IT companies bolstering partnerships, B2B businesses

Samsung Electronics’ Vice Chairman Kwon Oh-hyun, eleventh from left, poses with senior Chinese politicians and other officials at an event to celebrate the operation of the company’s mega chip-manufacturing plant in Xian, western China, in this file photo taken in May. Samsung is increasing investment in semiconductor and display plants in China to cut expenditure on labor and logistics. / Korea Times file

By Kim Yoo-chul

Samsung Electronics and other Korean tech companies are suffering steep falls in profits due to challenges from Chinese companies.

“Korea’s competitiveness in the technology and consumer electronics industries is weakening amid the rise of Chinese competitors,” said Kim Jeong-sik, head of the Korean Economic Association (KEA).

Kwon Tae-shin, a former top bureaucrat and currently head of the Korea Economic Research Institute (KERI), echoed these thoughts: “Leading Japanese manufacturers are gaining competiveness thanks to the weakening yen, while Chinese manufacturers are improving their technologies, which is also hurting us. I can say Korean manufacturers are facing bigger risks.”

Business transformation

China is no longer a land of opportunity owing to its rising labor costs and regulatory hurdles, which contribute to foreign companies’ falling profits.

“We have to try our best to effectively compete with our Chinese rivals by implementing fine-tuned strategies,” said one Samsung Electronics executive who requested anonymity.

The competition in the mobile segment has intensified as cheap handset manufacturers expand their stakes while larger names such as Apple cut theirs.

“Samsung understands that we should invest more to innovate and roll out devices on time according to market demand, a capability that is quite difficult for rivals to copy or even to compete against,” the executive said.

“Samsung’s key advantages lie in its large output commitment, on-time delivery and better pricing, but for the Chinese market, it is expanding its lineup to include budget models.”

In televisions, home appliances and displays, the Korean tech heavyweight is pushing to roll out premium products to entice more affluent Chinese customers, Samsung officials said.

“For that, Samsung is spending more to bolster its partnerships with major Chinese retailers such as Suning,” another company official said.

Product and service differentiation is another measure that Korean companies can take to weather the growing competition with Chinese manufacturers.

For example, Samsung Electronics, LG Electronics and others such as SK hynix, Doosan Infracore and Dongbu-Daewoo Electronics are transforming their business structures to focus on the more stable business-to-business (B2B) segment.

“The business-to-consumer (B2C) segment is very volatile and highly competitive, so Samsung is now focusing on the B2B segment as it believes being a solutions provider means stability,” said the official.

Samsung’s battery affiliate SDI’s latest moves to partner with major Chinese automakers reflects the company’s new focus on the B2B segment.

Market analysts also welcomed moves by LG Electronics to invest more on B2B businesses, saying LG’s tech units are well positioned to provide B2B solutions in China and find new growth opportunities there.

“Since 2011, LG Electronics has been increasing its investment in air conditioners for business rather than individual clients. This shift has helped LG’s air conditioning division earn more as the B2B segment has higher technological barriers but correspondingly higher margins,” Shinhan Financial Investment analyst So Hyun-chul said.

LG’s other B2B-focused affiliates, led by LG Display, LG Chem, LG CNS and LG Innotek, are collaborating with other companies over the development of electric vehicle parts such as batteries, dashboards and motors.

This is part of the group’s initiatives to cut its heavy dependence on the cyclical consumer electronics business and to expand its share in the Chinese market.

Ironically, the growing competition in China also benefits major Korean parts suppliers such as SK hynix, Samsung Electronics, Samsung SDI, LG Display and LG Chem through increased orders by set-makers.

“SK hynix is responding to the growing demand for advanced chips in China,” company spokesman Son Kyung-bae said.

The SK affiliate and the world’s No. 2 chipmaker reported a record operating profit last quarter, having remained as one of the few survivors in the memory chip industry and one of the few remaining suppliers to Chinese manufacturers.

Focus on Vietnam

Korean technology firms are eyeing Vietnam to cut costs, employ more skilled workers and thus, better compete with their Chinese rivals.

With China no longer a “global factory” and with Vietnam offering huge tax benefits, these Korean tech firms are focusing more on the Southeast Asian country as their next investment destination.

Samsung plans to invest as much as 10 trillion won in Vietnam in line with its three-pronged approach for overseas investment to take on Chinese rivals.

The approach involves establishing research hubs in Korea, a component manufacturing hub in China and a finished goods manufacturing hub in Vietnam, said Samsung officials.

Samsung operates two handset factories in Vietnam and is in the process of building a home appliances complex in Ho Chi Minh City. LG Electronics is also producing appliances in its key facilities in Vietnam.

Similarly, Korea’s top retailer Lotte Group has been increasing its spending in Vietnam, stressing the lower regulatory hurdles, greater government support and greater market potential.

The country is one of the most populated in the Southeast Asian region and home to many young customers who have significant purchasing power.