September 2, 2012
After Verdict, Assessing the Samsung Strategy in South Korea
By CHOE SANG-HUN
SEOUL, South Korea — When a jury in San Jose, Calif., ordered Samsung Electronics to pay $1.05 billion in damages for violating Apple’s patents for the iPhone and iPad, it did more than decide who had infringed upon whose intellectual property. To South Koreans, the legal battle highlighted the strengths and weaknesses of both Samsung and their economy in general.
“The ruling makes us reconsider the brand value of Samsung because it depicts Samsung as a copycat,” said James Song, who monitors Samsung for KDB Daewoo Securities in Seoul. “But a copycat or not, what Samsung has done with its smartphones was a brilliant move.”
“Look what has happened to companies like Nokia, Motorola and BlackBerry, which didn’t do as Samsung did,” Mr. Song added, referring to competitors whose failures to adapt quickly to the smartphone boom driven by iPhones have drastically reduced their market shares. “Samsung may lack in innovation, but right now, no one can beat Samsung in playing catch-up.”
For months, the South Korean media have watched avidly as Samsung, the world’s largest technology company by sales, clashes with Apple, the world’s No. 1 company by market value, over patent lawsuits in various countries.
Calling Samsung South Korea’s biggest, most profitable and most globally recognized brand barely explains the intense and often mixed emotions the name evokes among South Koreans. In Samsung, they see the crown jewel of their country’s transformation from a war-torn agrarian society into a global technology powerhouse.
Once an assembler of clunky transistor radios, Samsung is now the world’s top seller of smartphones and high-resolution television sets, as well as memory chips and flat-panel displays that allow those devices and others to store and display data.
Japanese companies have beaten rivals to the market with hardware innovations like flat-panel televisions and high-end mobile phones. Samsung waited for the others to test the market, and when it determined the time was right, it joined the fray to cash in.
Samsung’s strategy was to build something similar to another company’s product but to make it better, faster and at lower cost. When it pounced, it flooded the market with a wide range of models that were constantly updated with incremental improvements at a speed its rivals found hard to match — a strategy best illustrated by its smartphone business. Heavy investments have not been a problem; it once secured low-cost loans from a government-controlled banking sector friendly to big businesses and now draws on its own coffers, which are sloshing with cash.
Several years ago, Sony, Sharp and Panasonic were the first companies to market flat-panel televisions. But they obsessed over craftsmanship or held onto the old cathode-ray tube while dithering over the rival flat-panel technologies of plasma screen and liquid crystal displays, or LCDs.
Samsung placed billion-dollar bets on mass production of television-size LCDs. Its economies of scale helped it drive down prices to create, then clinch, the LCD television market.
Five years ago, Sony was the first company to make what is widely seen as the next-generation television. It featured the OLED display — organic light-emitting diode — which is thinner, more vivid and more energy-efficient. Sony was never able to mass-produce or market it; it was too expensive. Samsung and its domestic rival, LG Electronics, tiptoed in, building mass-production capabilities by first making smaller OLEDs for high-end smartphones. Then last week they pounced, announcing the marketing of 55-inch OLED televisions.
“Koreans do things quicker than almost anyone,” said Anthony Michell, author of “Samsung Electronics and the Struggle for Leadership of the Electronics Industry.” “This allows them to change models, go from design to production faster than anyone at the present time. Korean companies continually set themselves challenges, like the challenge to overtake Sony in terms of brand value in the past.”
Samsung Electronics is the flagship of Samsung Group, a family conglomerate that controls more than 80 companies that build oil tankers and apartment complexes, run hotels and amusement parks and sell insurance to housewives and artillery pieces to the military. The flagship’s operations are often faulted for their opacity. But analysts say that also allows Samsung to place huge bets and do so quickly.
Samsung makes not only hardware but also its components; it is Apple’s biggest parts supplier and its fiercest competitor in the completed smartphone market. In a way, its rivals help Samsung compete with them. Samsung’s handset business was its growth driver, raking in 20.5 trillion won ($18 billion) in the second quarter.
The strategy worked well for the latest product it dominated — smartphones — until Apple declared war over intellectual property in April 2011, accusing the South Korean company of “slavishly copying” the feel and look of its iPhone and iPad.
After the court victory, Apple lawyers sought injunctions against sales of Samsung Galaxy smartphones and tablets in the American market.
But those products had already lived through their life cycles in Samsung’s fast-paced marketing plan, analysts and Samsung officials said. With characteristic speed, Samsung had already retooled its latest Galaxy S III smartphones to stay ahead of the patent battle.
Samsung appeared to consider the legal trouble a necessary cost of squeezing out a giant in yet another field it is fast dominating. Samsung’s smartphone sales in the second quarter grew 150 percent to 50.5 million units, or a record 35 percent of the market, according to the research firm Strategy Analytics. Apple grew 28 percent, to 26 million units. Apple will attempt a surge back with its new iPhone model this year, but Samsung is ready to introduce the Galaxy S IV as a counter.
“The patent ruling and Samsung’s copycat image will have a negative impact on Samsung’s sales of cellphones and other products,” said Kevin Lee, an analyst at Korea Investment and Securities. “But Samsung will further widen the gap with Apple in the third quarter, though not as much as expected before the ruling.” Samsung is appealing the verdict, which it called “a loss for the American consumer.” Mr. Song said that despite the verdict, the fight for the smartphone market was over and had been decided in Samsung’s favor.
In South Korea, where Samsung’s achievements are a source of national pride, many perceived a bias against a foreign competitor in the American jury verdict. Still, the ruling reminded South Koreans of something their country lacked, a shortcoming magnified by comparisons between Samsung and Apple.
Although the name Samsung is synonymous with sophistication among South Koreans, the company has never created a product so innovative that it has defined an era in consumer culture, like the Walkman or the iPhone.
“Copying and clever upgrading are no longer viable,” the daily JoongAng Ilbo, The International Herald Tribune’s publishing partner in South Korea, said in an editorial. “Samsung must reinvent itself as a first-mover, despite the huge risks involved in acting as a pioneer, if it hopes to beat the competition.”
