The Capability of the Samsung Group

in Project Execution and Vertical Integration:

Created in Korea and Replicated in China

Keun Lee* and Xiyou He**

*Corresponding Author and Professor of Economics at the Seoul National University, Seoul,
Korea, E-mail: kenneth@snu.ac.kr; Tel. 82-2-8806367; Fax 822-8864231
**Associate Professor at the School of Economics, Fudan University, Shanghai, China. E-
mail: hexy@fudan.edu.cn

Earlier versions of this paper have been presented in several places and occasions, including
the 2007 Cicalics Workshop at Tsinghua University, Beijing, China. The authors would like
to thank two anonymous referees for two rounds of comments, Mike Peng, John Mathews,
Shulin Gu, and others for their useful comments.

1
 Abstract

To explain Korean business groups’ rapid success despite their late entry in China, this
paper uses the concept called “project execution capability” of diversified business groups,
which has led to another strategic capability of “vertical integration” (VI) among affiliates. It
examines Samsung’s electronics businesses in China as an excellent case of resource sharing
and coordination among affiliates in the execution of a project despite late entry into a new
market. The paper finds that the VI network was first created in the early 1970s in Korea and
has since been replicated in many parts of the world such as Mexico, Malaysia, and most
recently, China. The vertical integration network has three tiers consisting of Samsung
Electronics at the top as the final assembler, Samsung Electro-Mechanics and Samsung SDI
in the middle, and finally, Samsung Corning at the bottom. In the rapidly changing display
market, Samsung’s stable component sourcing among affiliates has played a critical role in
developing new products at lower costs to meet changing market needs. This case shows that
business groups can upgrade their capabilities rather than simply lose their advantages with
the maturing of market mechanisms.

Keywords: Samsung; business groups; capabilities; vertical integration

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Introduction

With the normalization of diplomatic ties between South Korea and China, Korean
business groups came into China on a major scale only after 1992. Within a very short period
of time, some Korean firms such as Samsung, LG, and Hyundai Motors were able to set up
many subsidiaries in China, consolidate business bases, and rapidly increase their market
shares despite their late entry compared with other multinational corporations (MNCs) (Luo,
2001: 95).
This paper aims to explain the success of Korean chaebols from the perspective of the
resource-based view (RBV) of firm growth. Kock and Guillen (2001) consider the
diversification of business groups from developing economies as a way of using their own
unique resources, termed by Amsden and Hikino (1994) as “project execution capability.”
The paper examines the Samsung Group, Samsung Electronics, and their entry into China as
an excellent case of resource sharing and coordination among affiliates to execute the project
of late entry into a new market. The paper also explains how the network of vertical
integration (VI) among affiliates was first created in Korea and then replicated in many parts
of the world, including China.
As discussed in the work of Chang (2003: 120), the vertical integration network consists
of three tiers with Samsung Electronics (SEC) at the top as the final assembler, Samsung
Electro-Mechanics (SEM) and Samsung Display Industry (SDI) in the middle, and finally,
Samsung Corning at the bottom. By entering China as a vertically connected network, SEC
was able to circumvent the risk of insufficient supply of color display tube (CDT), a core
part in monitors) in China. Such an advantage was built by a series of coordinated entries of
related affiliates and their products into the Chinese market. Using the case of Samsung, the
paper also argues that the traditional theory of business groups in developing countries
should be further revised to consider the fact that they are able to build higher-level
capabilities (VI and innovation capabilities) going beyond the stages of pursuing rent
seeking or unrelated diversification to simply fulfill “institutional voids” (Khanna and
Palepu, 2000).
This paper is organized as follows. Section 2 proposes a theoretical framework for
analysis, which is drawn from a resource-based view of firm growth, with particular
emphasis on business groups. Section 3 traces the history of the Samsung Group and its
electronic affiliates from the early 1970s and how they formed a network of vertically
integrated affiliates within a short period of time, even replicating the same network in

3
Mexico and Malaysia. Section 4 elaborates on the entry process into China and the formation
of the same networks in China since the 1990s. Section 5 describes how VI has brought
market success to Samsung. Section 6 contains the summary of the work and concluding
remarks.

Capability of Business Groups: A Theoretical Consideration

Previous studies have perceived business groups as emerging in response to acute

imperfections in products, capital, and labor markets (Leff, 1978). Later, Khanna and Palepu
(2000) rephrase this view as a thesis of “institutional voids,” which argues that since many
institutions supporting business activities are non-existent, business groups should fill the
institutional void in these places. While perspectives such as market imperfections or
institutional voids are good at explaining the origin of business groups, they cannot fully
explain these groups’ growth process and dynamics. A thorough explanation of the dynamic
process of a firm’s growth seems to need alternative theoretical perspectives.
In this light, this paper starts with insights into the RBV of firm growth, a view which
originates from Penrose (1959, revised edition 1995; p.xi) who saw the function of a firm as
“acquiring and organizing human and other resources in order to profitably supply goods and
services to markets,” defining a firm as “a collection of resources bound together in an
administrative framework.” Her theory has greatly influenced succeeding studies on the
firm, developing the view into several variations such as the capability-based view of the
firm, knowledge-based view of the firm, and evolutionary view of the firm (Hoopes et al.,
2003).
Motivated by a somewhat static bias of the traditional RBV, strategy scholars have
begun to explicitly acknowledge the importance of dynamic process, including the
acquisition, development, and maintenance of differential bundles of resources and
capabilities over time (e.g., Teece et al., 1997; Teece, 2007). There is a related but distinct
body of literature referred to as the dynamic capabilities perspective, which is concerned
with the mechanisms by which firms accumulate and dissipate new skills and capabilities
(Teece et al., 1997). This perspective builds on the same principles of resource heterogeneity,
but is more focused on the dynamics of capability development than stocks of capabilities at
any given point in time. According to Teece et al. (1997), dynamic capabilities refer to a
firm’s ability to integrate, build, and reconfigure internal and external competences to
address rapidly changing environments. Helfat and Peteraf (2003) also introduce the concept

