is one that we set up a year ago. Since then, the environment has changed. The exchange rate is going in one direction, and you are seeing a rise in the price of natural resources. Therefore, although we're quite confident we could achieve this objective, we can't, of course, be certain. In handsets, LCDs and consumer electronics you are seeing cutthroat competition, and things are pretty tough.
What is the most promising part of the business now?
Semiconductors, especially memory. However, other areas also look hopeful. Even in LCDs, TVs are getting bigger and bigger, and we are seeing a vast transition from the CRT [cathode ray tube] version to the LCD version. In handsets, since we are at the end of the current technology, competition is fierce. As soon as we get to the next phase -- to the third generation, the 3.5 generation and beyond, such as WiBro [a wireless Internet technology being developed in Korea] -- we have proprietary technological capability and will fare much better. In the year 2010, we'd like to be able to leapfrog to be a first-tier company, globally.
You're not first-tier now? That is like the supermodel calling herself ugly. What are some of the challenges?
We want to be humble, although we're aware that other people consider Samsung to be first tier. Still, there's lots of work to accomplish. We need to improve more in terms of quality and quantity. It's best to go over the different businesses.
In memory, we are well ahead. However, we want to widen the gap between us and our competitors from this point so that in the next five years, we will be even more firmly in the leadership position. System LSI is a new business that we are emphasizing, so we are investing quite heavily to complement our existing memory business and make it a full semiconductor business.
In LCD, quantitatively we're No. 1, but again we'd like to really leave the rest of the pack behind in terms of market share and profitability.
In handsets, we are quite strong in the mid- and high-end markets. However, we're still trying to set up a strategy to address the low-end market because that's where the market is growing very fast. That's something we're grappling with.
In flat-panel TVs, mostly LCDs and [plasma displays], we are No. 1 and No. 2. We'd like to solidify our position because the competition is very stiff globally, including the Japanese.
On digital devices, especially mobile and portable devices, we aspire to be the leader.
Lastly, we need to think about seedling businesses. One is printers.
Why printers?
It's a very good business. Momentum is quite strong. We'd like to be at the top of the league. Consumers make up the bulk of this market. As you know, there are two main types: inkjet and laser. With inkjet, because of intellectual property issues, there's a barrier hindering new participants. It is more of a level playing ground with laser printers. We are emphasizing laser printers, including color printers. The printer market is very big -- roughly speaking, about $100 billion, a lot bigger than the memory market -- and there aren't that many players involved in the market. This year, we'll be doing about $3 billion in our own printer business.
Why is Samsung in a good position to pursue the business? We have some of the critical elements important to success. One of the very important elements is optics circuitry. Printers tend to be bundled with other IT products. We are strong in information-technology products like monitors and LCDs. It is easier for us to penetrate the market than others.
It's paradoxical, but the fact that the market is big, with a small number of players, implies entry is difficult. On the other hand, once you get into the market, the business is highly profitable. We have high aspirations in regards to various businesses, and printers are a highly profitable one.
Are Hewlett-Packard's troubles making it easier for you to get into this market?
Fighting with HP doesn't serve much purpose. As you know, HP buys a lot of components from Samsung, such as semiconductor memory. They are a formidable player in inkjet printers, where we cooperate with them. We also do some OEM in other products such as laser printers.
What kind of printer sales are you aiming for in five years?
I'd refrain from talking specific numbers, but thus far, the printer business has been growing 20% per annum. Obviously we expect the speed to accelerate. In the past we were in mid-to-low-end printers. Now we're emphasizing high-end. Also we're becoming more active in B2B [business-to-business]. We expect the business to be at the top tier with the current leaders. That means there will be complaints from HP and Canon, who are good partners.
Whose board members are listening on the phone right now. What is the breakdown between business and consumer in printers?
For the overall market, B2B is 70% to 80%, and B2C is 30%. In the case of Samsung, it's the reverse -- B2B is only 20% to 30%. There is lots of room to grow. Hopefully, when you guys buy printers, you will purchase a Samsung.
You're trying to address the low-end market in phones. Was it a mistake to focus on the high end?
Samsung's handset business isn't just about making money, because it has a very close relationship to our image. We are keen to raise Samsung's brand recognition through the handset business. That objective could not be achieved through selling at the low end. The $50 handset would not get us anywhere in terms of brand power. We have diverse businesses, so if the brand goes up in handsets, it's a positive spillover to other businesses. Four or five years ago in the analog era, our brand recognition was weaker. Through handsets, we were able to drastically raise brand recognition.
Now, companies have adopted two different approaches. One is going from the low end to the high end. In our case, we have to go from high end to low end. I do realize the endeavor is not that easy. As you know, we are in the business to make a profit. The bottom line is very important. The thinking is going to change, obviously. The mid-to-high-end market is 30% and the low-end market is 70%. A lot of that will be coming from emerging-market growth. In emerging markets, we are very concerned about raising our brand recognition. Until now we have restrained ourselves going into the low-end market. But it is fast-growing and it is about time we addressed it. Therefore, we will increasingly go into the low-end market, but within that, we've tried to tackle the higher end. That implies we're not going into the $50 handsets but the higher ASPs -- say, sub-$100, but a lot higher than what the other companies are trying to attack.
