Samsung,
one of the world’s leading electronic companies have been in the IT industry
from 1938 till today (Samsung, 2013). Originated from Korea and now is
expanding worldwide. Samsung specializes in digital appliances ranging from
smartphones and televisions to microwaves and refrigerators, memory, semi-conductors
and system integration (Samsung, 2013).
Samsung's Long Run Production
Samsung
is currently in the long run where all of its factors of production are
variables and can be subjected to change. Samsung has achieved economies of
scale as they are financially very stable and strong which means they have
enough capital to invest in more inputs to further increase in production.
Also, they have large plants and factories around the world to accommodate their
production and where they produce their own memory chips and flat screen
sectors thus they are able to decrease their unit production costs instead of
importing or outsourcing the spare parts from other suppliers states the senior
executive of Samsung Electronics (Kim, 2009). The biggest plant that Samsung
owns is the Gumi plant located at their homeland, Korea which produces 400
million phones, in other words 12 phones per second (Grobart, 2013) and in an
addition to that they have many a new plant in X’ian, capital of Shaanxi, China
(People’s Daily Online, 2013) and Vietnam (Lee, H.S., 2013) to accommodate the
high demand in the industry.
Samsung
has the potential to achieve economies of scope with its AMOLED display which
is a high quality slim display with clearer images and is less power
consumption compared to traditional screens. With assistance from Samsung
Mobile Display which at the moment carries the most resources and Samsung
Electronics with the potential to drive the phones, they are able to expand the
market for AMOLED display (Lee, H.S., 2013). “Mobile phones with AMOLED display
are only holding 5-percent market share due to the higher cost” said Lee
Ka-Keun, an analyst at IBK securities (Lee, H.S., 2013). Since Samsung has
planned to invest $18 billion in memory chips and display (Lee, J., 2013), they
are financially able to raise capital for investment easily as compared to
small firms thus they are achieving economies of scale. In addition to that,
Samsung owns large machines and high amount of labor to produce their
smartphones and other electronic goods. They have the financial capability to
support these costs whereas a smaller producer has to borrow money from the
bank in order to carry production out as labor and rent costs can be very high
and with that interest is charged so their input costs will be way higher than
Samsung’s.
Not
only that, Samsung also has its own system integration such as the Android OS
and as a result of that they do not need to purchase an OS and this is able to
reduce their input costs as well unlike HTC who do not own their own OS as they
are considered small producers of the smartphone industry, (Schuermans, 2012)
they have to bare costs such as licensing and operating fees in order to own
the Android OS.
Recently,
Samsung decides to switch the raw materials used in producing Samsung Galaxy
phones in which plastic is being replaced with metal (Lee, H.S., 2013). The
reason why it was replaced is because metal brings a more prestige and higher
class value in terms of outlook and feel which is why Steve Jobs insisted all
iPhones to be made with metal to bring a futuristic feel to its customers (Lee,
H.S., 2013). This implementation is only subjected to Samsung Galaxy premium
smartphones (Lee, H.S., 2013) as it is a luxury good and since the elasticity
of demand for Samsung Galaxy premium smartphones are slightly inelastic, price
is not the main purchase criterion for customers. Thus they are able to
transfer the increase in production costs to the customers since metal is more
expensive than plastic.
Government Intervention in Malaysia
Despite
Samsung smartphones flying off the shelves of many IT stores around the world,
the Malaysian government isn’t taking the opportunity to implement tax to
increase its revenue but instead is giving subsidies. This is a conditional
subsidy which is a RM200 rebate and is subjected to customers who are 21-30
years old and with a monthly income of less than RM3000 (Krishnan, 2013). This
subsidy was put in place is to offer the youngsters an easy access of information
through the smartphones (The Star Online, 2013).
Since
the Law of Demand is affected by two effects; one of which being the income
effect where when price falls, the individual’s real income increases to which
they are able to purchase more. Thus when subsidy is given to consumers, price
decreases and they are now able to purchase the smartphones. Due to the
financial constraint as their monthly income is less than RM3000 and most
smartphones range from RM 400 – RM 3000, smartphones can be viewed as a luxury
item to this group of people. As a result of that, the elasticity of demand for
smartphones for the target group is highly elastic.
Unfortunately,
the subsidies allocated are subjected to a price cap of RM500 which means
consumers can only purchase smartphones which are priced RM500 and below
(Krishnan, 2013). As a result of this, the supply curve shifts rightward,
taking opportunity of the gain revenue from the subsidy as shown in Figure 1.1. S1 represents the RM200 subsidy given by the government. After the rightward shift, price of an average smartphone (P), decreases by RM200 down to (P1).
 |
| Figure 1.1 |
After
complaints from the community, the government decides to remove the price cap
of RM500 (The Star Online, 2013) which gives the opportunity to the consumers
to purchase other smartphones of a higher price and this shifts the demand
curve rightward and thus price increases back to P as when they purchase phones at a higher price, the rebate value is not as high of a reduction as compared to purchasing a phone cheaper or of RM500 as shown in Figure 1.2.
 |
| Figure 1.2 |
So what determines Samsung’s high demand?