4
capability life cycle, which articulates general patterns and paths in the evolution of
organizational capabilities over time.
These ideas on the development of firm capability over time should be quite relevant in
understanding the growth of firms in developing countries. Some studies have applied such
insight into a particular form of firms in developing countries, that is, business groups (Kock
and Guillen, 2001; Guillen, 2000; Amsden and Hikino, 1994). Kock and Guillen consider the
diversification of business groups from developing economies as a way of using their own
unique capability or resources, termed by Amsden and Hikino (1994) as “project execution
capability.” This capability refers to the skills required to establish or expand operating and
other corporate facilities.
The acquisition of such capability by firms in developing countries has to do with the
unique origins of firms. In the case of Asia, the generalist who established itself as a chaebol
in Korea arose out of the rent-seeking and business opportunities surrounding American
foreign aid allocation in the 1950s (Amsden, 1989: 38-40). In the absence of proprietary
technology for use in related industries and in the presence of potentially high profit rates in
“pre-modernized” startup industries, their pattern of diversification tended to be
opportunistic and technologically unrelated (Amsden and Hikino, 1994). Through
diversification, the latecomer firms learned and accumulated what can be called as project
execution capability. According to Amsden and Hikino (1994), the greater the number or
frequency of projects the firm undertakes itself, the greater the knowledge acquired about
project execution. The advantage of the business groups then comes from the fact that the
frequency of project execution is greater in diversified business groups than in stand-alone
firms, ceteris paribus. Moreover, this idea of project execution is not inconsistent with the
eventual accumulation of sector-specific know-how, especially when the projects tend to fall
more within the same areas. In other words, there is a need for dynamic perspectives on firm
growth.
Firms from developing countries often do not have deep sector-specific knowledge, so
they often end up diversifying into totally unrelated areas if only to follow market demands.
Through this process of running businesses in many areas, some synergies among affiliates
were formed, which have led to VI. Furthermore, new entries could happen in new
geographical areas but in the same sectors. In this case, the project execution capability itself
would be different in different sectors, namely, stronger in those sectors where they entered
most frequently.
In other words, one can consider a dynamic path of capability development by business

5
groups, similar to that shown in Table 1. In the early stage, business groups are less capable
and pursue rent-seeking behavior, and any market-winning capabilities should be more about
how to build, maintain, and utilize their connections and network with the government,
which is in charge of key resource allocation (Kim et al., 2004). During the second stage,
these business groups diversify into whatever related or unrelated sectors they think are
promising or profitable owing to market demand or government industrial policy, thereby
accumulating project execution capability which is not very sector specific. In the third
stage, with diverse sectors, they can expect some integration benefits associated with
horizontal integration among less related sectors or VI, which is more sector specific. Such
integration would be a significant advantage in an environment with input market
deficiencies, and also helps companies maintain better quality, efficient coordination, and
punctuality than the level possible through outsourcing (Chang, 2003: 120). Finally, they
could develop technological innovation capability, which is very specific to certain
technological areas or knowledge and which can be represented by patents or totally new
products. The VI stage preceding the innovation stage makes sense because increased
interaction between buyers and sellers can enhance technology development (Chang, 2003:
121).
One possible difficulty with this framework would be distinguishing between stages 2
and 3, given that related diversification can also be seen as vertical or horizontal integration.
The often-heard story of LG’s diversification appears to suggest that Korean business groups
pursued VI from their early days. However, as Kim et al. (2004) argue, chaebols pursued
unrelated diversification first and vertical integration at later stages because benefits from
unrelated diversification, often linked with artificial rents, became exhausted along with the
industry vacuum depletion and market liberalization. For example, Samsung hardly pursued
any VI until the 1970s when it entered the electronics business. This entry itself was
unrelated diversification as Samsung’s main business areas used to be textile and apparel,
food, and beverage. Samsung entered electronics because the government declared a plan in
June 1968 to promote the electronics industry as a leading export industry. Korean business
groups did not feel much need to develop such higher level capabilities (integration) until
they faced greater competition among rival firms, both domestic and foreign (Kim et al.,
2004). Only after this entry into electronics did Samsung realize the needs and benefits of VI
as a way to outperform other rivals in both domestic and overseas markets. Thus, we prefer
to reserve the term “integration” to refer to more explicit and intentional pursuits of
synergies among affiliates, rather than emerging passively as a consequence of entries into

6
whatever profitable business areas.
While this theoretical vision should be developed further and be subject to empirical
analysis, the current paper focuses on stages 2 and 3 with SEC as the example. Thus, when
we say VI in this context, it refers to VI among a certain number of affiliates or sub-group
levels, not entire group levels which are still diversified. According to this theoretical vision,
Korean business groups took advantage of their skill to build an empire in Korea and wanted
to fully utilize this skill in China.
[Table 1]

The Samsung Group had an indifferent start in overseas trading in 1938, which was
revived in 1953 with the establishment of an affiliate in a typical import-substitution and
capital-intensive industry, sugar refining. Although Samsung started its business mainly in
labor-intensive industries, it rapidly branched out into capital-intensive production and
services (Amsden and Hikino, 1994). One important fact about the Samsung Group is its
project-executing mechanism, which has led to the creation of synergies between different
lines of businesses extensively using its affiliates. The Samsung Group’s outstanding
performance in the global market is explained by VI among its affiliates and its continuous
deepening.
VI in electronics consists of the SEC at the top, Samsung Electro-Mechanics and SDI at
the middle, and finally, Samsung Corning at the bottom. In the display manufacturing
business, SEC is closely linked with Samsung SDI, a manufacturer of television tubes,
which in turn relies on Samsung Corning that produces glass bulbs for the tubes, as shown
by the fact that 61% of its total revenue comes from Samsung SDI. In turn, Samsung SDI
supplies 52% of its products to SEC. Samsung Electro-Mechanics, a producer of electronic
parts, sells 69% of its products to SEC (Chang, 2003: 120-121).
Samsung’s entry into China took advantage of VI and a network of resource sharing
which have been long been established. To produce monitors in China, SEC established a
joint venture called the Tianjin-Samsung Electronics Display Co. Ltd (TSED) in 1996. Three
years after its initial production, TSED became the largest supplier of monitors, with total
sales of 450,000 units and a 20% market share in the self-branded market in China (see
Table 2). In November 2000, the total TSED sales reached 1 million units, representing
30.5% of the market share. TSED was followed by Philips with a 26% market share. It kept
a stable position with 1.4 million unit sales and a market share of 25.8% and 29.6% in 2001
and 2002, respectively, then reaching 34% in 2006 (Table 2).

