Reasons for Samsungs Success (Uniqueness & Complementary Assets) 1.

Bold investment for fabrication new equipment which has an advantage in procurement and technology leadership 2. Vertical integration of Technologies of design and process close internal collaboration from design to mass production 3. Reduction of cost by innovation process enhance efficiency in usage of product lines 4. Product differentiation value added features to reflect the needs of customers 5. Diversification in business portfolio and organization strategy Key issue 1: Trends of South Korea - Common land cost Three-fold increase in land cost - Common labour cost, rapidly increasing from 5.3% to 6.7% - Government subsidy Decreasing to less than 3% - South Korean customers Early adopters (Samsung global scale); High computing penetration rate since 1998 - Comparatively less government subsidies for R&D. Samsung receives about 20% of R&D budget from Korean government, which equates to 400 million. (VS. R&D budget subsidized by Chinese government which equates to 1 billion) Trends of DRAM Market - Increasing demand for DRAM high long term growth rate of 12% - Increasing cost of wafer plants o Cost of developing wafer plant and new generation technology is 1.5 billion 65mm and 2.5billion for 45mm o (Therefore we go to China market, to get government subsidy) Foreseeable increase in Capital Expenditure of Technology of DRAM market

Decreasing DRAM Shipments from 80% to 67% - Lesser profits, higher costs Short product life cycle of less than 2 years

Volatile Market High Sunk Costs about 10 15% of annual sales ($1 2 billion for fabrication plant with large lag time of 1 2 years) Large R&D expenditure $14 million Downturn of industry reduces the number and increases the size of viable DRAM players. Fragmentation of the market in next-generation DRAM technology is forces manufacturers to reduce price yet improve performance to compete (Most cost-effective way to improve PC performance is to increase the amount of memory of DRAM) Future prices of Chinese products will be lower than other companies Capital breakdown of Samsung (Geographical location) China Semi Conductors Suzhou 189,723 Shanghai 2396 China Semi Conductor Capital $194,119 Europe Semi conductor Capital 55,981 America Semi Conductor Capital 561,108 Korea Semi Conductor Capital 133,104

1) Should we have a market presence in China? a. Trends in Chinas semiconductor industry (Pros and Cons) b. Pros: (PULL FACTORS) i. Cheaper labour (0.56 to 0.23) China still enjoys an advantage in labor intensive activities ii. Utilise Government subsidy Chinese government provided cheap credit, abundant land, cheap utilities, engineering talent, tax incentives to anyone who was willing to partner with a Chinese company iii. Able to position yourself better to cater to Chinas demand of semiconductor iv. Building better networks v. Expand Brand Equity vi. Lower Transportation cost to china market vii. A zero tariff rate for importing semi-conductors viii. Tax rebates to domestically produced semiconductors (PUSH Factors) i. Trends in south korea ii. No government subsidy iii. Higher labour costs Win-Win Situation for China Foundry and Samsung - Maintain competitive edge of Samsung - Accelerate progress of China Foundry c. Cons

i. China lacks the critical infrastructure necessary to support a cutting edge semi-conductor industry Evaluation of whether or not we should go into China China is expected to be the second biggest of semi-conductors

2) How should we have a presence in China? a. Partnership i. Joint venture with any China firm ii. Have a small stake percentage (20%) in the China firm to protect intellectual property rights. b. Product servicing of legacy products i. Utilize old fabrication for developing new product and produce different generation at the same line. ii. c. Acquisition i. Buy over another China firm ii. Problem: Chinese government will prohibit the loss of control of a chinese business -> Reduction in government subsidies Decision Matrix Leverage on Chinas production capabilities Retain trade secrets/ protect IP rights Lower Government Better position production Support in Chinas cost / Tax semiconductor Relief industry

Joint Venture Product Servicing of legacy products Acquisition

Decision: Joint Venture A corporation Prevent Cannibalization Joint Venture with Chinas foundry will only cater Maintaining One-site Strategy Using the production advantage of China Foundry Industry Customizing products specifically to the needs of Chinese Consumers

Decision matrix for target company Rankin Track record of Competit g in IP lawsuits or Rivalry terms of assets size SMIC 1 Misappropriati ng TSMC intellectual property Infineon, Elpidia, etc has R&D tieup with SMIC

Productio n Capacity (No. of Wafer Plants)

ASM C

CSM C

No tieups

Three 8 inch Fab, Process 150,000 wafers per month. 70% of this capacity is for logic chips. Future 0.5532 plans (In % 2008) to have 5, 6 and 8 inch wafers Future 0.30% plans CSMC buying over Qimonda, 70% owned by Infineon (samsung s competito r)

Size of compan y (Debt to Asset Ratio in 2005) 33.11%

Steady revenu e growth (CAGR)

0.4733

0.0989 %

0.1109 %

SMIC went public in 2004 ASMC had IPO in Q1 2005 CSMC to go public in Q2 2005 Steady revenue growth (Better allow the company to raise equity, since it is a capital intensive industry, this factor will allow investors to better aid in case the government subsidies are insufficient. Size of company (The bigger the size, the easier it is to raise debt Debt level less than 60% of total assets (Average level of capital structure of semiconductor industry in China)

Choice: ASMC The company will be principally engaged to manufacture and sell 5 inch, 6 inch and 8 inch wafers. This joint venture will deepen its strategic alliance to meet existing customers of ASMC and Samsung.

