SEC China010821BJ-Toshiba CONFIDENTIAL Brown Goods and PC Competitor Analysis: Toshiba SAMSUNG ELECTRONICS CHINA (SEC China) August 20, 2001 This report

SEC China010821BJ-Toshiba

CONFIDENTIAL

Brown Goods and PC Competitor Analysis: Toshiba

SAMSUNG ELECTRONICS CHINA (SEC China)

August 20, 2001

This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.


2

OVERVIEW OF COMPETITOR ANALYSIS FRAMEWORK

1. Background information

• Location• Registered

capital• Management

team• Equity

structure

• Starting year• Number of

employees• Era analysis

4. Value chain strategy

5. Organization and ownership

6. Financial performance

Focus on• Marketing,

advertising and promotion

• Distribution (channel and sales force)

• Organization structure• Ownership structure

• Sales • Profit

2. Strategy

3. Product/market

• Mission• Vision• Corporate strategy

• Key product offerings• Market position


3

BACKGROUND INFORMATION




team• Equity

structure






• Focus on– Marketing,


– Distribution (channel and sales force)



2. Strategy

3. Product/market




4

Source: Toshiba website, Lit search

BACKGROUND INFORMATION – TOSHIBA

Established: 1875 by Hisashige Tanaka

President & CEO: Tadashi Okamura

Total Assets: US$51,578 million

Shareholders’ Equity: US$10,054 million

Number of employees: 190,000 worldwide

(As of September 30, 2000)

Domestic Plants, Branches OfficesAnd Other Facilities:

Production facilities: 25Branch offices: 35Sales offices: 23

Overseas Plants, Branches Officesand Other Facilities:

Offices: 10Manufacturing companies: 42Subsidiaries & affiliates: 72


5

Source: Company website, Lit search

BACKGROUND INFORMATION – DALIAN TOSHIBA TELEVISION, LTD

Location: Dalian, Liaoning Province

Starting year: 1996

Registered Capital: US$30 million

Unit Sold: color TV 1 million sets, 50% export (Year 2000)

Joint Venture Partners Type

Foreign Juristic Person's Shares

Foreign Juristic Person's Shares

• Toshiba

• Toshiba (China) Co.

• Dalian Daxian (Group) Co., Ltd.

Number of employees: 2,000

Products: 21’ – 34’ color TV (CRT, Projection, Flat)

Domestic Juristic Person's Shares


6

Source: Company Report, Lit search

TOSHIBA’S CORPORATE MANAGEMENT TEAM

President & CEOTadashi Okamura

Corporate project

Corporate staff

Corporate support services

iValue Creation Company CEO: Tsutomu Kawada

e-Solutions Company CEO: Hiroo Okuhara

Social Infrastructure Systems Company CEO: Tsuyoshi Kimura

Digital Media Network Company CEO: Atsutoshi Nishida

Mobile Communications Company CEO: Tetsuya Mizoguchi

Power Systems & Services Company CEO: Toshiyuki Oshima

Semiconductor Company CEO: Takeshi Nakagawa

Display Devices & Components Company CEO: Eisaburo Hamano

Medical Systems Company CEO: Masamichi Katsurada

Home Appliances Company CEO: Makoto Nakagawa


7

Source: Company website, Literature Search

HISTORY OF TOSHIBA


8

Source: Literature Search; McKinsey Analysis

TOSHIBA’S DEVELOPMENT WENT THROUGH THREE STAGES

Organization structure

Corporate strategy

Product Development & Technology

1875-1939

• Two Japanese electrical equipment manufacturers merged in 1939 to create Toshiba.

• Technological innovation accounted for the companies’ successes. One of the founders was the so-called Edison of Japan.

• Main products included transformers, electric motors, light bulbs, radio receivers, and cathode-ray tubes.

1978- PRESENT1939-1978

• The company grew rapidly and became a market leader in the electrical and electronic industry. However, the organization became more bureaucratic.

• The company continued to be innovative in the early years, producing many firsts in the industry. However, It lost its innovator image in the 70’s .

• Numerous leading products in the electrical and electronics areas. Examples includes Japan’s first vacuum cleaner, first fluorescent lamp, first radar, etc.