It is
now a trend to own a smartphone where worldwide smartphone usage is expected to
reach 1.4 billion this year (Pramis, 2013) with 57% of the market share is
dominated by Samsung (Pramis, 2013). Since everyone is demanding for
smartphones, why Samsung? It is shown that Samsung’s demand for smartphone increased
up to 23% for early 2013 (Etherington, 2013). This was from the sales of
Samsung S3 and Samsung Galaxy Note II smartphones (Etherington, 2013). The most
desirable phone among Samsung handsets was the S3 holding 69% of overall demand
and Samsung Galaxy Note II of 23% of all Samsung consumer’s interest
(Etherington, 2013). It can be seen that smartphone users now are leaning
towards getting a “phablet”, with 27% reported to prefer their phone screen to
be at least 5-inches (Etherington, 2013). The increase in demand could be
because users now prefer a larger screen mobile device which explains in the
decrease in interest by 21% in Apple smartphones (Etherington, 2013). Also,
Samsung users are loyal to their brand in which it brings in positive effects
where smartphone users would only purchase Samsung smartphones and no other
brand. Samsung currently holds the top spot in brand loyalty for smartphones
reported by Brand Keys (Tode, 2013).
What is the smartphone industry market structure like? & where does
Samsung stand?
Since
there are only a handful of firms dominating the smartphone industry such as
Samsung, Apple, HTC, Nokia, Blackberry and et cetera, the smartphone industry
could be seen as an oligopoly with Samsung being the dominant firm in the
industry since it holds 57% of the market share (Pramis, 2013). In most
oligopoly cases, there are high barriers to entry mainly caused by high scale
production or the strong branding of the dominant firms (Blink and Dorton, 2008) ; Samsung and Apple. In 2008,
barriers of entry to the market was lowered as Android was launched to provide
a free platform for other firms to enter the industry as Android is an
operating system (Schuerman, 2012) which allows one to download and use
applications which is one of the main features of the smartphone. Despite the
barriers of entry being lowered, competition among firms are high especially
the small firms trying to compete with large firms such as Samsung and Apple as
they have achieved economies of scale and build strong brand loyalty and
recognition.
The key
element in all oligopolies is that there is interdependence. This is different
from perfect competition and monopolistic competition where all the firms are
too small in the market and thus they are unable to influence the market as how
oligopoly is able to. A few numbers of large firms dominating the industry
takes careful notice of what other firms are doing as interdependence tends to
make firms collide to abstain from surprises and unexpected outcomes (Blink and Dorton, 2008). If all the firms act as a monopoly, they can maximize
the industry’s profits (Blink and Dorton, 2008). However there are situations where firms compete
vigorously to gain greater market share such as Samsung and Apple.
Since
Samsung and Apple compete with each other head to head at all times, a tacit
collusion emerges as competitors may charge the same price (Blink and Dorton, 2008). In this case, the
firms act as a monopoly where they become the price makers and make monopoly
profits and these profits are shared according to the market share (Blink and Dorton, 2008). Samsung
being the dominant firm gets the larger share of profits while Apple not too
far behind shares the remaining with the other smaller firms such as HTC, Nokia
and Blackberry.
 |
| Figure 1.3 |
Figure 1.3 shows the abnormal profits earned by the firms in the industry. Since all the firms are in an oligopoly industry, there are only a few firms to compete with and thus all firms are able to make supernormal profits as shown.
 |
| Figure 1.4 |
But since some firms have a bigger market share compared to others, the profits are split according to the market shares. The demand curve shifts to the left due to other firms competing to obtain the market demand and profits thus Samsung's supernormal profits are highlighted in the purple area as shown in Figure 1.4. As more and more firms enter the industry, the demand curve will continue to shift to the left and this it will subsequently reduce the firm's supernormal profits.
How will Samsung stay at the top of the pyramid of the oligopoly market?
Samsung
has to keep watch of its competitors at all times as new inventions and
smartphones are released almost semi-annually. Since Samsung has achieved
economies of scale and is already their own producers for most of their raw
materials and supplies such as memory card and screen displays, they are able
to achieve a bigger profit margin and can thus sustain the bigger market share
of the industry. But Samsung has to take caution as barriers of entry has
lowered and other smaller firms such as HTC rising up, Samsung has to make sure
to invent new goods that will capture the demands of the consumers and avoid
them from being Galaxy-fatigue (bored of Samsung smartphones) in order to
increase their profit margins.
References
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[Accessed 17 October 2013]
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[Accessed 17 October 2013]
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Lee, H.S. (2013) Samsung puts the metal case design on Galaxy
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[Accessed 18 October 2013]
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[Accessed 18 October 2013]
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[Accessed 22 October 2013]
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[Accessed 22 October 2013]
Etherington, D. (2013) Demand for Samsung jumps up to 23% for early
2013, iPhone interest down 21 points from the last quarter [blog]. 15
January. Available from: http://techcrunch.com/2013/01/15/demand-for-samsung-smartphones-jumps-to-23-for-early-2013-iphone-interest-down-21-points-from-last-quarter/ [Accessed 22 October 2013]
The Star Online (2013) Government lifts smartphone cap [online].
22 April. Available from: http://www.thestar.com.my/News/Nation/2013/01/03/Government-lifts-smartphone-cap.aspx
[Accessed 20 October 2013]
Krishnan, G. (2013) Fixing maximum price will ensure smartphone
rebates reach target group [blog]. 1 January. Available from: http://www.themalaysiantimes.com.my/fixing-maximum-price-will-ensure-smartphone-rebates-reach-target-group/
[Accessed 20 October 2013]
Grobart, S. (2013) How Samsung became the world’s no.1
smartphone maker. [online]. 28 March. Available from: http://www.businessweek.com/articles/2013-03-28/how-samsung-became-the-worlds-no-dot-1-smartphone-maker
[Accessed 22 October 2013]
Pramis, J. (2013) Worldwide smartphone usage will reach 1.4
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[Accessed 22 October 2013]
Blink, J. and Dorton, I. (2008) Economics Oxford: Oxford University
Press
