Samsung strategy in DRUM business

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To determine whether the DRAM market is attractive to newcomers, we can assess the favorability of each of Michael Porter’s five forces : 1) Barriers to entry for this market are unfavorable. Capital requirements are huge. (Fab construction costs rose from $200M in ‘85 to $3B+ in ‘04.) Also, the DRAM industry requires high R&D costs along with earned intellectual property (for advanced memory technology). 2) Substitutes present as moderately favorable. Currently, there are no substitutes for memory chip technology; market entrants do not face an immediate risk of substitution. Yet, there is a risk that a new type of memory could enter the market (e.g, nanotechnology). 3) Suppliers are a moderately unfavorable force. As the technology grows more complex, suppliers have become more concentrated, with just three equipment suppliers; as a result, DRAM producers face upward pressure on raw material prices. Suppliers do reward their high purchasing customers with a 5% discount; yet, new market entrants are less likely than incumbents to be able to capture these discounts. 4) Buyers are also an unfavorable force. In contrast to suppliers, buyers are more fragmented, but these companies still have massive negotiating power and are hyper-sensitive to both price and reliability issues (putting downward pressure on memory producers). 5) Competition is unfavorable. Brand identity is very important and is earned through reliability (low defect rate in memory chips). (In ’04, Samsung’s brand value was ranked 21st in the world.) Downward pricing pressure is increasing in the industry, as both new entrants to the market and incumbent players have shown a willingness to rapidly cut their margins on DRAM. There has been a drive by some players who have lost their technological lead (e.g., Nanya Technology), to cooperate and share technology in order to shore up their

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