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 [Table 2]

Samsung’s rapid success in China raises the question as to how Korean chaebols, which
entered late into China, achieved remarkable success compared to other multinational
corporations. Focusing on the case of SEC in China, this paper argues that one of the most
important success factors for SEC has to do with its group-style organization and VI,
providing mutual support and jump-start functions in an imperfect market like China.

Creating Vertical Integration in Korea: Samsung Affiliates in Electronics

The Samsung Group entered the electronics industry in 1969 with the incorporation of
SEC with 100% ownership by seven persons, including the founding chairman Lee Byeong-
chul (SEC 1989). In the display/monitor industry, SEC produced the black-and-white TV in
1970 and the color TV in 1976. Eventually, in 1977, SEC became one of the biggest
manufacturers of television sets in the world. With the emergence of the computer business,
SEC’s visual monitor division ventured into the computer monitor business by developing
monochromatic monitors in January 1981. In 1988, it became the largest manufacturer and
supplier of monitors in the world, with a 12.4% market share (SEC, 1999: 484). In March
1996, SEC began producing the TFT-LCD monitor, which was called “the second
transformation” by SEC itself (SEC, 1999: 482).
Prior to Samsung Group’s declaration of its entry into the electronics industry in 1969,
preparation for the entry already began in February 1968 with the creation of a team within
Samsung Corporation (the general trading company of the group). Although Samsung was a
latecomer in electronics, it had a clear vision, emphasizing three strategies aimed at
achieving scale economy, VI, and R&D capability (Samsung Group, 1998). For the VI and
promotion of R&D capability, Samsung relied on foreign companies, mostly Japanese
companies. In a period of one year from the establishment of SEC, Samsung established two
companies that would produce electronic parts: Samsung-Sanyo in December 1969 which
later merged with SEC, and Samsung-NEC in January 1970 with equity participation of 50%
by SEC, 40% by NEC (Japan), and 10% by Sumitomo General Trading Company, which
later became Samsung SDI (Samsung SDI 1990). In 1973, Samsung established two more
affiliates: Samsung Corning (SC) and Samsung-Sanyo Parts which later became Samsung
Electro-Mechanics (SEM).

8
 Samsung-Sanyo Parts was established with its initial shareholders of SEC (42.85%),
Samsung-Sanyo (14.3%), Sanyo Japan (30%) and Sanyo Electric Trading (12.85%).In
March 1974, the company’s name was changed to Samsung Electrical Parts Co., Ltd., and
again, to Samsung Electronic Parts in May 1977. Finally, it was named Samsung Electro-
Mechanics in February 1987. From its initiation, this company has produced parts for
televisions, including tuners, deflection yokes, transformers, and condensers (Kim, 1993:61-
62, 171). SEM became a pioneer in the production of A/V components in the 1970s,
diversified by launching computer parts manufacturing divisions in the 1980s, and finally,
focused on manufacturing chip components, multi-layer circuit boards, and mobile
communication and optical components in the early 1990s (SEM, 1998).
Samsung Corning was created because Samsung needed a dependable parts maker
(Samsung Corning, 1994). Samsung knew that forming a partnership with Corning was vital
since Corning had the world-class glass Braun tube technology. In return, Corning could
serve as the production base for the Asian/Korean market that it required. Thus, in December
1973, Samsung formed a 50-to-50 joint venture with Corning Glass Works of USA to
establish Samsung Corning to produce glass bulbs for the production of CRTs. Samsung
Corning moved into color TV tube glass production in 1981. From 1984, its production
facilities were expanded continuously to include front and rear Braun tube glass (panel and
funnel). Now, SC’s business activities cover four main areas: Braun tube glass, ITO glass,
ceramics, and fiber optics.
In sum, within a four-year period, a VI system in the electronics industry was formed
with all affiliates located in one area, Suwon City, which has remained the main hub of
Samsung’s electronics business (Samsung Group, 1998). At present, the division of labor
among the affiliates is such that SEC (with the acquisition of Samsung-Sanyo) does the final
assembly, while the other three supply the key parts and components to SEC. These key parts
include vacuum tubes, black and white cathode ray tubes (CRTs), and color CRTs from
Samsung SDI; all kinds of electronic parts such as deflection yokes, transformers, and
condensers from SEM; and finally, glass bulbs for CRTs from Samsung Corning.
With regard to R&D capability, one should find the fact that in all of these new
affiliates, Samsung had at least half of equity ownership and gradually bought out foreign
equity shares. Apart from the first three years of the venture with Corning, all ventures were
under Samsung's management control (SC, 1994). This is consistent with the observation
that foreign direct investment (FDI) firms, especially when controlled by foreigners, cannot
be relied upon for the technological development of latecomer countries, although they can

9
serve as initial learning venues. As Amsden and Chu (2003: 3) declare, technological catch-
up requires the use of assets related to project execution, product engineering, and a form of
R&D that straddles both applied research and exploratory development. They also observe
that if such assets are accumulated at all, the responsible party tends to be a nationally owned
organization. It should also be noted that foreign linkages allowed Samsung to achieve a
high VI level in the production of TV sets in a remarkably short period of time.

