A P: Lessons from Samsung

In certain products Samsung is driving technological innovation globally.

The Economist in its latest issue had a special section chronicling the dramatic rise of Samsung Electronics of South Korea. What a rise it has been! In 1997, at the height of the Asian crisis, there were serious doubts as to whether Samsung would survive, or go the way of Daewoo into bankruptcy.

Today it is among the largest market capitalisation stocks in the emerging markets universe and probably the most widely held. It is a global bellwether for technology stocks(being among the top five in terms of profits) and is tracked by analysts all over the world.

It is widely admired globally for its high-quality products and technological innovation. It dominates the global market for memory chips, is a leader in flat panel displays, and second only to Nokia in the hand phone business.

The scale and size of the company are truly global with annual sales exceeding $50 billion and net profit near $9.5 billion. Its market capitalisation and profitability now dwarf Sony, once the undisputed leader in the consumer electronics space.

Given the undeniable success of Samsung in conquering global markets, what are some of the lessons Indian companies can draw, as they attempt to go global themselves.

What parts of the Samsung formula for success can be repeated? While Korea is not really an emerging market in the true sense of the word, the fact is that Samsung is in the emerging market indices(largest stock), and the barometer against which most other emerging market companies will be measured by investors, as they attempt to break into developed markets.

Its transition into a global leader has been extraordinarily rapid and must hold lessons for other emerging market companies, most of whom have similar ambitions.

The first observation which hits home straight away is the sheer difference in scale. Samsung had a turnover of $50 billion in 2004, dwarfing the turnover of entire sectors in India, forget individual companies.

It also spends more than $3 billion in research (equal to the turnover of the top three Indian software companies) and greater than $3 billion in advertising and marketing (almost 50 per cent of the total ad spend in India).

Its capital spending budget in 2004 exceeded $5 billion. All this just goes to highlight how small Indian companies still are when measured on the global scale, and the challenges ahead to become truly global and have international scale.

Despite all the hype around software services, BPO, and pharmaceuticals in India, our companies in these spaces still remain very small by global standards (at least in terms of sales and global footprint, if not profits).

A second related point is how all great and global companies like Samsung spend large sums on three key areas: production capacity, technology, and brand. Most companies in India tend to focus only on capacity, neglecting technology and brand investment.

The consequent inability to control technology and build brand awareness becomes an obstacle to breaking into international markets. A singular focus on capacity creation will ultimately force you to focus only on cost as the basis of your competitive advantage, putting you in direct competition with China.

Another point is the fact that the bulk of Samsung's growth has been largely organic. It has not made some huge game-changing type of acquisition to break into international markets.

Many Indian companies are of the opinion that to truly break into OECD markets they have no choice but to acquire. While the acquisition route may make sense for some, Samsung does show that it is by no means the only way to grow and break into developed markets.

This just goes to reinforce the case of the Indian software industry, which has actually been criticised for its unwillingness to make acquisitions.

Samsung has also achieved global leadership in most segments by attacking the premium end of the market, and not confining itself to being perceived as the lowest-cost player.

In fact, in the handsets market, Samsung till recently was present only in the premium segment of the market, and it developed a strong presence in the lower price point phone markets at a much later stage.

Even in consumer electronics its strategy is focused on providing leading-edge products that can be sold for a premium. Even in the commoditised world of memory chips, Samsung has maintained a price premium through technological leadership.

This again turns conventional emerging markets' corporate wisdom on its head. Most companies out of India automatically assume they have to attack the lowest end of the market. Samsung shows it need not be so and that various entry strategies are possible.

Even more surprising is that in certain products Samsung is driving technological innovation globally. If you look at flat panel displays, for example, Samsung is the global leader in technology and the only company to have generation seven fabs near production.

So much so that Sony has even entered into an alliance with Samsung to source these panels. Again this serves to highlight that in certain niches, even companies from the developing world can be drivers of technology and not necessarily always followers.

Samsung is also largely controlled and managed out of Korea. The corporate office remains in Korea and the bulk of its top management still resides in the country, putting to rest another myth of going global. Many observers continue to wonder as to how Indian companies can be global when the entire top management still sits in India.

Samsung shows that there need be no correlation. Another related point is that the bulk of the top management of Samsung is still Korean, laying another myth to rest. Many observers continue to blast Indian companies, especially the software giants, accusing them of being too insular.

How can you be truly global if your workforce is still 90 per cent Indian, ask many. While the ability to tap a global talent pool is obviously important, as Samsung shows, there is more to achieving success in global markets.

Many people may rightly complain that Samsung is not a fair comparison or point of reference, because being part of a chaebol it had many advantages given to it by the Korean government.

The Korean government's policy of treating the chaebol as national champions, with almost unlimited access to capital, obviously helped the company acquire global scale and size without the need to focus on immediate financial returns.

Also, its initial success came largely in the area of the memory chip, a mass market commoditised product, sold to industrial consumers. The only formula for success in this area was scale and the ability to keep committing capital so as to increase capacity and continuously drop prices. Samsung used the cash flows from its hugely profitable memory chip business to fund its entry into handsets and flat panel displays.

While the above is true and clearly helped Samsung become an international giant far quicker than it could have otherwise, most of the lessons from Samsung's meteoric rise are still relevant and applicable to any emerging market corporate.