Global Cooperation and Corporate Internationalization Strategy

- Samsung Electronics’ Manufacturing Complex in Vietnam

Hansoo Kang

Plenary Session 3: Global Cooperation and Cluster Internationalization

2015. 11. 5

Samsung Economic Research Institute

Global Cooperation and

Corporate Internationalization Strategy

- Samsung Electronics’ Manufacturing Complex in Vietnam

1

Globalization of Corporate Activities

In today's business environment, globalization of large firms'

value chain activities is a necessity, not a choice

- Production systems are complex, with multi-layered international sourcing

networks and rapidly changing technologies. This has facilitated the

expansion of firms’ cross-border activities

Most of the large global firms organize their activities in a

'Global Value Chain'

- “International production, trade and investments are increasingly organized

within global value chains(GVCs), where different stages of the production

process are located in different countries” (OECD)

The question is not 'if', but 'how?'

: Some globalize through outsourcing,

Others choose to do it on their own through FDIs

2

Firms' FDIs and 'Locational Advantage'

3

Global firms' FDIs: From 'asset exploiting' to 'asset seeking'

- Today, most firms' FDI decisions are motivated by strategic considerations

rather than simple extension of existing competencies or the lure of lower

cost resources elsewhere

FDIs are increasingly pursued to combine MNCs' global

strategy and (developing) countries’ locational advantage

- MNCs conduct outward FDIs to place the core activities of their global value

chain in most efficient locations

- (Developing) Host countries use their local advantage to recruit MNCs’

high value-added business and promote their economic development

- Local advantage often correlates with the existence of clusters

• “A location’s best chance of attracting foreign

investment and promoting exports is in existing or

emerging clusters.” (Michael E. Porter)

Creating a Virtuous Cycle through Cooperation

4

Low cost Inputs, Infrastructure, Government Incentives, Institutions etc.

Productivity, Innovation,

New Business

Technology Transfer, Supplier Support, Partnership with Local Universities,

Employee Training etc.

Seeding, Growth & Upgrades

Outward FDIs

Large Global Firms (Fledgling)

Local Clusters of

Developing Countries

5

Consumer Electronics

Samsung Electronics : Businesses

6

IT & Mobile Communications

Device Solutions

Visual Display

Business

Digital Appliance

Business

Printing Solutions

Business

Health & Medical

Equipment Business

Mobile Communications

Business

Network

Business

Memory

Business

System LSJ

Business

LED

Business

Samsung Electronics : Global Network

213 world-wide operation hubs, including 15 regional HQs

- While most electronics companies today choose to outsource their production, Samsung has kept most of its production ‘in-house’ and operates global production sites in 17 countries

7

Europe

Middle East Japan Korea(HQ)

Southwest Asia

Southeast Asia Africa

North America

Latin America

320,000 Employees in 84 Countries

2

3

17

4

1

1

1

8

3

CIS*

1

1

4

2

China

2

13

2

7

1

1

1

3

1

2

1

4

1

2

7

9

2

1

5

6

1

1

1

2

1

2

2

2

5

1

1

3

7

1

* CIS : Commonwealth of Independent States

15

38

54

36

6

64

Regional Headquarters

Global Production Bases

Global Sales Bases

Global R&D Centers

Global Design Centers

Others*

* Sales Branches,

Service Center,

Distribution Bases, etc.

In-house Production Rate 90%

Localized Designers 1,700 persons

► SEV (1st facility)

• Location: Bac Ninh Province, Yen Phong

• Investment: Initial $1.5billion (2008), Follow-up $1billion (2013)

• Area: 1.12 million square meters

• No. of Employees: 48,000

► SEVT (2nd facility)

• Location: Thai Nguyen Province, Yen Binh

• Investment: $2billion (2013~2014)

• Area: 1.82 million square meters

• No. of Employees: 50,000

Manufacturing Complex in Vietnam

3,000,000m2, with 100,000 employees at two plants

- Samsung Electronics’ Manufacturing complex in Vietnam has two facilities

* SEV

Foreign

Manufacturing

Hub

9

Why Vietnam?

Success Factors for a Foreign Manufacturing Hub

Local/Regional

Demand

Local Government

Support

Supplier Base

Infrastructure Human Capital

10

Why Vietnam? - Demand & Potential

A large and youthful population

A major member state in ASEAN (free trade)

- TPP agreement in 2015

ASEAN Overview

Total Population : 600 million

GDP : $2.0 trillion

Free Trade Agreements with

China, Korea, Japan, India,

Australia, and New Zealand

(Potential Reach: +2,800 million)

POPULATION : 91 million

(No.3 in ASEAN, No.13 in the world)

YOUNG DEMOGRAPHICS

(Age 0~30 : 63%)

STRONG CULTURAL EMPHASIS

ON EDUCATION & SUCCESS

VIETNAM OVERVIEW

ONE OF THE FASTEST GROWING

OF THE EMERGING ECONOMIES

Local Government Support

Low Cost Infrastructure

• Land Development /

Workforce Training

• Export Customs

Inspection Center

• Most Favored Terms

for 50 years • Exemptions on

Import Tariffs & VAT

11

Why Vietnam? - Government Support and Infrastructure

• Exempt for 4 years,

5% for 12 years,

10% for 34 years

- The stability of Vietnam's transportation and electricity infrastructure is

not yet first rate, but its low utility costs are a strength

Vietnam Complex Gumi (Korea)