Replicating the Vertical Integration in Mexico and Malaysia

As has been explained, the Samsung Group expanded internationally beginning in the
early 1990s. It is interesting to note that the VI formed in the 1970s among the electronics
affiliates was replicated in other parts of the world, such as Southeast Asia, North America,
and China. What follows is a presentation of the elaborate process of replication based on the
documents of Samsung’s overseas affiliates such as Samsung Corning SSG (2004), SEM
STEM (2004), and Samsung Electronics TSED (2004), unless otherwise noted.

Seremban Complex in Malaysia

The Seremban Complex was initiated by an SDI plant called Samsung Electron Devices
(M) Sdn Bhd (SEDM) established in 1990. Employing more than 4,300, this affiliate’s
purpose was to manufacture color picture tubes (CPTs) for color televisions, CDTs for color
monitors, and, in 1992, electron guns for color tubes and CDTs. In the same year, the
Samsung Corning (M) Sdn Bhd (SCM) was established. Initially a small plant with a
polishing line, it started to produce television and computer monitor glass panels and funnels
in 1992. SCM employed 1,200 people.
With the incorporation of Samsung Electronics Display (M) Sdn Bhd (SDMA) in March
1995, and its operation as a fully integrated automated manufacturing facility of color
monitors and printed circuit boards (PCBs) beginning in October 1995, the effects of VI
started to emerge. The second largest SEC monitor plant at that time, SDMA produced
Samsung SyncMaster color monitors, which won international recognition as "Best Monitors
in Its Class" in Europe and the USA. Top IT players in the world such as Compaq, IBM, and
Dell are listed clients of SDMA. The complex effects also attracted much attention from the
local government (SEC, 1999: 409-410). The Seremban Complex is considered by Samsung
itself as the model case of integration of the new Samsung management as it went into profit
only six months after its completion.

10
Tijuana Complex in Mexico
To respond to the economic block of the North American Free Trade Area (NAFTA) in
America, the Samsung Group promoted its first complex in Tijuana with the SEC subsidiary
SAMEX as its core. Tijuana is located only 10 minutes from the Mexico-USA border.
Construction began in October 1994 and was completed in March 1996. The complex
employed 5,000 persons. SEC moved its existing color TV plants to the complex and
established new monitor plants there. At the same time, the CPT and CDT plant of Samsung
SDI, the glass fiber (used for Braun tube) plant of Samsung Corning, and the video cassette
recorder (VCR) components plant of SEM were also established. Additionally, Samsung
Aerospace also established its camera processing plant. After completion of its R&D and
logistic centers, the function of the complex became more efficient. Apart from the Samsung
Group’s affiliates, 15 other small and medium enterprises have also established offices in the
complex. With an efficient internal sourcing, the complex has become a solid production
base of Samsung in the Americas.

Replicating the Same Vertical Integration in China

Korean firms used to see China merely as a production site during the first stage of
Korean FDI to China—from the late 1980 up to the mid-1990s. During the same period, the
Chinese economy grew much faster than expected, and its consumer market also expanded at
an astonishing rate. Under these circumstances, Korean firms changed their views on China,
and they startedto recognize it as a strategically important market rather than just a
production base for re-exports. This transition opened the second stage of Korean FDI in
China in the mid-1990s and was led by business conglomerates or chaebols. In comparison,
the first wave was led by small and medium enterprises (SMEs). The chaebols started to
espouse FDI to build both a local market and an export market-oriented production network
that emphasized product standards, rapid innovation, and speedy response to the growing
market. Chaebols like Samsung, LG, and Hyundai Motors remarkably succeeded in the
Chinese market despite their late entry as compared to other MNCs (Luo, 2001: 95).
According to Table 3, by the end of 2008, Samsung had invested a cumulative amount
of $7.2 billion to set up and run 31 manufacturing companies and 34 non-manufacturing or
trading companies in China. In 2008, Samsung earned sales revenues of $33 billion, with
exports of $20.6 billion, and hired a total of 76,000 employees in China. A rough calculation

11
of the combined performance shows that the sales per staff and the sales per one dollar
invested had increased tremendously from $114,286 in 1998 to $434.211 in 2008, and $1.5
in 1998 to $4.6 in 2008, respectively. China’s share in Samsung’s worldwide sales was about
10% in 2003, increasing to 22% in 2004 and 25% in 2005.

[ Table 3 ]

Preparation Stage
In 1975, the Samsung Group established Hong Kong Samsung Trading Company, and
since 1978, Samsung has been importing coal from Mainland China through Hong Kong.
Before diplomatic relations were established between the two, Samsung initiated pilot
investment projects while trading with China. In 1985, Samsung Corporation set up an office
in Beijing in the name of Hong Kong Sungjin Company, and in 1990, its Shanghai office
was set up. In 1990, SEM established its wholly owned subsidiary in Guangdong Province.
In April 1992, Samsung Corning also invested US$ 1 million in Tianjin using a wholly
owned mode to produce ferrite. Although they were small investments, they played an
important role in accumulating information and experience which were necessary for
subsequent bigger investments.
Samsung’s bigger investments in China occurred when the diplomatic ties between
Korea and China normalized in 1992. The investments received further momentum due to
the so-called “Frankfurt Declaration,” which spelled out Samsung’s overall
internationalization strategy in Frankfurt in 1993 under the new leadership of Lee Kunhee.
On 7 June 1993, the Samsung Group declared the famous “Samsung’s New Management,”
which included its vision to establish five headquarters that would manage five strategic
regions in the world (China, America, Europe, Southeast Asia, and Japan) and to create its
own “Samsung Group” in each strategic region by 2000. This so-called “Frankfurt
Declaration” proved to be the new momentum for the qualitative jump in Samsung’s global
operations because up until the early 1990s, offshore production was conducted mainly to
avoid charges of dumping or other import restrictions, and the competitiveness of production
outside Korea was much lower than that of domestic production (Yun, 2005).
According to this new vision of globalization, China was chosen because of its
geographical proximity, cheap labor, and market potential (Wang, 1996: 110). After ocular
inspections of locations, Samsung selected Tianjin, Suzhou, and Dongguan-Shenzen as its
three bases in China. However, when Samsung tried to establish joint ventures, there were