• Toshiba shifted direction by investing heavily in IT segment. The organization became increasingly global, employing 190,000 employees world-wide with annual sales over ¥ 5 trillion.

• IT focus, diversification, innovation and globalization are four key elements of Toshiba’s corporate strategy.

• Toshiba is intensively focusing on IT-related business (i.e. telecom and internet), meanwhile, leveraging its legacy businesses to generate stable income

Business Building Becoming Industry Leader

Meeting worldwide competition


9

Source: Literature Search; McKinsey Analysis

DEVELOPMENT OF DALIAN TOSHIBA’S TV BUSINESS IN CHINA

Key initiative

Key results

1996-1997

• Founded as a joint venture in 1996, construction was completed in 1997.

• Conducted accurate market forecast and implemented just in order inventory management.

• Inventory turn-over less than two days.

• Made profit the next year.

20011998-2000

• Focused on high profit margin PJTV segment, and competed on technology, service and management rather than price.

• Strengthened customer service

• Revenue and profit grew 50% annually. Became the No. 1 market share leader in PJTV segment.

• Toshiba decided to relocate its digital TV production to Dalian and invested ¥300 million to expand capacity from one million units to 1.5 million units

• exported 800,000 units to Japan.

Business Building Establishing Leadership in PJTV Market

Becoming Toshiba’s Key Global TV Production Base


10

TOSHIBA WILL FURTHER INVEST IN IT INDUSTRY IN CHINA

Background information

Source: Literature research, interview

"To support China's 10th 5-year plan, we will enlarge our investment in IT industry…. Toshiba has the world-leading LCD related and semiconductor technology. The amount of each investment will exceed I billion USD."

“Apart from Japan, Toshiba divides global market into four regions, America, Europe, China and the rest of Asia. China is the only region made up of one single country"

Chief representative of Toshiba in China

• Invested companies in China

• Total investment

• Chief representative

• Total number of employees

• Importance of China

• Future investment plan

23

RMB 6 billion

Pintianxinzheng (pinyin)

over 10,000

Chief representative of Toshiba in China

Source: literature research, interview


11

TOSHIBA IS THE LEADING PLAYER IN NOTEBOOK MARKET BOTH IN CHINA AND GLOBALLY

Time Key milestones

1985

1990

1993

1994

1999

2000

Introduced the first notebook in the world

Introduced STN notebook

Introduced color TFT notebook

Introduced Pentium-empowered notebook

Ranked number one in China notebook market for 4 years

Ranked number one in world wide notebook market for 7 years

Era analysis of Toshiba in Notebook



12

STRATEGY




team• Equity

structure











2. Strategy

3. Product /market

• Mission• Vision• Corporate strategy• Market position

• Key product offerings


13

TOSHIBA’S MISSION AND VISION

Corporate mission

“We, the Toshiba Group companies, based on our total commitment to people and to the future, are determined to help create a higher quality of life for all people, and to do our part to help ensure that progress continues within the world community"

Corporate vision

“To grow with excellence as the leading-edge, internet-ready enterprise globally by accelerating innovation with agility, and to create a 21st century of success hand in hand with our customers"

Source: Company website, Lit search.


14

THREE STRATEGIES PROPEL TOSHIBA TO BECOME A GLOBAL HI-TECH LEADER IN THE NEW MELLIMUM

Toshiba as a leading-edge, internet-ready

global leader in hi-tech

Accelerate the speed of innovation• Management Innovation (MI2001) is a

major initiative being promoted throughout Toshiba Group. It is aimed at advancing creative destruction and competitive superiority

Champion market-centric management• Customer Relationship

Management and Supply Chain Management systems will be deployed to cover company-wide operations.

Be internet-ready• Digital Manufacturing, a new

system, will be introduced throughout the Toshiba Group

• An IT infrastructure for collaborative engineering will be established

Source: Lit search, external interviews: Toshiba Annual Report


15

ASSESSMENT OF TOSHIBA'S CURRENT STRATEGIC POSITION – SWOT

Strengths

• Broad and diversified product portfolio

• Strong presence in Asia• Strong R&D and

manufacturing capabilities

Weaknesses

• Less customer focused• Weak brand name in cutting-

edge information technologies• Unbalanced global presence

Opportunities

• Global digital convergence• Emerging technologies,

i.e., Internet, 3G• China joining WTO opens

doors to foreign companies

Threats

• Bureaucratic management style

• Its core semiconductor business is a cyclical commodity business

• Behind the curve in key IT developments


16

THERE ARE TWO SUCCESSFUL MODELS IN THE CHINA CTV MARKET, DALIAN TOSHIBA FOLLOWS THE SONY MODEL

The Konka Model• Capital intensive, aggressive growth

through economies of scale in manufacturing and in the sales force

• From 1993 to 1998 Konka acquired TV manufacturers: North east Du Dan Jian, San Xi, An Suo, Chong Qing factories to bulk up

