Making Good Memory(s) in Volatile Times

The semiconductor is a viciously competitive market. It is capital intensive with little margins. To survive in the semiconductor world, one truly must be on the top of its game. According to a recent article, Samsung will be able to use its competitive advantages to leverage market shares.

Market analysts have seen a slowing trend in microchip demand, and future forecasts are looking bleak. Companies like Intel, Toshiba, Hynix and Micron all stand to lose a large percent of their operating income, upwards of 65% in this quarter. Intel has even been forced to cut 12,000 jobs to cushion the impact. How is Samsung surviving this brutal slowdown? Samsung has positioned its competitive advantages in technology. Samsung’s investment in technology has given them a first mover’s advantage. With this first mover’s advantage Samsung has also moved up the learning curve, and in this time of hardship that knowledge will payoff greatly. Samsung is years ahead of its competitors in manufacturing, allowing them to decrease the size of their chips, permitting more chips per wafer. Also the smaller chips take up less volume and consume less energy, which has differentiated their product and increased their profit margins. These advantages alone will help bolster Samsung’s strategic position, yet, its greatest advantage is vertical integration.

Not only is Samsung an industry leader in the semiconductor business, it also happens to be an industry leader in the smart phone business as well. Samsung generates its own demand for microchips, and with its vertical integration, they can capitalize on both ends of the spectrum. In reality, Samsung may lose some profits, but the market shares it stands to make easily outweigh the cost. In these volatile times Samsung looks forward to making good memory.


Dr. Tufte said...

KC Hulse: 82/100 You wrote "The semiconductor is a viciously competitive market.", which does not make sense as written (-6) You also wrote "... one truly must be on the top of its game, ...", and here your pronouns don't agree with each other. (-6) I will also not let you slide on the incorrect positioning of the break between the second and third paragraphs. (-6)

I am dubious about parts of the source article. It reads like a fluff piece. Part of what you're learning through this exercise is to call writers out on that. But, my expectation is that some of should be able to do that, not that I will take off points if you don't. So it's OK that KC Hulse missed this. More generally, though, I'm also concerned that KC Hulse is repeating a lot of the "economics" in the source piece rather than digging deeper. Remember: you folks know more economics than the writers do. Prove it.

Here's the stuff that bugs me.

The source author writes that Samsung has a technological edge. Fair enough. Is it the right edge to have at this time? Firms make bad bets on technology all the time. No answer is given. Now, much later in the article they do support their position by noting increased demand in the markets where Samsung does have an edge. But it seems like an afterthought.

The source author then says this will enable Samsung to "... boost market share for some key products and possibly even lift revenue." These are bugbears for economists. Firms maximize profits. Period. I don't see anything about market share or revenue in what I just wrote. Market share and revenue do get talked about a lot, but often because they are used as benchmarks for employee incentives. This is because they are readily observable, not because they are the right thing to look at. Again, there are many firms that have made bade bets that caused their market share and revenue to rise.

Then there's some sleight-of-hand with the accounting figures. The source author writes "Even with a first-quarter drop of around 10 percent, Samsung's chip operating profit is expected to be nearly five times that of SK Hynix." Note that the amount of profits isn't mentioned. It could be that SK Hynix made $2 and Samsung made $10. That would not be something to crow about.

And who the heck is SK Hynix anyway? It turns out that they are mentioned further up in the article (again with the separation of ideas): "Qualcomm has said fiscal third-quarter chip shipments could fall as much as 22 percent, while SK Hynix Inc on Tuesday reported a 65 percent slide in quarterly operating income ...". Recall that operating income is pretty close to profits. Anyway, the author's point is that Samsung's profits are 5 times this SK Hynix company that has done really bad. Can't really bad times five still be bad?

Oh gosh ... now there's even more of the separating of ideas. At the top the source author writes that "A plunge in PC sales and slower growth for smartphones globally has hit the sector hard ...", but then follows several paragraph down with "The world's No. 2 chipmaker also happens to run the world's biggest smartphone business, giving it a captive customer for its chips that none of its rivals have." Let me get this right: Samsung tied itself tightly to one sub-sector, and that sub-sector is doing poorly, but this is good because Samsung is tightly tied to it. Huh?

I don't know much about Samsung, so I could be wrong. And I don't want to imply that the business press is loaded with misleading articles. But I wouldn't put the number of bad articles at zero either.

Dr. Tufte said...

What KC Hulse adds is that Samsung has a first mover advantage. Unless it turns into a disadvantage; it might be better to qualify it a little bit, as in "Samsung is the first mover in chip technology, and this appears to be an advantage in this market because their profits are OK." KC Hulse also notes Samsung is vertically integrated. Again, it's true. But he also implies that it's good, and this is what the author of the source article wants you to think too ... it just wasn't well supported.

KC Hulse also notes that on one line of chips they "... differentiated their product and increased their profit margins." That would be great. Except the source article studiously avoids saying anything at all about margins.

P.S. I hope that last line is written that way intentionally! Rhetoricians call that metonymy.

KC Hulse said...

The last line was intentional I am glad you liked it. I recently had the opportunity to tour Micron's facilities. They actually covered a lot of what was spoken in this article. That is one of the reasons I picked it. Hynix is actually one of Samsung's and Micron's biggest competitors. Hynix is based out of South Korea. Micron also explained that their strategy was to lag on technology and produce chips for legacy products. They mentioned how their strategy has put them in a tough place, while Samsung did indeed have a technological advantage.