Innovation powers Samsung's success

A 4.5-inch flexible OLED display developed by Samsung Display / Courtesy of Samsung Display

Korean tech giant has no ‘Apple risk’ on internal parts

By Kim Yoo-chul

Mark C. Newman, Sanford C. Bernstein senior analyst

Innovation and execution are two key drivers for Samsung Electronics to beat its rivals and emerge as a global technology leader, according to a noted technology expert from Wall Street.

He said the scale, execution and technology of the Korean technology powerhouse make it more powerful.

“Without a doubt, Samsung has long been an innovator. No company comes close to Samsung in its broad technology internalization and seamless execution, thus enabling Samsung to surpass competitors in incremental innovations,” said Mark C. Newman, a senior analyst at Sanford C. Bernstein, in an exclusive interview with The Korea Times, Tuesday.

It is the first time Bernstein, the sell-side research division of AllianceBernstein, has done an interview with the Korean media. Bernstein has offices in New York, Los Angeles, London, Stockholm, Zurich and Hong Kong, facilitating equity execution in more than 40 countries.

Newman said there are different types of innovation.

“There are ‘revolutionary innovations’ or ‘scientific discoveries’ like the invention of the transistor or the light bulb that are typically difficult to monetize as the commercial impact takes years to be felt. There are ‘game changing innovations’ that change the game but are not usually revolutionary on the technology front but use technologies in a different and innovative way,” the analyst said.

Incremental innovation

Newman said Apple has specialized in the “game changing innovations” area with its i-devices. He said the innovation styles being pushed by Samsung Electronics are “incremental innovations,” technological improvements to current products.

“This late area is where Samsung excels, making things smaller, faster, lighter, last longer and all with added functionality,” he said.

Impressed by a steep rise in corporate brand awareness, the world’s biggest smartphone producer Samsung is focusing on putting more advanced technologies into its Galaxy line of devices, getting warm responses from consumers.

Samsung’s Galaxy S4 smartphone broke the “10 million” mark in unit sales in less than a month, becoming the fastest-selling mobile in the firm’s phone-making history. Samsung aims to sell over 510 million smartphones by the end of this year.

Newman said such brilliant achievements are based on clear strengths that Samsung have.

“Samsung has access to leading component technologies from internal divisions and is run by highly professional and loyal managers all reporting to the de-facto owner Chairman Lee. The execution we can see is far superior to competitors, just look at some of the recent failures by competitors in smartphones, an area where Samsung was relatively ‘late’ to,” he responded.

Its hierarchical structure, where employees are expected to remain strongly loyal results in Samsung Electronics having less creativity. However, the company is trying to overcome its weaknesses in management and product development.

“The company is aware of this and is working actively to build systems to improve creativity and increase the foreign talent pool,” said the analyst, who’s been following Samsung for the last few years.

While Samsung is migrating into a marketing-driven outfit helped by stronger sales of smartphones, tablets, computers, televisions and other appliances for households, Newman said the company’s set-making businesses are increasingly driven by marketing.

“In set-making businesses, Samsung has no option but to focus on market needs then build and brand accordingly. But on the component side, technology remains the driving force,” he said.

Samsung is also the top producer in TVs. It is also a top supplier of computer memory chips and flat-screens to be used in digital devices. Samsung generates most of its annual revenue by supplying high-end chips such as mobile processors, display panels and some system solutions.

There are signs the global smartphone market will be nearing saturation from this year as a growing number of players led by Chinese budget smartphone makers such as ZTE and Huawei rise in the market.

According to analysis by Newman, the global smartphone market still has room to grow in the next few years.

“Growth is beginning to slow down and will be increasingly in the low-end segments of the market,” he said.

Despite such looming uncertainties, Bernstein believes the tech powerhouse will steadily increase its corporate profit because Samsung has three drivers of profit growth ― displays, chips and smartphones.

“Memory chips in particular will start to play a much more important role again as memory pricing has rebounded. We believe a new paradigm is now emerging in memory semiconductors that no longer reward aggressive investment and thus more stable and higher profits result,” he stressed.

No Apple risk

Bernstein said Samsung won’t grapple with the so-called “Apple risk.”

The Cupertino-headquartered firm has shifted to Samsung’s rivals for its supply of both chips and flat-screens ― TSMC of Taiwan and LG Display of South Korea ― as ties with its once top South Korean business partner deteriorate.

In one example, TSMC will handle the supply of Apple’s next-generation A-branded processors. Samsung Display is supplying a very small amount of displays to Apple.

As a back-up plan, Samsung is closely collaborating with search giant Google in future projects. Samsung is going to supply advanced OLED screens for Google’s upcoming “Google Glass,” which will debut soon.

Google CEO Larry Page recently visited Samsung’s OLED lines in Korea to meet with top brass including the heir-apparent Lee Jay-yong and mobile chief Shin Jong-kyun.

“Fortunately Samsung’s own internal divisions are growing far faster than Apple and so they will be able to replace Apple sales with sales to their own handsets, tablets, PCs and TVs etc. Samsung also appears to be making inroads selling to Chinese makers,” Bernstein said.

Newman added the natural and eventual downside of success is that growth becomes increasingly more difficult and that is cited as one of the challenging factors for Samsung to tackle.

“As a market leader in several categories, Samsung needs to find new areas to continue its growth. We see the business-to-business market (selling handsets, tablets, PCs and printers directly to large corporations) as one area of potential. Also, LED and medical equipment that the company is currently investing in may enable growth in the longer term,” he said.

Asked what will be the “next big thing” in the global information & technology industry, Newman said convergence will be the top word and stressed Samsung is well-positioned to lead that wave.

“I can say IT-CE convergence. The traditional worlds of information technology (PCs) are colliding with consumer electronics (handsets, tablets and TVs) with smart devices like smartphones and smart-TVs. With eggs in all baskets, Samsung is well positioned in this convergence,” he said.

“I believe Samsung’s brand image will continue to improve as it continues to release stellar products and beat rivals in the market place. Samsung’s huge scale also enables it to out-invest rivals in marketing, which further helps their brand.”