Should we expect lower profit margins, then?
The short-term tendency to go down is inevitable, considering the low end is growing faster. In the past, there was a pretty fast transition from one phase of technology to another. With screens we went to color, we went to camera, and then to the MP3. Samsung is a very speedy company, so we were able to do this better than others. The problem now is we're at the very end of the current technology, which is the second generation. The transition to the third generation is taking a bit longer than expected. However, when that transition accelerates, going from 2G to 3G and then even beyond 3G to technology such as WiBro or HSDPA, there again we will have the upper hand, the know-how. In the big scheme of things, you could even say that our profit margin is at the trough and is expected to go up over the long term with the transition to the next phase of technology.
Sizing Up Samsung -- It isn't just about appliances. Samsung also makes phones, chips and displays.
We also have lots of capabilities that others don't. We're definitely in a strong position to procure components. If you disassemble a handset there are lots of different chips -- memory chips, modem chips, display -- and even components like battery that come from our sister companies. The integrated nature of our business is serving us.
What uptake have you seen in WiBro subscriptions? In this country, nobody wants dual-mode handsets; they don't want to lose the minutes by having calls go over the Internet. It is frustrating to the WiMAX or WiFi advocates.
The WiBro service is still in a very incipient stage -- in fact, in a test phase in Korea. As you know, we had a big discussion with Sprint a few weeks back regarding their adoption of WiBro as a next-phase technology. Although the market is quite lazy, people believe it will grow very fast. We are hopeful this will be a big business opportunity for us. I guess for the time being, people will have to use dual mode. But eventually, everything could be done on a single-mode chip version. We are looking in many, many different directions.
No discussion of Samsung shares would be complete without a chat about the discount and people's complaints about corporate governance. What still needs to be done?
I don't think there is any problem at all with corporate governance. Corporate governance is more of a transparency issue, and the question is whether Samsung is transparent. I would say definitely so. We have an impeccable accounting standard. We've adopted the most conservative accounting standards; most are U.S. GAAP [Generally Accepted Accounting Principles] standards. We expensed stock options from the beginning. All our transactions are very transparent and objective. I would caution people from looking at the corporate-governance issue [as a problem] with ownership structure. The more important thing is transparency. And the valuation of this company has risen quite a lot. The gap still exists, but the gap has narrowed quite a bit in recent years.
What about an ADR?
Dialing Up Growth -- Critical to Samsung's phone division is a new plan to concentrate on the low-end segment, where demand has risen because of growth in emerging markets.
We are working very hard to advance operations such as accounting. We are preparing over the very long term to have an ADR [American depositary receipt] listing. That doesn't mean we will have it next year. It's difficult to say when. The gap between us and global standards is really narrowing. As long as we stick to the very transparent running of our operations, we believe that eventually our true valuation will be realized.
Why hasn't Samsung created a killer product like the iPod?
Killer products like the Walkman and the iPod are very important. They have a big influence on the market and society and did a lot to raise the image of the company involved. But I do not really believe that the killer product is something fundamental to managing a company. As much as they're attractive, they're not really that innovative. Walkman was not innovative in the sense of core technology. We emphasize the core technology aspect. Having said that, I do agree that more killer products would be a positive for this company. We are trying hard to complement that.
What's happening with your R&D spending?
Obviously for a technology-oriented company, R&D is very important. R&D in this company is on the uptrend. Currently we are spending 7% to 8% of sales on R&D. But our top line is growing very fast. We are spending about $6 billion on R&D. At the heart of R&D is competent people. We have about 34,000, including about 2,900 Ph.D.s. We employ the most Ph.D.s in Korea. We have 10 R&D centers around the world -- a telecom center in the U.K. and a software center in India, and a more practical application center in Japan. They are all very complementary in nature.
Please update us on your LCD venture with Sony. Should we expect more JVs with other companies?
The joint venture with Sony is very successful and has served both companies well. We started with Gen-7 facilities and found the experience so rewarding that we did another joint venture on a Gen-8 fab with Sony. Again that joint venture is very successful and the synergy is quite amazing. So we are keeping everything open. As long as we feel that there will be a synergy between Samsung and our potential partner we are willing to consider any proposal. At the moment, there are no discussions, but we leave ourselves open.
Finally, let's talk about chips. When will there be a glut in flash memory with Intel and Micron opening up foundries over the next year?
I think new entrants are creating a very healthy market, because flash demand is going up faster than the new supply coming on stream. As you know, in the past the use of flash was confined to digital still cameras and MP3s. Now there are lots of telecom applications. Demand is growing by leaps and bounds.
Where do flash prices have to fall before solid-state, or flash-memory, drives gain a big presence in the notebook-computer market?
The problem is manufacturer prices are coming down, but the memory-storage content of hard disk drives is also going up. That's a problem. Currently, the high-end notebook uses something like 200 gigabytes of memory. The most we could provide at a reasonable price would be 32 gigabytes [of flash memory]. So if you consider that the price of flash is declining maybe 50% annually, and do the math, you'll see that it will take a few more years to have a sizable presence of flash in the notebook market. The memory content of the HDD is also going up pretty fast. So you have a moving, not stationary, target.
Thank you very much. |