12
few solid partners to cooperate with because strong local firms had already been selected by
the American or Japanese companies that entered earlier. Thus, compared with other MNCs’
“strong-strong alliance” mode, Samsung cooperated mainly with the weaker SOEs (Wang,
1996:88, 112). Except for Tianjin Broadcasting Corporation (TBC), an established and
popular state-owned TV factory, Chinese partners in Samsung’s joint ventures all faced
serious technological or management difficulties. For example, Tianjin 5th Radio
Components Plant, the Chinese partner of Tianjin Samsung Electro-Mechanics (TSEM)
which did well in the 1970s and 1980s, was posting losses because its products could not
meet new standards due to outdated equipment and lack of capital to upgrade technology.
However, Samsung’s China strategy was not that successful during the initial stages of
entry because it brought medium-level technology and cheap products to China and was thus
unable to provide differentiated products in competition against locally made products (He,
2003). Later, at the request of Chinese leaders, Samsung changed its strategy from using
outdated technology to bringing in new or updated technology. Since then, Samsung’s
approaches to the Chinese market have changed from dumping cheap products to selling
high-end goods.

Replicating in North China (Tianjin Area)1

The Samsung Group selected Tianjin—which is close to Korea—as a strategic location
in entering China. SEC planned to set up integrated operations to build VCRs, color TVs,
and monitors in sequence. Through the operation of two subsidiaries in Tianjin and SEC
subsidiaries in other cities, SEC had acquired much knowledge about the local markets.
Once the plan was decided, the Group acted quickly to establish a web of related affiliates in
the electronics business.

First Round of Moves by SEC: VCR, Color TV, and Monitor

As a core affiliate in the electronics business of the Samsung Group, SEC subsequently
expanded in China before it began its monitor business.
After some preparation and the pilot project mentioned above, SEC signed the
agreement for the establishment of a joint venture (Tianjin Samsung Electronics Company,
TSEC) with an equity share of 50:50 for VCR, and its components production with the state-
owned electronics enterprise TBC on 18 July 1992. In January 1993, the joint venture TSEC
was established, and in September 1993, it started the production of VCRs with imported
parts in the TBC plant. In May 1994, it achieved localization of core components for VCR

13
decks and VCR drums by opening the VCR decks production line. With a total of US$ 64
million investment in the vertically integrated project and a production capacity of 400,000
VCR units in 1995, TSEC became SEC’s fourth offshore VCR plant in the world and the
second in Asia. Half of its products were sold locally, while the remainder went to Australia
and the former Soviet Union (Kim, 1998). In February 1995, TSEC put up a new plant and
extended its equipment, increasing its production capacity to 1 million units by the end of
1998. Moreover, SEC increased its equity share from 50% to 80% in 1997 and 90.6% in
1998.
Subsequently, SEC also formed the Tianjin Tongguang Samsung Electronics Co.
(TTSEC) in February 1994 as a 50%-owned joint venture company with the same partner as
that of the VCR plant. The group invested US$ 79.8 million on the joint venture, with six
lines and an initial production capacity of 800,000 units (SEC, 1999: 404). TTSEC was the
largest of Samsung's overseas color TV plants, absorbing about one-third of the tuner
capacity of the nearby components plant (Kim, 1998). After production at the former rented
plant, TTSEC put up its new plant in October 1998 and moved into it in March 1999.
Eventually, the plant extended capacity to 1 million units, and SEC also increased its share
from 50% to 94.3 % at the end of 1998.
In March 1996, the SEC established a joint venture called the Tianjin- Samsung
Electronics Display Co. Ltd (TSED) with a registered capital of US$1.2 million, where SEC
held 80% of equity (He, 2003: 200). Starting operations on 1 September 1997 with 320
employees including 10 Korean staff, TSED began producing 14-inch monitors in February,
15-inch monitors in May, and 17-inch monitors in October. The annual capacity was over 4
million units, while the main products were 15- to 19-inch CRTs and 15- to 17-inch TFT-
LCD monitors. Three years after its initial production, TSED became the largest supplier of
monitors in China, with total sales of 450,000 units and a 20% market share in the self-
branded market.

Subsequent Moves by SC, SEM, and SDI for Parts and Components
As components makers, affiliates such as SC, SEM, and SDI also set up their local
plants in the Tianjin area.
a) TSSC by SC. In April 1992, Samsung Corning set up a TSSC plant with 100% equity
share to produce rotary transformers for VCRs, a product it has been making in Korea since
the late 1980s. Toward the end of 1992, after the approval of Samsung Corning's American
partner, TSSC began producing rotary transformers with a capacity of 800,000 units, which

14
was rapidly expanded in the succeeding months. In 1993, it began adding more sophisticated
products such as four-channel rotary transformers, in addition to the two-channel type (Kim,
1998). By the end of 1998, the production increased to 20 million units.
b) TSEM by SEM. In December 1993, SEM established TSEM with an equity share of
80:20 with Tianjin 5th Radio Components Plant to manufacture VCR drums and other
components used in the VCRs produced by TSEC and in the color TVs built by TTSEC.
With a total investment of US$ 60 million, TSEM started production in May 1994. Its
products included low-noise block down-converters, VCR heads, VCR drums, VCR motors,
and flyback transformers, among many others.
c) TSDI by SDI. In August 1996, another joint venture, called Tianjin Samsung SDI
(TSDI), was established by Samsung SDI with the same Chinese partner of TSED in order to
supply core components to TSED and TTSEC. TSDI started mass production in May 1998,
with a CPT capacity of 1.2 million units. In May 1999, it started the mass production of
CDTs with an annual capacity of 1.8 million units. The products of TSDI were large-sized
CPTs (25 to 29 inches) and 15-inch CDTs. In August 2001, TSDI started producing super
large-sized Braun, the AF Braun, at 34 inches (He, 2003: 205).