3) How the deal structure will be like? a. b. Factors Flash Memory Why not R&D? Samsung Electronics, are investing 75% of all R&D investment expenditures, and the degree of R&D investment concentration is already very high. In addition, Samsung has their own R&D institute group, Samsung Advanced Institute of Technology (SAIT), which employ thousands of scientists and engineers to have specialized R&D operations in various centres across Korea.

Main idea of flash: Not many existing competitors of Flash, but demand for Flash is steadily increasing Therefore, our main idea is to invest in capital for bigger wafer and thinner main design rule, which will achieve 2 objectives. Our strategy is U n I 1) Upgrade and Increase a. Upgrade current technologies b. Increase production capacity 2) U represent consumers, I represent producer and N represent the new collaborative effort between consumer and producer in order to come up with new customized products that will better suit to customers needs. Demand of Flash (Market Driven) a) Increasing consumer electronics in flash (mobile phones, cameras, etc)

450 400 Number of Flash Memory Demanded 350 300 250 200 150 100 50 0 2000 2001 2002 2003 2004 2005

Analysis: This indicates that the trend for flash memory appears to be increasing in demand. b) Consumers have a greater demand for more memory capacity (256 to 512) a. Prove by showing how logic chips processors are increasing steadily. b. To show how data usage of these memory (512) is increasing

NAND Flash Density Growth

64GB 32GB 16GB 4GB 04 05 06 8GB

0.256GB 00 01

1GB 02 03

2GB

07

08

09

Source: Samsung Electronics Supply of Flash (Technology Driven)

a) Competitors production has increased a. Show how dollars shipment has increased

Dollar Shipments of Flash Memory

1400 1200 1000 Dollars 800 600 400 200 0 1Q99 30 Number of Publications 25 20 15 10 5 0 2000 2001 2002 2003 2004 2005 Samsung Toshiba Intel Hitachi Ltd St Microelectronics 2Q99 3Q99 4Q99 1Q00 2Q00 3Q00 4Q00

Analysis for the graph: Samsung will continue to be the main market player of research for flash memory technology.

No. of publications on flash memory by companies

Samsung Toshiba Hitachi, Ltd Intel Corporation ST. Microelectronics 0 20 40 60 80 100 120 140 160

b) Competitors profits has also increased when they produced NAND Flash (As seen in case study) c)

Competitors: Intel owns 25% of market share, Fujitsu and Advanced Micro Devices Inc. (AMD), Hitachi, SanDisk, Toshiba and Infineon

The worldwide flash memory market is expected to be worth around $8.4 billion this year, with an average annual growth rate of 20 percent expected in 2001 and beyond, Fujitsu said. Worldwide demand for flash memory is exceeding the current industry capacity. Therefore, Samsung should ramp up its current production capacity of 24% to a higher percentage. The average selling price of flash memory is increasing by 8% to 10%. If Samsung were to build a fab specifically for Flash memory to cater to the surge in demand, this will quadruples it production.

By 2002, Intel Corp has reached 2 billion mark in number of flash memory chips sold. Building a facility (1.5 billion spent by competitor) to quadruple its production of flash by moving to 0.18 micron process technology and bringing a new flash fabrication plant into production. The fab will have about 34,100 square meters of building area, about 11,000 square meters of which will be used as a clean room. It will manufacture flash memory devices using process technologies of 0.23 micron, 0.18 micron and below, with 200mm wafers.

The new FASL fab will produce about 13 million pieces (16Mbit equivalent) per month at the end of fiscal year 2001, the companies said. By the end offiscal year 2002, capacity is forecast to be 52 million pieces, with FASL's total monthly production estimated to reach 200 million pieces (16Mbit equivalent) per month. Greater profitability due to efficiency of going to 0.18 micro process technology. With current Samsungs Flash fab, only can produce 257 silicon chips. New Flash fab will increase production to 845. Cost Savings of 0.69 To breakeven, 425170 chips need to be sold.

Benefits of Producing more flash Demand for higher capacity Relatively simple structure Conclusion: Most aggressively scaled technology among electronic devices consumers, such as Apply and Sony, would want to continue improve Easy Scaleability first mover advantage which will lead to dominant market share. So easy to make, huge demand