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Is Samsung Losing at Economies of Scale?

Feb 22 2014, 12:01am CST | by

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Is Samsung Losing at Economies of Scale?

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Is Samsung Losing at Economies of Scale?

Samsung is known as a company whose key strategy is to use economies of scale to gain a competitive advantage.

The trouble is, the company doesn’t always succeed in that quest.  Surprisingly enough, one of the markets in which Samsung does the worst is in smart phones.

My colleague, Tom Starnes, Objective Analysis‘ processor expert (pictured), has produced a white paper that explains this finding.  The following is excerpted from this white paper, which can be downloaded free of charge from the Objective Analysis website.  (See: “Comparing Apple's and Samsung’s Economies of Scale” on the Home Page.)

The smart phone is one of the prime drivers of the $300B semiconductor industry.  There were numerous multi-purpose smart phones leading the high-end of the cellular industry before Apple joined the market, but it took Apple with its seminal iPhone to crystallize the wireless handset to a more robust industry that would draw thousands of additional participants, largely in software products.  The company has had previous successes of this kind: Apple took over the MP3 music player with its iPod device backed by the iTunes store a decade ago.

Starnes tells us that the wireless handset and tablet businesses consist of two leading OEMs followed by many other vendors that he says are: “tumbling in the dust.”  Apple and Samsung top the charts in smart phone shipments and tablet shipments: in round numbers Samsung sold 300 million smart phones in 2013 while Apple sold 150 million out of a total market of nearly one billion handsets.  The lower-grade feature phones add 800 million to the total of which Samsung shipped 150 million.  Apple sells only smart phones.

But he points out a dichotomy in the makeup of the phones that Apple sells and those sold by Samsung.  Apple gets its 15% market share with just three models of smart phones.  While Samsung takes 30% of the market, it must produce 150 models of smart phones to do so. You could say that Apple averages 50 MU per handset model while Samsung averages just 2 MU per model.  That’s a 25x difference!

Apple proudly boasts of the applications processor in its phones, currently the A5, A6, and A7, increasingly higher performance chips designed by Apple (and manufactured by Samsung.)  Mr. Starnes, who delves into processor chips, says that Samsung uses a broad range of applications processors designed by Texas Instruments, Qualcomm, and NVIDIA in their myriad smart phones.  All the while, Samsung’s semiconductor operations designed its own applications processor, called Exynos, but the company’s cell phone organization has only recently started to use it in Samsung’s own mobile devices.  So far Samsung has had no success selling the processor into other vendors’ handsets.

Volume drives cost reductions in electronics hardware.  Software development and maintenance is further complicated when it has to run on myriad hardware platforms.  One has to wonder how Samsung can amortize the cost of 150 models of phones across 300 MU as profitably as Apple can amortize the cost of just 3 phones across 150 MU.

Source: Forbes


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