Replicating in South China (Guangdong-Shenzhen Area)

About the same time it initiated its major subsidiary (TSEC) in the Tianjin area in late
1992, SEC set up another major subsidiary in Guangdong named Samsung Electronics
Huizhou (SEHZ), with a 90% share in Huizhou in December 1992. It started producing
audio-video products in September 1993, with the core components imported from Korea.
Soon, however, it consolidated a VI with other affiliates.
SEM established a fully owned subsidiary called Dongguan SEM Co., Ltd. (DSEM) in
1990 and started producing components in July 1992 in Dongguan, Guangdong Province.
DSEM produced diverse parts and components such as optical devices, floppy disk drives,
inverter, LBP motor, speaker, and keyboards. SEC and SEM soon attracted other component
makers from Korea, such as Sinpung Industry, to set up local plants in February 1994. This
was the first case of joint entry of SMEs following an initial move by leading big firms into
China (SEC, 1999: 403). Owing to such prompt setup of VI, the capacity of SEHZ reached
540,000 units in 1994, a year after the initiation of production, and 15% of its production
was sold in the local market. Further success was guaranteed because other affiliates
followed, setting up their subsidiaries in Guangdong Province.

15
 In June 1998, Samsung Corning established another joint venture in China following the
one in Tianjin, the Shenzhen SEG Samsung Glass Co., Ltd. (SSG), to produce the glass used
in color TVs and Braun monitors. SDI also established Shenzhen Samsung DI (SSDI) in
Dongguan in April 1998 to produce electron guns to be supplied to all SDI subsidiaries in
the world. With the establishment of SSG, SSDI and TSDI were able to purchase local glass
for Braun production.

Power of Vertical Integration in the Display Market

The Vertical Network

While the original VI network formed during the early 1970s centered on the Suwon
area in Korea, its replication took place about 20 years later in two areas in China within a
short period of time. Within 1992 and 1993, the Samsung Group started production in five
electronics-related subsidiaries in China. In each concentration area of North (Tianjin) and
South China (Guangdong), the four pillar affiliates of the group formed the network. Each of
these four pillar companies had set up at least one subsidiary in both the North and South
China hubs. In North China, it took only two years (1992 and 1993) to form the semi-
complete network among the first three, which was then finalized by the joining of SDI in
1996. In South China, half of the network was completed by SEC and SEM by 1993; the
other two joined in 1998.
These networks are obviously working to produce multitudes of products as each
subsidiary produces somewhat diverse items such as color TVs, VCRs, monitors, and audio
products. The final assembler of the monitors, both CRT and LCD, is TSED, which gets
CDTs from SSDI and TSDI. These two companies get Braun glass from SSG and electronic
guns from SSDI. If the product is a color TV with built-in VCR/VCD functions, then TTSEC
supplies the needed parts. The same network works with additional participation from TSEM
(tuners and drums) and TTSC (transformers). Backed by a stable and efficient supply of its
core component, CDT, from two local SDI plants, TSED has experienced rapid expansion in
the local market since 1998.

[ Figure 1]

Rapidly Changing Market Conditions and Samsung’s Responses

In the Chinese market, trends in the monitor market have experienced rapid changes

16
since the mid-1990s (He, 2003: 202). The 15-inch monitor became the mainstream standard
instead of the 14-inch monitor in 1998 and 1999. At the same time, the 17-inch monitor
began its entry into the market and grew rapidly; the market share of the 17-inch display
surpassed that of the 15-inch display and became the mainstream standard by 2001 (He,
2003: 202). The resulting situation was that while small-screen color tubes below 21 inches
had been oversupplied, large and wide-screen color tubes of more than 25 inches were in
great demand, but the supply of CDT was insufficient. Thus, during this period, the
inefficient and insufficient supply of the core component, CDT, constrained monitor makers’
production capacity (He, 2003: 203).
There were five local factories manufacturing CDT, including IRICO (formerly known
as the Shaanxi CPT Plant), TSDI, SSDI, Chungwha Picture Tubes Fuzhou (CPTF), and
Philips. In 1999, the production capacity of these five manufacturers could only meet 28% of
the total requirement for monitors in China. The local market fulfillment rates were 64.4%
for the 14-inch and 30% for the 15-inch monitors, but only 1.6% for the 17-inch ones (He,
2003: 203). In the latter half of 1999, the import quota of CDT for computer monitors was
insufficient, and thus there appeared difficulties in monitor production (He, 2003: 68).
Firms with strong VI with a high-quality CDT supplier, like Samsung, therefore
possessed obvious advantages over its competitors. Thus, the subsidiaries of SEC were able
to respond better and quicker to changing market conditions. For example, TSED initially
manufactured low-end products (i.e., 14-inch and 15-inch displays). However, to improve its
brand and market share, TSED soon made a transition to products with large screens and
started producing flat displays since December 1999 (He, 2003: 207). In 2000, TSED
pursued expansion in the flat display market by lowering prices and providing product
differentiation. With a reliable components supply from group affiliates, TSED was able to
manufacture stably at competitive prices. In the case of flat displays, TSED’s products were
well positioned in the market with their lower prices and good quality; thus, its flat products
were accepted well by local consumers2. Likewise, Samsung integrated flat panel
technologies with short neck technology3 and developed new products that occupy less work
space. It also launched the first multimedia-based flat display products in the Chinese
market.
To keep its leading position in the market, TSED also started manufacturing LCD
products right after its launching of flat panel products in 2000 (He, 2003: 208). It began
selling LCD products with diverse model names, dividing LCD products into several
segments so that consumers may have a “taste” of the common LCD technology with

17
different flavors.
In sum, TSED commands a diverse variety of product families, from low-level color
shell CRTs to high-level flat displays, LCDs, and large screen displays, from family-use or
office-use displays to professional models, and from 15 inches to 24 inches in size.
Such variations and adaptability is possible owing to the existence of a reliable vertical
network within China. Furthermore, Samsung’s products can be renewed or upgraded within
short periods of time. Moreover, the display product cycle, led by Samsung’s technological
capabilities, was reduced from 10 months to 6 months. With such product diversification and
variety, Samsung could reduce the risks associated with changing market conditions (Chen,
2001).
The rapid expansion of Samsung’s monitor business is also due to its quick and
successful transition to the current, localized marketing network. During its stages, Samsung
started the traditional mode of centralized marketing through reliance on a single national-
level general marketing agency. Through initial marketing efforts, the SEC found its
disadvantages and built a new one. The new marketing system was designed by a
professional team from the Korean headquarters after a thorough investigation of the
Chinese market, which took more than two years of touring across 100 cities in China.

