March 30, 2009 6:33 pm

Samsung simplifies business groups to woo high-end users

If South Koreans look to one talismanic company to pull their battered economy out of the quagmire, it is Samsung Electronics, responsible for more than 10 per cent of national exports.

But the country’s flagship company has sprung some alarming leaks. The Korean group reported its first quarterly loss at the end of 2008, hit mainly by a global collapse in the price of memory chips.

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Lee Yoon-woo, chief executive, this month warned investors that 2009 would be “a very difficult year”. Samsung executives say, however, that the company’s divisions should be profitable during the third quarter.

To achieve this, Samsung plans to restructure into simpler business groups, challenge Nokia’s mobile phones in India and China and capture the classier end of the television market. The world’s largest maker of memory chips will also slash capital expenditure on semiconductors but still aim to outspend Asian rivals.

Samsung says it plans to continue to reduce chip sizes at a time when competitors are being hit even harder than it is by the worldwide recession.

“All the Taiwanese or even the Japanese are still running at 70 [nanometres]. We are now at 56 nanos. The gap is now very wide, almost two generations,” says Robert Yi, head of Samsung investor relations. He says the company regards the downturn as an opportunity to extend this technological superiority.

In spite of pressure to reduce costs, Mr Yi predicts that Samsung could survive the crisis without large scale job cuts. He says highly skilled staff represent only a small outlay in relation to the rest of Samsung’s massive investment in electronics plants. Mr Yi declines to put a figure on reductions to 2009 capital expenditure but says some executive salaries have been cut by more than 10 per cent.

At the start of the year, Samsung transformed its four business divisions. Mobile phones and consumer electronics merged into a group called digital media and communications. Semiconductors and liquid crystal displays became device solutions.

Managers say the company had long needed to combine these divisions for technical and managerial reasons. They complained the businesses had traditionally not shared expertise and products, procured materials inefficiently and even failed to co-ordinate properly in intellectual property battles.

Chi Young-cho, senior vice-president of the digital media group, says the internal mergers should allow technology to be shared more readily between different products, enabling consumers to access and share content in the same format, whether using mobile phones, MP3 players, televisions or even panels on refrigerator doors.

Mobile phones remain the robustly profitable bedrock of the company, holding the number one market position in the US, Canada, Britain, France and Russia.

Yet Mr Chi says Samsung has radically changed its strategy from two years ago when it was content to focus on the higher end of the phone market, and is now looking to expand aggressively into India and China.

The company says the key to expanding market share in Asia is to invest hundreds of millions of dollars in retail outlets and training sales staff. Samsung also plans to tailor phones speci-fically to developing countries. So phones will, for example, have torch functions in case of power cuts, increased volume for noisy traffic and enhanced protection against dust.

Kwon Seong-ryul, an analyst at Hana Daetoo Securities, welcomes the strategy, but warns against taking the step of investing in additional production bases in developing markets. Mr Chi admits western markets pose a challenge because consumers change phones far less regularly but says the market is still expanding for more costly products such as smart phones and touch-screen phones.

Samsung’s TV division is also concentrating its efforts on higher-end products, stressing design in models such as its Bordeaux line. Its LED television is thin enough to be hung on a wall and though expensive, Samsung claims owners will get their money back through energy-saving features.

Analysts in Seoul suggest a swing to profitability in the second or third quarter is realistic, stressing the company would be helped by the prolonged weakness of the won against the dollar and yen.

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