• Grew capacity by 2 million units from 1993 to 1998

• Through economics of scale and aggressive pricing Konka was able to grow market share from 3% to 11% from 1995 to 2000

The Sony Model• Zero in on the high end, high profit

segment of CRT TV market with a strong brand able to command price premiums

• Not in a strong presence in unit market share, but the top brand when consumers respond for the brand quality and reliability

• Corporate philosophy unwilling to sacrifice profits for larger market share (vast different from Chinese players)

• Future target focused on higher end, cutting edge technology TVs e.g. PJTV, Digital TV, LCD and PDP which have significantly higher profit margins.

Source: Lit search, McKinsey analysis


17

TOSHIBA SHIFTS ITS STRATEGIC FOCUS TO APPLICATION SOLUTION AND CUSTOMER SERVICE IN CHINA NOTEBOOK MARKET

Mission To be the most responsible IT product application solution and service provider

Time Strategic focus

1996

1997

1998

1999

• Product itself

• Channel development

• Application

• Customer service

2000 • VIP certification focusing on core customers• Channel development into 2nd tier geographies• Application solution of "mobile office" concept

Toshiba notebook strategy* in China

Strategy evolvement

* Toshiba notebook strategy in China is co-developed by Digital China, Toshiba’s exclusive notebook chief-distributor in China



18

PRODUCT/MARKET




team• Equity

structure











2. Strategy

3. Product /market




19

TOSHIBA’S GLOBAL NET SALES BY BUSINESS SEGMENT

Source:Toshiba web site, Lit Search

Yea 2000 (¥ billion)

7%10%

23%

9%23%

28%

Information & Communications & Industrial Systems ¥1,858

Power Systems ¥571

Electronic Devices & Components ¥1,477

Digital Media ¥1,518

Home Appliances ¥660

Others ¥473


20

DALIAN TOSHIBA's KEY TV PRODUCT OFFERINGS

Color TVs (inch, model no.)

• Projection TV Series: 43’ – 61’– 61D9UXC– 50D9UXC– 43D9UXC– 50D8UXC– 43D8UXC

Source: Company website, Lit search

• CRT TV Series: 21’ – 29’– 29D2DC– 29D2XC– 25D2XC– 25E3DC3– 21D2NC

• Flat TV Series: 21’ – 34’– 34D8UXC– 34D6DC– 29D8UXC– 29D6DC– 29D3XC– 25D6XC– 21AF6C


21

DALIAN TOSHIBA’S MARKET POSITION IN CHINA’S CONVENTIONAL CRT TV MARKET: NO. 5 MARKET SHARE LEADERMarket share by sales, %

Source:GFK, McKinsey Analysis, External interviews: Konka, Sony, Toshiba

9.7 11.7

9.6 9.3

7.4 7.5

7.0 7.3

7.0 5.7

6.6 5.0

4.2 4.9

4.2 3.94.0 4.63.0 3.32.2 2.22.0 2.4

13.013.7

11.2 10.9

6.46.3%

1999 2000

Others

100% 100%Key trends Rationale

• Industry undergoes further consolidation

• Foreign players lose market share to local players

• Top five players in the market –Changhong, TCl, Konka, Hisense, Skyworth,controlled 41.6% of the market in 1999 grew to 43.7% in 2000

• Local players increased market share from 65% in 1999 to ~67% in 2000

1.9 2.0RowaLGPanda Jinxing Skyworth-RGBXoceco Philips Haier Panasonic Hisense

Toshiba

TCL

Changhong

Konka

Sony


22

DALIAN TOSHIBA’S MARKET POSITION IN CHINA’S PJTV MARKET: NO. 1 MARKET SHARE LEADER

Source:GFK, internal interview, literature search, external interviews: Sony, Panasonic, Toshiba

