In 1995, it was decided to create a single Samsung company in China, for previously, various operations were conducted separately by different Samsung units.
The Chinese market
The Chinese market was strategically important. At the time, China’s market was the third greatest in the world after NAFTA and EU in TV sales. This caused stiff competition. Sony and Matsushita dominated the high-end market; companies such as Sharp, Toshiba, Mitsubishi, JVC, Sanyo, and Hitachi were also influential. Furthermore, over 20 companies worked with the low-end market.
In 1995, China produced 16 million color TVs, and 2 million out of these were exported to other countries. The small (<17-inch) color TVs were becoming unpopular, whereas the demand for medium and large screen (18-21-inch) sets was rising; together, they accounted for 83% of sales in 1994.
In 1994, there were 80 million urban households in China; ≈80% had a color TV, so the urban market was almost saturated. Simultaneously, only 28% of the 220 million rural households had a color TV. It was predicted that there would be more than 200 million people whose official purchasing power was more than $1000 (i.e., who could afford such products as TVs and washing machines). Furthermore, many Chinese did not report their full income, so their purchasing power was even greater. And still, rural consumers preferred cheaper TVs with reasonable quality (mainly local manufacturers), whereas urban buyers preferred functionality and good brand names (e.g., Japanese products).
As for the market environment, the first mover enjoyed major advantages such as the loyalty of the customers in China; the first impression was long-lasting. Importantly, Japanese manufacturers of color TV received significant recognition in this market.
China also implemented a strong protectionism policy. The tariff for color TVs dropped from 100% to 50-65% in 1995. The rates were to be decreased further (to 36% in 1997, and to 15% in perspective), but in 1995 they still were high. In addition, the entry to the market was hindered by the product differentiation via the recognition of brand name; it was hard to establish a new brand name.
A crucial method for the competition was obtaining cost competitiveness via the economies of scale and the learning effect; before a firm gained such an advantage, the scale and learning effects were a barrier.
The situation at home
Simultaneously, in the 1990s, in Samsung’s “homeland” (South Korea) labor costs were rising, the government’s subsidies were cut, and the economy was being significantly restructured, which led to decreased competitiveness in low-end products at home. In addition, Korean market entry barriers were lifted, which increased the competitiveness of the internal market and forced firms such as Samsung to seek compensation for the competition abroad.
Samsung in the U.S.
Samsung entered the U.S. market in 1979, focusing on the low-end segment, using Korean advantage of low labor costs; it adopted the “buyer brand name” policy, simultaneously creating a strong image. In 1984, Samsung also created a subsidiary in the USA to address the trade barrier. By 1995, it became one of the top companies in the U.S., having ≈3% of the market share.
Samsung’s initial plans for the full-scale entry into China
Samsung first penetrated the Chinese market in 1985 (indirectly, via Hong Kong), but, due to governmental barriers, it only started moving there actively in 1992. In 1995, Samsung China Headquarters (SCH) was established to coordinate the dispersed operations of the company in this country. It is stated that SCH planned to become oriented to the high-end market, but Seoul was skeptical about this and proposed to aim at the low-end market and to employ a volume-oriented strategy.
Recommendations
Based on this information, it is possible to provide the following recommendations:
- Endeavor to establish a strong brand name in China.
- Focus on selling 18-21-inch TVs.
- Focus on the high-end market initially, but diversify the products offered to cover the low-end market as well once the protectionism policy in China is lightened.