March 14, 2005 in Social Responsibility News

SAMSUNG Is Now What Sony Once Was

Samsung Is Now What Sony Once Was

By JAMES BROOKE and SAUL HANSELL

Published: March 10, 2005

 

OKYO, March 9 - In 1997, the
year Sir Howard Stringer joined the Sony
Corporation,
Japan's premium electronics company, it took little notice of the Samsung
Electronics Company, a South Korean television maker fighting a life-or-death
battle to survive the Asian currency crisis.

Less than a decade
later, Samsung now has twice the market capitalization of Sony, which this week
named Sir Howard its chairman.




Nor is Samsung Sony's
only rival. Apple now dominates the market for portable music players. Silicon
Valley companies have led the way in digital gadgets like hand-held personal
organizers and digital video recorders. Sony is even facing strong competition
from Kodak and Canon for digital
cameras, a product category it invented.

Samsung has become what
Sony could once claim - the competitor with both the breadth of products and
the appeal of a premium brand.

This rapid reversal of
fortunes illustrates the highly competitive world of consumer electronics that
Sir Howard, a media man, is entering. Complacency and coasting on best-selling
products have contributed to a nearly 75 percent decline in Sony's stock value
since its March 1, 2000, peak. The invincible "factory of ideas"
founded almost six decades ago by Akio Morita, the company that brought the
world the transistor radio, and the Trinitron television tube,
seems to have lost its way.

"Samsung is now the
anti-Sony," George Gilder, an American technology analyst, said here
Wednesday. "Sony is layered with bureaucracy. The amazing thing about
Samsung is that it is like Apple with Steve Jobs involved in designing the iPod, it is like Sony with Morita
deeply involved in developing products."

Samsung has kept a lean
corporate structure, with authority increasingly delegated to front-line
managers around the world, and almost a quarter of the far-flung staff of
88,000 dedicated to research and development.

But in Monday's
boardroom purge, Sony demoted the one engineer credited with developing a new,
world-beating product line, the PlayStation game consoles. Ken Kutaragi remains
chief executive of Sony Computer Entertainment, but he loses supervision of
Sony's consumer electronics and semiconductor business just as it is preparing
the Cell Chip, a superchip that is to run the next generation of game machines
and also high-definition televisions. With the hand-held PlayStation Portable
selling like hotcakes since it was released here in December, the next
PlayStation is to come out next year, in time to compete with a new Xbox
console by the Microsoft
Corporation
and a new console by Nintendo.

In the last three years,
Sony's electronics division has dragged down company profits. With the division
forecasting losses for 2004, Sony is expecting about $1 billion in profits for
the year ending this month, about 1.5 percent of revenue of about $69 billion.
By contrast, Samsung, in the year that ended in December, had $10 billion in
net income on sales of $56 billion. High profits allow Samsung to invest
billions in research and development, maintaining 15 laboratory complexes
around the world.

"Last year we spent
$7 billion in capital spending, the largest for any information technology
company in the world," Joo Gwan-Moo, a spokesman for Samsung Electronics,
said by telephone from Seoul. This year, Samsung Electronics, the world's
largest maker of memory chips, will invest $10 billion.

Samsung also has a huge
capacity to build raw components like memory chips and display panels. This
investment has given Samsung some of the lowest production costs for items like
flat-screen televisions, DVD players and cellphones. Efficient production of
flat screens is crucial in a market where oversupply last fall led prices to
drop by more than a third. Low cost, stylish design and advanced technology are
crucial in a world where the number of producers of DVD drives has jumped to
more than 20, from 7 in 2003.

Samsung was once a
back-of-the-store brand with bulky televisions and boom boxes. After the Asian
currency crisis, Samsung upgraded its product lines to compete directly with
Sony for the premium market, leaving cheaper electronic goods to new companies
in China. After spending $3 billion a year in advertising, including extensive
Olympics sponsorships, Samsung's $12.6 billion brand value now rivals Sony's,
according to Interbrand, the brand consultancy.


Samsung is such a leader
in flat screens that Sony swallowed its pride last year and joined Samsung in
building a huge factory in Korea. With the price of LCD panels quite volatile,
executives of both companies said the deal helped reduce the risk.

Jim Sanduski, the vice
president for marketing of Samsung's television group in the United States,
said that locking Sony into the deal was better than trying to sell excess
panels on the open market.

"We would rather
have Sony as a captive customer for 50 percent of the output," he said.
"Sony will try to sell the products at a premium price rather than some
Chinese brand, say, trying to undercut the market."

Sony, for its part,
clung too long to its once-innovative Trinitron picture tube technology, and it
paid the price at Christmas. In the last quarter of 2004, Sony's television
sales rose 5 percent, but profits plunged 75 percent, year over year. No longer
able to command the premium prices associated with proprietary technology, Sony
increasingly competes with high-volume, low-cost producers.

"I meet many Sony
employees here who are so gloomy," Takeshi Oyabu, an assistant professor
of Keio Business School, said in an interview here. "Without me saying
anything, they say things like 'I am from Sony whose reputation is very bad.'
"

In the United States,
however, Sony's brand reputation is far stronger with consumers than it is in
Japan or most of the rest of the world.

"My product may be
better today in a blind test but consumers love S-O-N-Y branded on their
TV's," Mr. Sanduski said.

Sony followed its
flat-screen joint venture in December by signing a cross-licensing agreement
with Samsung. Valid until 2008, this deal allows the two companies to share the
roughly 20,000 patents they hold between them.

In cellphones, Samsung's
clamshell designs, clear displays and strong computing power have emboldened
the company to set a worldwide 2005 sales goal of 100 million handsets, 16
percent more than last year's sales. Such an increase in sales could pull
Samsung close to the industry's second-largest cellphone producer, Motorola, an American company that
sold 104.1 million handsets last year.

While cellphones are
Samsung's largest business, Sony has stayed out of mobile phones. But in a time
of technology convergence, Sony could lose if increasingly powerful cellphone
cameras start cutting into sales of digital cameras.

In Korea, Samsung
unveiled on Wednesday the world's first mobile phone with a powerful
7-megapixel camera. By comparison, many digital cameras feature 3 or 4 megapixels.
In an example of technological convergence, this high-end handset, SCH-V770, is
Internet-capable and has an MP3 player and a business card reader.

"The transistor
radio, Trinitron tube televisions - Sony created products that changed
our lifestyle," Mainichi Shimbun newspaper said in an editorial Tuesday.
"We hope to see the introduction of new, Sony-like products as soon as
possible."

On Tuesday, Sir Howard
met with Japanese reporters and vowed that Sony would be cool again.

But on the Ginza,
Japan's main shopping street, cool migrated a few months ago from the Sony's
showcase building to the five-floor Apple
Computer store. On a recent
Sunday afternoon, crowds elbowed each other to inspect the latest iPod designs,
using computer terminals to book appointments with Apple's sought-after
technical advisers.

When Sony was caught
flat-footed with a late introduction of an Internet version of its 25-year-old
, its profits from world audio sales fell a cataclysmic 48 percent in
the final quarter of last year. Once again, Sony had coasted on an old
technology, while competitors invested in new ones.

"Samsung is like
the old Sony," said Mr. Gilder, who edits the Gilder Technology Report.

"Samsung has much
of the spirit of Sony 10 years ago."

James
Brooke reported from Tokyo for this article and Saul Hansell from New York.

 


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