Key trends Rationale

• Established MNCs, Toshiba, Sony will continue to dominate market

• Local players start establishing themselves by 2005

• High-end producers with superior technology in pixel resolution and brightness

• Local players expected to acquire key PJTV technologies as of 2003

• As comparison, Changhong alone now controls ~ 20% of large screen CRTV market, local players likely to gain similar share in PJTV market

Market share by salesPercent

Local (KonkaChanghong, etc)Other MNCsHitachi Panasonic

Samsung

Sony

Toshiba

1999 2000

100%

35 32

3332

7 10

15 14

61~5 ~3~4 ~3

100%


23

PJTV PLAYERS’ STRENGTHS AND WEAKNESSES

Company Strengths/weaknesses

Toshiba • Strong brand name• Aggressive sales and marketing

Sony • No. 1 brand name• Premium market with highest industry profits

Samsung • Strong quality in resolution and brightness• Solid position in the market• Comparable technology with Japanese counterparts

Other MNCs: Panasonic, Philips, etc.

• Possess the technology, but yet to establish themselves in market

Local companies: TCL, Konka, Hinsense, Haier, Changhong

• Lack the key technologies for PJTV components – tubes and screen• Low-end brand have resulted in low sales volume• Will fill up the technology gap by about 2003

Source: Lit search, McKinsey analysis


24

TOSHIBA HAS A FULL-LINE PROUCT OFFERING IN NOTEBOOK, COVERING LOW-END TO PREMIUM SEGMENT

Source: Literature research

Key product offerings

• Satellite Series 2800 (13.3", 14.1", 15.0")

• Portege Series (7220CT, 3480CT, 3490CT)

• Tecra Series (8100H, 8000J, 8200)

• Satellite 1750 (13.3")

• New satellite 2800 (13.3", 14.1",15.0")

• Satellite Pro 4600 (13.3", 14.1", 15.0")

• New Satellite Pro 4600 (14.1")

• Satellite 3000 (13.3")

Source: literature research


25

TOSHIBA IS STRONG IN EDUCATION, LARGE AND MEDIUM BUSINESS, BUT PARTICULARLY WEAK IN GOVERNMENT

Source: IDC

17.831.4

23.5

28.8

27.422.2

8.410.9

8.44.8

5.5Small office Home

100% =

Toshiba Market average

73 484

Education

Government

Large business

Small business

Medium business

3.8 3.53.7

Sales by customer segmentsPercent of units shipment (000s), 2000


26

TOSHIBA IS GENERALLY A MEDIUM TO HIGH-END PLAYER, PARTICULARLY STRONG IN USD 2.5-3.5K PRICE BRAND

Source: IDC

48.8

22.712.1 10.4

11.1

56.513.324.5

16.1 10.4

17.9

24.212.2

13.5

7.1

9.2

3.8

9.8

13.96.6

26.620.2

0.9

Low(0-2k)

Medium (2-2.5k)

High (2.5-3.5k)

100% = 0.11 0.12 0.17

0.7 3.5

1.4

0.1

0.08

Premium (>3.5K)

2.2

Toshiba's market share

0.1

Sales by customer segmentsPercent of units shipment (M), 2000

Others

Dell

IBM

Founder

Legend

AcerToshiba


27

VALUE CHAIN STRATEGY




team• Equity

structure











2. Strategy

3. Product/market




28Source: Literature Search, Konka web site, team analysis

R&D ManufacturingMarketing& Sales

Distribution After-Sales Services

• Toshiba Digital Media Network Company is responsible for Color TV R&D

•Dalian Toshiba is responsible for TV production. 30% parts come from China

•Dalian Toshiba and its 4 subsidiaries in Dalian, Beijing, Shanghai and Guangzhou are responsible for marketing and sales

•Dalian Toshiba primarily uses sales forces in its four subsidiaries to sell TV products directly to retailers. It also uses distributors in certain regions such as Chongqing.

• Toshiba (China) helped set up the after-sales service network, and Dalian Toshiba is running the network and responsible for PNL.

Digital mediaDigital MediaNetwork Co.

Dalian Toshiba TV Co.