Industrial Electricity $0.06/kwh $0.09/kwh

Water $0.4/kwh $1.2/kwh

Mobile Communications $0.05/min $0.1/min

The best location for logistics

- Close to Noi Bai International Airport (air transport), Hai Phong Port (marine

transport), and the Chinese border (land transport)

12

※ Location of the Complex

Noi Bai

Int’l Airport

Hai Phong Port

Hanoi

SEVT(1.82mil m2)

SEV(1.12mil. m2)

Why Vietnam? - Young Workers and Low Wages

Average Wages

13

- About 1/10 of the Korean Average

- In 2012, Samsung Electronics hired approximately 20,000 workers in Vietnam.

This would not be possible in Gumi, Korea

• No. of high school graduates who do not go on to college within 200km

of the manufacturing facilities (2011)

: 64,000 (Gumi) vs. 223,000 (Vietnam)

Gumi Vietnam Complex

Average Monthly Wages 3,715 353

(US＄)

* Gross amount including overtime charges

A Large Pool of Young Workers

Low Wages

Providing seeds for a cluster to bloom

“One of the key tasks of the complex is developing

top-tier technical and product capabilities in close

partnership with local suppliers.

Samsung understands the importance of components

and the equipment ecosystem. That is why Samsung

has implemented various supporting programs to

raise its suppliers to become leaders of their own

industry.”

14

Myeongsup Han,

Head of the Vietnam

Manufacturing Complex

Samsung’s Contribution to the Vietnamese Community

Initiation of a Virtuous Cycle

- Aside from the direct financial contribution, development of the complex

has created a “win-win” situation for both Samsung and Vietnam

• In 2014, Samsung Electronics, the second largest company in Vietnam, paid $53 million

in taxes

Sharing of Cutting-Edge Technology

- More than 1,200 researchers are working at the software R&D center in Hanoi,

and they are all locally employed

• "The fastest way for Samsung Electronics to grow is through promoting technology

development from cooperation with foreign manufacturing complexes.“

Enhancing the capabilities of local employees and

the community

- STP (Samsung Talent Program): An industry-academia cooperative

education program at the Hanoi University of Science and Technology,

and Post & Telecommunication Institute of Technology (PTIT)

• Students selected for the STP can take computer programming courses at Samsung

Labs and the best performing students are offered internships at Samsung Electronics’

R&D center (SVMC)

15

Samsung’s Contribution to the Vietnamese Community

Since 2009, numerous Samsung affiliates and their domestic

partner companies have entered Vietnam

- More than 90 partner companies of Samsung Electronics are in operation in

Vietnam, most of which are from Korea

16

Samsung Affiliates' investment in Vietnam

Company Location Commencement

of Production Products

Invested

($100 Mil.)

Samsung Electronics

Bac Ninh 2009.4 Smartphones, Tablet PCs,

Wearables 25

Thai

Nguyen 2014.3

Smartphones, Tablet PCs,

Accessories 20

Samsung SDI Bac Ninh 2010.7 Battery Packages 1.2

Samsung Electro-

Mechanics

Thai

Nguyen 2014.8

Chip Components, Camera

Modules etc. 12.3

Samsung Display

Bac Ninh 2015.3 Displays 10

Samsung’s Contribution to the Vietnamese Community

17

The Vietnam Complex's Contribution to Samsung

Growing Importance for the Vietnam Manufacturing

Complex in Samsung' business

- About half of Samsung Electronics' cell phones are produced in Vietnam

18

Cell phone Sales for the Vietnam Manufacturing Complex

SEV

SEVT

($100mil.)

61

130

243

188 168

78 200

2011 2012 2013 2014 2015

266

368

As the necessary knowledge, infrastructure and institutions

coalesce in Vietnam, global companies are starting to gather

19

Electronics Product Exports from

Vietnam

* Source: KOTRA

A Cluster Forming in Vietnam?

(Billion Dollar)

Global Firms' Investments in Vietnam

• Invested $1bil. in 2007 to build a semiconductor manufacturing facility.

• 2nd stage investment is in progress in the Hai Phong area

• 1st Stage(2013~2017): Plans to invest $510 million

• 2nd Stage(2017~2023): Plans to invest $990 million

• Nokia established a cell phone manufacturing facility in Bac Ninh with $300 million in investment

• Has maintained four operating facilities since 2002

• Annual exports: $1.3 billion (2014)

• Established operating facilities by investing $120 mil. in Hai Phong

3.4

6.9

20.5

31.8 35.0

2010 2011 2012 2013 2014

Wrap-up

• A virtuous cycle of cooperation between Samsung

Electronics and Vietnam seems to have started to work

– More Investment: In 2015, Samsung Electronics decided to invest additional

$3 billion in the SEVT complex

– Searching for Local Suppliers: In 2015, in cooperation with the Vietnamese

government, Samsung Electronics provided a list of 144 smartphone and tablet

PC components that it wants local partner companies to supply

• The journey is still on going

– Samsung Electronics started construction on

another manufacturing complex in 2015

to produce consumer electronics products

within Ho Chi Minh City SHTP(Saigon Hi-Tech Park),

a newly forming hi tech cluster

20

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