Comparison with Other Companies

While the case of Samsung shows the advantages associated with a local vertical
network, the case of MAG, a Taiwan company, is an example of trouble and decline when it
had to purchase core components at an arms-length relationship (He, 2003: 292). Boasting of
a strong operational capability, MAG entered the local China market quickly by targeting the
high-end market with competitive pricing strategies and flourished. However, it depended on
Sony for its core component, CDT (Jiang, 1997). Thus, when competition among monitor
makers intensified, given the limited supply of core components, Sony had to limit its supply
of CDT to MAG and eventually stopped it in June 2001 (Ouyang, 2001). MAG suffered,
later turning to Hitachi for its CDT supply. However, Hitachi soon stopped producing CDT,
and MAG had to find new suppliers once more. Thus, MAG disappeared for some time in
the display market until it developed a monitor model based on Mitsubishi’s CDT in March
2002 (You and Yi, 2001). The case of another Taiwan-based company, AOC, also indicates
the importance of securing a stable supply of components in the Chinese market (He, 2003:
292). When AOC set up its first production base in Fujian Province in 1990, it used to
purchase CDT in a market, or from an independent Taiwanese company called Chunghwa

18
Picture Tubes (Zhang, 2001). However, facing the troubles of an instable supply, in 1997,
AOC established a joint venture in Beijing with BOE, one of the top CDT makers in China
(Hu, 2000), and finally started to produce the components at its own in-house plant in Fujian
since early 2002.4
Philips was in a much better situation than these two Taiwanese companies, although it
likewise represents a case of gradual decline due to a weaker vertical network. Philips was
one of the earliest entrants in the Chinese market and had been the leader until 1998 before
Samsung entered. Philips established a joint venture in Suzhou named the Suzhou Monitor
Plant in May 1995. Before 1999, the plant was able to purchase CDTs from a tube plant,
Nanjing Huafei Color Display System, a joint venture established by Philips and two other
local partners. However, this plant mainly produced small- and middle-sized CDT tubes,
with less capacity for the large-sized tubes that were in short supply. In this sense, Philip’s
vertical network had a weaker capacity than its rival Samsung. Due to the unstable or
insufficient capacity of component factories, Philips was often late in supplying the market
with flat CRT monitors as compared to its rivals (Guan, 2002). Only after facing the
declining trend in the China market after 1999 did Philips try to build its local sourcing
system by establishing strategic alliances with LG in Braun tube and TFT-LCD panel
businesses in 1999, setting up two joint ventures (LG-Philips LCD and LG-Philips Displays)
in 1999 and 2001, respectively. Despite this effort, the monitor business of Philips continued
to experience setbacks, and it was finally merged with AOC in early 2005.
Finally, Sony was in a much better condition than the preceding companies because it
had its own version of VI in China with its joint venture, Shanghai Suoguang Visual
Products Co., established in 1995. However, its investment in China was not as aggressive as
Samsung. With a smaller production, Sony exported most of its monitors and Trinitron CDTs
back to Japan rather than delivering to the local market in China. Additionally, Sony had not
set up a localized marketing network in China (He, 2003:171-179).

Conclusions

This paper examined Samsung’s electronics business in China as a case of resource sharing
and coordination among affiliates to execute a project despite late entry into a new market.
Thw study found that the VI network among affiliates was first created in the early 1970s in
Korea, and was then replicated in many parts of the world. The basic structure of VI has
three tiers consisting of SEC at the top as the final assembler, SEM and SDI at the middle,
and finally, SC at the bottom. By entering as a vertically connected network, SEC

19
circumvented the risk of an insufficient supply of CDTs in China and took advantage of the
synergistic effects generated from the VI of crucial components. In the rapidly changing
Chinese market, Samsung’s stable component sourcing played a critical role in enabling
Samsung to develop new products continuously to meet market demands.
It should also be mentioned that at the bottom of the power of VI lies the innovation
capability of the mother company, SEC. In the 2000s, SEC’s R&D expenditure to total sales
was about 6%. According to China’s State Intellectual Property Office, SEC ranked second,
after Matsushita from Japan, in the number of patent applications by foreign firms in China
with the registration of a cumulative total of 794 patents as of August 2002. Thus, SEC
outstripped other companies such as Philips Electronics. Recently, VI by Korean chaebols in
China has extended to include the function of R&D as evidenced by their setting up of R&D
centers (Table 3), although the R&D conducted in China mainly aims to modify existing
products to suit the Chinese market.
Samsung’s case suggests that the vertical network was particularly powerful in an
environment with diverse imperfections in input markets and other institutions, such as
China. In this light, this case provides a linkage between the capability-based theory and the
market failure theory of business groups. While business groups emerge in response to
market imperfections, they may build horizontal or vertical integration by conducting
multiples of new entries and projects during their growth stages, and then building until such
networks become particularly powerful in markets with more institutional voids. In other
words, co-evolution between the external environment and internal capabilities of the
business groups may be significant. More importantly, this implies that the advantage of
business groups may prevail not only in environments with a market failure common in
developing countries, but also in other oligopolistic markets of differentiated products, such
as IT goods, where key components are often monopolized by a few suppliers and market
demands constantly change, thus generating uncertainties. For example, given the uncertain
supply conditions for LCD panels, Sony secured a long-term contract with Samsung for its
LCD panel supply.
The above story is consistent with the theoretical vision set forth in Section 2 regarding
the dynamic development of business groups’ capabilities in developing countries. Their
capabilities have evolved from generic or less sector-specific project execution capability,
which supported related or unrelated diversification, to vertical or horizontal integration
reaching across several sectors or firms, and finally, to sector-specific or specialized
technological innovation capabilities. While this dynamic path of business groups should be