TOSHIBA CHINA TV BUSINESS HAS A PRODUCT LINE ORIENTED VALUE DELIVERY SYSTEM


29

DALIAN TOSHIBA’S TV DISTRIBUTION CHANNEL

Source: McKinsey Literature Search, external interviews, McKinsey analysis

Dalian Toshiba TV Co.Manufacturing Plant

Dalian SubsidiaryBeijing Subsidiary

Shanghai SubsidiaryGuangzhou Subsidiary Distributors

Retailers:Hyper/super-market: 10%

Designated Stores: 25%

Dept. Stores: 30%

Specialty Stores: 35%

Consumers Subsidiary Sales

Force

70%

30%


30

TOSHIBA ADOPTS THE NATIONAL CHIEF-DISTRIBUTOR PRACTICE IN NOTEBOOK BUSNIESS IN CHINA

R&D ManufacturingMarketing and branding

Sales and distribution

After-sales service

• Toshiba R&D • Toshiba SH• OEM: Renbao,

a Taiwanese OEM player

• Digital China

• Digital China (for Toshiba notebook only)

• Toshiba

• Digital China– Centralize key

accounts across different products

– Centralize SI for key accounts (banking, tax)

– Be in charge of channel develop-ment and management

• Digital China– Major

responsibility

• Toshiba SH factory– Parts' inventory– Ancillary hotline

ToshibaToshiba SH

OEMToshiba Toshiba SHDealers

Digital China

Source: interview


31

TOSHIBA HAS POSITIONED CHINA AS A KEY R&D BASE

* The other two R&D centers are in the UK and the US respectively


• Three-layer structure of Toshiba R&D

– First layer focusing on technology trends in the next 3-5 years– Second layer focusing on multi-media technology and

technology trends in the next 2-3 years– Third layer focusing on product development

• Toshiba R&D in China

– Established "R&D department" in Beijing, April 2001– Plan to develop it into "Toshiba (China) R&D center” in October

2001 which will be the third overseas R&D center of Toshiba– Plan to have 250 people this year and expand to 500 people

in R&D center in 2005

R&D


32

TOSHIBA HAS OUTSOURCED THE MAJOR PART OF NOTEBOOK MANU-FACTURING AND ITS DISTRIBUTOR IS CAPABLE OF CUSTOMIZATION IN CONFIGURATION


Manufacturing

Parties involved Responsibilities

Toshiba SH • Assembling production to cover total volume sold in China

• Assembling production for expert

OEM (Renbao) • Major part of notebook manufacturing

Digital China • Customization for big-batch order according to customers' individualized demand for hardware configuration


33

UNDER STRONG COST PRESSURE, DIGITAL CHINA AND TOSHIBA ARE PUSHING TOWARDS MORE FLATTENED CHANNEL STRUCTURE

Source: CCID, interview

Channel Structure Channel Cost Percent of retail price

Digital China

Core distributors (~ 50)

DirectSpecialty shops

(over 100)Industry

distributors

End users

Second tier dealers

(hundreds)

Before 1997

1997-1998

1999-2001

Future expecta-tion of manu-facturers

>> 10

>10

8-10

5-8

• Pay sufficient attention to fast-growing customer segments, such as education and home, as well as major segments, such as government and business

• Expand into 2nd-tier geographies and enhance channel

Channel strategy


34

DIGITAL CHINA IS BUILDING UP AN ADVANCED NATION-WIDE DISTRIBUTION NETWORK TO FURTHER CUT DOWN COST


Distribution

Key initiative • Build up a nation-wide logistics system

Total investment • RMB 65 million

Three-tier structure

• 3 first-tier centers in Beijing, Shanghai and Guangzhou• 7 second-tier centers• Third-tier components

Detailed practice • Providers deliver to three first-tier centers• Inventory is distributed among all the three tiers with

inventory cycle shortening from first tier to the third• SCM management is through IT network


35

DESPITE CONTINUOUS IMPROVEMENT, TOSHIBA NOTEBOOK’S CUSTOMER SERVICE STILL LAGS BEHIND IN CERTAIN ASPECTS

• VIP certificate

For A-class customers, Toshiba notebook guarantee includes response within 10 hours, and repair finished within 20 hours, otherwise offering a backup notebook

