Can Samsung Innovate?
The Korean giant now dominates the smartphone and tablet era, but it is built for steady progress rather than big breakthroughs
Tue, March 05, 2013
IDG News Service (Tokyo Bureau) — If we're not there yet, we are quickly approaching the Samsung Era in handheld electronics.
The Korean giant sells more mobile phones, and more smartphones, than any other company. It competes in all markets, from the high-end down, and is pouring its record profits into expansion and advertising. Samsung is now among the most valuable brands on the planet.
Samsung rose to prominence by out-grinding rivals in commodity markets, and it approaches phones and tablets the same way, by quickly pumping out handsets with incremental tweaks and improvements.
The question now is whether Samsung can innovate, if it can deliver the kind of totally new devices that rival like Apple has.
There is no question about Samsung's ability to compete in many markets at the same time. Last week the company announced a new Galaxy Note tablet with an 8-inch display, and reports say its next Note smartphone will have a 6.4-inch screen.
This means that Samsung's smartphones and tablets will probably soon come in one-inch intervals at every size from 4 to 11.6 inches. These are sold at various specs for different markets and price points, meaning the company has many dozens of devices in play around the world.
"They are literally competing in all segments at all times, even competing with Apple before a product comes out," said Andrew Rassweiler, an analyst at IHS iSuppli. "Samsung has a horse in every race."
And Samsung's breadth has not come at the cost of its thoroughbreds. Its flagship Galaxy S line is the first to truly challenge the iPhone for dominance in high-end smartphones. It also revealed last week that it will soon unveil the Galaxy S IV, just 10 months after the S III was launched.
The company is wildly profitable and successful. Recent data show that Samsung is easily the world's dominant phone maker by units shipped and the global leader in smartphones. If you see a random person with an Android device, chances are it is a Samsung.
The company, however, has built this success directly on its history as a component maker, where it rose to prominence the same way. As Samsung Electronics was building momentum in the global mobile phone industry in 2004, then-CEO Jong-yong Yun expressed his feeling toward the devices in an interview:
"Speed is the key to all perishable commodities from sashimi to mobile phones. Even expensive fish becomes cheap in a day or two."
For Samsung, phones are not the "revolutionary product" that Apple promised when it launched the first iPhone. The company does not aim, as Steve Jobs once said of Apple, to "make our hearts sing."
Globally and in this article, "Samsung" refers to Samsung Electronics, the flagship firm of the Samsung Group, a massive chaebol, or Korean conglomerate, that runs everything from fashion brands to health care.
The group's electronics unit was originally founded in 1969 to make appliances like refrigerators and TVs, and was eventually merged with its semiconductor business. DRAM is where Samsung had its first real international success -- it started years behind rivals in the U.S. and Japan, but steadily outworked them, gaining ground with each chip generation until it took the technology lead in the early 1990s.
Long-time Samsung watchers say this intense focus on small, steady technical improvements is still the company's core approach.
"Samsung never comes up with any new products. It improves it and comes up with the next generation of product -- much better and much cheaper, and much faster," said Sea-Jin Chang, a professor of business policy at the National University of Singapore, who wrote a book about the company's emergence over now-struggling Sony.
"Samsung's success comes from this DRAM experience, because it was the first business they actually made any money in," he said.
The company's consumer electronics are now its largest source of profit. But it is still the world's dominant producer of components like NAND flash memory and DRAM, LCD screens and mobile processors.
Samsung still approaches both businesses the same way, Chang said. The "digital sashimi" philosophy holds across all of its product lines.
As with the semiconductors used in memory and screens, which gradually increase in complexity with each generation, the current wave of smartphones and tablets can be seen as a steady progression. Each new model gets thinner, with better screens and faster processors, plus hardware add-ons such as NFC (near field communication) chips, but the overall concept doesn't change.
"Samsung is like the Japanese companies when they were at the their peak, pumping out tech products for cheaper and cheaper," said Hiroyuki Shimizu, an analyst at Gartner.
Shimizu said one way out of this spiral is software, but Samsung has had little success in developing its own. The company has largely abandoned its Bada OS, first announced in 2010, and is almost entirely dependent on Android for core content like maps, apps and video.
"Samsung emphasizes speed and execution. But this is contradictory to creativity. If you want speed and execution, you don't expect to create something new," said Chang. "Software is more individual and requires out-of-box thinking."
Still, Samsung has opened up new segments of the smartphone market.
While it has yet to create an entirely new type of device, its ready supply of components makes it easier to gamble on new slices of the market. When it launched the original Galaxy Note in 2011, a phone with an oversized 5.3-inch screen, the device's marketing phrase was "Phone? Tablet? Its Galaxy Note!"
Samsung later said it sold 10 million units of the "phablet" in nine months, creating a new sub-category, and is now gearing up for its third iteration of the device. A host of rival companies, including Korean competitor LG, Asus and Huawei, have since announced their own oversized phones, and IHS iSuppli now estimates that 60 million phones with screens 5 inches and larger will ship this year.
"It's a shotgun approach," said Rassweiler of IHS. "The best way to test it is to build it and see if they come."
Samsung's ability to make most core hardware components in-house, and its deep pockets, mean it can gamble on devices like the Note. They also give it a massive advantage over competitors.
When you make calls or flick the screen of an iPhone, the bits produced take a virtual tour around the tech world -- the screen may come from Sharp's factories in central Japan, the processor from Samsung's plant in Texas and the assembly completed at the massive Foxconn complexes in China.
In Samsung products, teardowns show that over 80 percent of components are made by the company itself. Consumers may be not able to tell the difference in a finished product, but this greatly reduces the time it takes to get a product to market.
"If you really look at it as who can compete with Samsung in terms of vertical integration right now, the answer is nobody. Nobody's even close," said Rassweiler. "No one can hold a candle to them in terms of in-house ability."
Some say that Samsung's status as a top component supplier can give its in-house products unfair advantages, such as first crack at new items in short supply. The company, which famously counts even bitter rivals like Apple among customers, maintains it is client neutral.
"Components like OLED displays have been monopolized by Samsung Mobile in the past," said Won Seo, an analyst at Korea Investment and Securities. "But even though there is some conflict in interest between its component business and handset business, Samsung so far has managed this quite well, with independent businesses."
A Samsung spokesman emphasized that the company maintains strict firewalls between its component and product businesses, and that the two operate completely separately.
Samsung's broad range of devices also means that it can compete in widely different markets. In smartphones, the company is strongly competitive in advanced markets in the U.S. and Europe, and is still the dominant vendor in emerging China, where Apple lags rivals.
In nearby brand-conscious Japan, however, Apple is now the market leader, while Samsung has struggled. The Korean company is pouring much of its recent record profit into marketing, however, and was recently named the strongest smartphone brand by researcher Brand Keys.
A few weeks ago, rumors that Apple is working on a "smartwatch" hit the mainstream press. Days later, images of a Samsung smartwatch also emerged.
Whatever the source or accuracy of the watch rumors, the message is the same as it has been for smartphones and tablets. Samsung is now matching Apple product for product, leak for leak -- anything Apple can make, Samsung can too, and probably better.
The question is whether Samsung can give us something new.