20
subject to a fuller analysis than what was done here, it strongly suggests the need for a
restatement of the theory of business groups. More relevant for business groups at stages 1 or
2, traditional theories tend to look at them as just passively fulfilling institutional voids, not
looking at their function of building higher levels of capabilities along the course of their
growth. In a sense, as emphasized by Choo et al. (2009), traditional views cannot explain
how some Korean chaebols survived the 1997 crisis and became much stronger global
players today in more open and mature market conditions. The market failure theory predicts
that business groups should lose advantage and disappear with the maturation and opening of
market institutions. This paper provides a firm-level story for the econometric work of Choo
et al. (2009), which points out technological capabilities as the real cause for the post-crisis
turnaround of some Korean chaebols that reached stage 4 of the dynamic development of
business groups. In this light, we do not subscribe to the logic of the predicted decline of
business groups with the maturation of market mechanisms.

Notes:
1. Information about the Vis in North and South China can be found in the documents
of the overseas affiliates of Samsung, such as Samsung Corning SSG (2004), SEM
STEM (2004), and Samsung Electronics TSED (2004), unless otherwise noted, in
addition to the documents of their parent companies introduced above.
2. Their model names are “technological 700NF and 900NF,” “professional 700IFT,”
“economical 700DF and 753DF.” See He (2003) for details.
3. Neck is the linkage part between the monitor screen and the seat (or foot). A short
neck can save space and make the monitor stand stable. Thus, a short neck is one of
the important features in monitor technology.
4. Http://hk.biz.yahoo.com/company/review/0/0903.hk.html. Access date: May 6, 2003.

21
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Figure 1: Vertical Integration in Samsung’s Monitor Production in China

CRT Monitor LCD Monitor

(TSED) (TSED)

DY. FBT CDT

(STEM) (SSDI&TSDI)
)))

Electron Gun
Braun Glass STN-LCD
(SSG) (DSDI)

25
Table 1: Evolution of the Core Capability of the Business Groups

Stage 1 Stage 2 Stage 3 Stage 4

Integration: Technological Innovation

Capability Networking Project execution
Vertical/Horizontal Product Development
Diversification Replication
Behavior Rent Seeking Specialization
Related/Unrelated Geographical Diversification
Sector Specific / Technology Specific
Specificity Random Less Sector-Specific
Across Several Sectors (e.g., Nano Technology)
Periods in
1960s, 1970s 1970-1980s Mid-1970s, 1980s, 1990s 1990s, 2000s
Samsung
Source: Authors
Notes: Vertical integration was pursued only after the mid-1970s as shown by the example of Samsung, but
unrelated diverfication continued to be pursued until the 1980s. Thus, some overlaps between stages are
unavoidable. This happens because the beginning of each period is clear, while their endings are not.

Table 2: Samsung Monitor’s Market Shares and Ranks in China (1997-2006) (by sales
volume)
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Market
N/A N/A 20.0% 30.5% 25.8% 29.6% 27.3% 31.3% 31.7% 34.1%
share
Rank 8 N/A 1 1 1 1 1 1 1 1
Source: Compiled based on CCID’s Annual Report on China’s Display Market
(http://www.ccidnet.com/news/industryexpress/2003/04/07/81_85640.html) and the news related by SEC on
May 7 2007 at its Web site (http://www.samsung.co.kr/news/biz_view.jsp?contentid=115792).

26
Table 3: Presence and Performance of Samsung in China

A. Presence in China
1) Affiliates in China Fields (Numbers) 2003 2004 2005 2006 2007 2008
Manufacturing 26 28 28 28 28 31
Trading 14 28 30 30 31 34
R&D 3 4 4 4 5 5
Service, offices, etc. 29 - 54 57 59 63
Total 72 - 116 119 123 133
Electronics, telecommunications, textiles, apparel, ship-building, steel,
2) Business areas finance, IC chips, software, advertising, chemicals, trading, construction
3) R&D units in China
Telecommunications in Beijing on TD-SCDMA & W-CDMA, with 110 employees, opened in 2000/10.
Semi-conductor in Suzhou and Hangzhou on solutions, with 40 employees, opened in 2003/09.
Design in Shanghai, with 13 employees, opened in 2004/03.
Digital technology in Nanjing opened in 2004/04.
4) Ratio of Sales in China to Samsung Group’s total
2003: 10% 2004: 22% 2005: 25%

B. Performances (million US$)

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Cumulative
investment (a) 1500 1900 2100 2500 2700 3300 3900 4500 5000 6100 7200

Sales revenues (b) 2400 3600 5500 5700 8300 11800 16200 17100 20300 27600 33000
Exports (c) 700 1300 2400 2300 3500 5300 9200 9800 12100 16900 20600
% of sales 33.3% 36.1% 43.6% 40.4% 42.2% 44.9% 56.8% 57.3% 59.6% 61.2% 62.4%
Employees (d)
(1,000 person) 21 26 34 36 41 45 50 50 55 61 76
Sales/Employee
(b/d= 1,000 $) 114.3 138.5 163.7 157.5 196.2 262.2 324 342 369.1 452.5 434.2
Sales/Capital
(b /a = $/$) 1.5 1.9 2.6 2.3 3.1 3.8 4.2 3.8 4.1 4.5 4.6
Sources: The official annual brochure of Samsung China (2004-2008), the Web site (china.samsung.com.cn),
and the data provided during an interview in Beijing with the directors of Samsung China in January 2004.

27