• On-site service

On-site service is offered in Beijing, Shanghai, and Guangzhou

• Dell and Acer offer 4-hour response commitment

• Dell offers on-site service in major cities in China

Customer service

*Footnote

Source: Source

Major initiatives

Competitor’sofferings



36

ORGANIZATION AND OWNERSHIP




team• Equity

structure











2. Strategy

3. Product /market




37

Source: Lit search, team analysis

TOSHIBA’S CORPORATE STRUCTURE

Statutory Auditors

Board of Directors

President & CEO

Corporate project

Corporate staff

Corporate support services

iValue Creation Company

e-Solutions Company

Social Infrastructure Systems Company

Digital Media Network Company

Mobile CommunicationsCompanyPower Systems & Services Company

Semiconductor Company

Display Devices & Components Company

Medical Systems CompanyHome Appliances Company

Japan Foreign Country

Dalian Toshiba TV, Ltd

Other JV

Other Subsidiaries

Japan Foreign Country


38

TOSHIBA’S MAJOR SHAREHOLDERS

Source:Toshiba website

(As of September 30,2000)

Entity Percent Outstanding

The Dai – ichi Mutual Life Insurance Company

The Sakura Bank,Ltd.

Nippon Life Insurance Company

State Street Bank and Trust Company

The Chase Manhattan Bank NA London

The Sumitomo Trust and Banking Co.,Ltd.

Employees Stock Ownership Plan

The Mitsubishi Trust and Banking Corporation

Mitsui Mutual Life Insurance Company

The Nippon Fire & Marine Insurance Co.,Ltd.

3.94%

3.88%

3.36%

2.55%

2.28%

2.27%

1.88%

1.68%

1.65%

1.55%


39

TOSHIBA HEADQUARTER HOLDS THE MAJORITY OF ITS NOTEBOOK MANUFACTURING JV IN CHINA


Ownership structure

Toshiba Toshiba China Co., Ltd Shanghai Jinqiao

Toshiba Computer (Shanghai) Co., Ltd

80% 10% 10%


40

FINANCIAL PERFORMANCE




team• Equity

structure











2. Strategy

3. Product/market




41

TOSHIBA’S OVERSEAS SALES AND R&D EXPENDITURES

Overseas Sales( ￥ billion)

R&D Expenditures( ￥ billion)

Source: Toshiba 2001 Annual Report, Lit search

1998 1999 2000

CAGR=4.7%

1998 1999 2000

￥ 2,040￥ 2,116

￥ 2,235

2,000

1,500

1,000

500

0

￥ 323 ￥ 317

￥ 344

320

240

160

80

0

5.9 ％ 6.0 ％ 5.8 ％

R & D Expenditures

Percentage of Net Sales


42

TOSHIBA’S HISTORICAL REVENUES AND PROFITS

Net Sales

5,522 5,458 5,9515,7495,301

CAGR = 1.9%

1997 1998 1999 2000 2001

Net Income

67

15

-9 -33

96

CAGR = 9.4%

*

Source: Toshiba 2001 Annual Report, Lit search

Yen billion

1997 1998 1999 2000 2001


43

IN 2000, DALIAN TOSHIBA’S UNIT SALES IN CHINA WAS 7% OF CHANGHONG’S UNIT SALES, BUT DALIAN TOSHIBA’S GROSS PROFIT IN CHINA WAS 89% OF CHANGHONG’S GROSS PROFIT

Unit Salesthousand

Dalian Toshiba Changhong

Source: 21st Century Economic report, March 19, 2001

Gross Profitbillion RMB

1.01.1

500

7,500

Dalian Toshiba Changhong


44

DESPITE OF STRONG GROWTH OF TOTAL MARKET, TOSHIBA NOTEBOOK HAS EXPERIENCED STAGNANT GROWTH OF 4.4% ANNUALLY

Notebook revenue (RMB billions)

Source: IDC

Toshiba in China

1999 20001998

98-00 CAGRPercent

Total China market

1999 20001998

98-00 CAGRPercent

48.6

4.8

6.1

10.6 4.4

1.6 1.51.7

Documents

SEC China010821BJ-Toshiba CONFIDENTIAL Brown Goods and PC Competitor Analysis: Toshiba SAMSUNG ELECTRONICS CHINA (SEC China) August 20, 2001 This report