Introduction

Samsung has been one of the largest foreign investors in China. It has built a China structure that rivals that found in its home country of Korea. Since the early 1990s, Samsung has invested deeply across manufacturing, research and development (R&D), design, distribution, and standards development. It introduced world-class semiconductor and display manufacturing to China, supported the development of Chinese telecom standards, and helped legitimize open-source smartphone ecosystems that later empowered domestic brands.

In 2014, Samsung Electronics had revenues of US$201 billion globally, with 16% (US$32 billion) coming from China. China hosted 13 of Samsung’s 38 global production bases, seven of its 36 research and development centers, two regional headquarters, and one of the company’s six global design centers. Samsung evolved from treating China as an export platform to making it a core pillar of global strategy.

Committing to China

Samsung committed to development in China early on. One sign of this commitment is the sheer value of Samsung’s China investments. In 1994, Samsung established an integrated production complex in Tianjin with an investment of nearly US$1 billion. In 2014, Samsung Electronics completed a US$3 billion liquid crystal display facility in Suzhou. At the time, it was the largest ever single foreign investment in China by a Korean company. It also announced a joint effort with Xi’an Hi-Tech Group to build a production base for electronic car batteries, with a combined investment of US$600 million and projected revenues in excess of US$1 billion by 2020.

In 2015, Samsung Electronics opened the US$2.3 billion first phase of a NAND flash memory chip fabrication complex in Xi’an. With a total planned investment across multiple phases of US$7 billion, this would be the single largest investment by Samsung in China, and Samsung claimed it would be the single largest foreign direct investment in China to date. The complex, Samsung’s first semiconductor production complex in China, is expected to generate annual sales of US$5 billion.

Building supply chains and distribution network

Unlike many other electronics companies, Samsung did not outsource most of the products sold under its name, nor did it simply carry out low-value added assembly in China. Instead, it committed to building an entire electronics ecosystem in China, including key components, major subassemblies and finished products. This approach contributes more to a local economy that just doing electronics assembly as the key components often involve higher levels of technology, higher value added, and more potential for technological spillovers than simple assembly. In particular, Samsung not only manufactures mobile phones, communications equipment, computers, home electronics, and appliances in China, it also manufactures LCDs, LEDs, screens and monitors, semiconductors, opto-electronic components, and other key components in China. In most cases, Samsung has brought its global best technology and practices, rather than older generations as many other foreign companies have.

Samsung worked extensively to develop local suppliers in China. The company operates a policy of ‘Mutual Growth’ whereby it offers support in the form of training, technology, and funding to its first-tier suppliers along with strengthening communication between them and Samsung. The program was later expanded to their second- and third-tier suppliers.

Samsung has also helped its Chinese suppliers develop their supply chain management systems. Samsung’s LCD headquarters established a Supply Chain Management (SCM) system to ensure the quality of component parts suppliers and raw material suppliers encompassing its Enterprise Resource Planning, Manufacturing Execution System, Transportation Management System, and Warehouse Management System. Furthermore, Samsung introduced a new SCM system connecting first- and second-tier suppliers to reduce inventory levels and improve supply chain network efficiency.

On the distribution side, Samsung has worked with national electronics retailers, offering high margins and cutting off retailers that hurt the brand image by cutting prices. To gain better access to China’s inland cities, Samsung established its own stores to specifically introduce its products to these cities, which enabled the company to get more direct feedback from customers, allowing it to become more attuned to the differences that exist not just between Chinese and Western consumers, but also between different regions in China. By 2015, Samsung had three times the number of retail stores as Apple, and has been more aggressive in courting consumers and creating partnerships with phone operators.

Setting up global research and development human resources

Samsung is one of the world’s largest R&D spenders, and it made China central to its innovation strategy. By 2015, China hosted three of Samsung’s six global R&D centers and seven of its 36 R&D institutes, employing 7,000 researchers, or 11% of Samsung’s global R&D workforce.

Samsung evolved quickly from “Made in China” to “Created in China.” It designed products specifically for the Chinese market, often exporting successful innovations globally. It co-developed China’s home-grown 3G network standard (TD-SCDMA) with Datang Mobile and worked with China Mobile on TD-LTE for 4G. At the Xi’an semiconductor base, Samsung partnered with universities and research institutes to advance NAND flash memory chip technology.

By the mid-2010s, one in four of Samsung Electronics’ 319,000 employees worldwide worked in China. Samsung has had a strong focus on developing and promoting Chinese talent not just on the factory floor but in management as well. By 2006, at one of Samsung’s subsidiaries, Samsung SDI, about 95% percent of upper management was Chinese. In 2010, the then CEO of Samsung China spearheaded a localization drive for higher level managers to make the company ‘more like a Chinese company than a Korean’ one. In 2010, 20% of the department heads at Samsung’s China operations were Chinese, but by 2012, the figure was 70%.

Supporting Chinese standards and open systems

Samsung has demonstrated consistent commitment to helping the development of Chinese telecommunication standards, developing the technology needed to realize those standards, and promoting them to a wider audience beyond China. This enabled Samsung to bring compatible products to the China market sooner than their international competitors, while providing Chinese consumers with improved performance and choice. Samsung was one of the first foreign-owned companies to release a phone compatible with China’s TD-SCDMA standard. It was an early member of the 4G TD-LTE standard consortium along with Chinese companies like China Mobile and Huawei. When China Mobile switched on its TD-LTE 4G network in December 2013, and Apple had no phone capable of handling the standard, Samsung was ready with its S4. The TD-LTE standard has become popular in Asia, particularly India and China, and China Mobile expected to hit 80 million TD-LTE subscribers by the end of 2014.

Samsung’s support of the open Android system has facilitated, though perhaps inadvertently, the rise of Chinese smartphone producers. It enabled companies like Xiaomi, Huawei, ZTE, to focus their R&D on hardware and China-specific applications, without the need to develop and gain acceptance for an operating system of their own. Without Samsung’s support for the Android system, Chinese smartphone makers would not be nearly as prominent as they have become.

Moving beyond China

Despite deep roots in China, Samsung’s foreign investment is pivoting rapidly to Vietnam. By 2015, Samsung had invested US$2.5 billion in factories in Bac Ninh Province, US$5 billion in an assembly plant in Thai Nguyen Province, and US$1.4 billion in another facility in Ho Chi Minh City. Estimates of the total investment in Vietnam by the end of 2015 were US$14.2 billion, making Samsung Vietnam’s largest foreign investor by a substantial margin. The company’s exports from Vietnam reached US$26.3 billion in 2014, equal to 17.5% of Vietnam’s total exports, and its Vietnam factories employed over 110,000, or roughly one-third of Samsung Electronics’ global employment, and well above its China employment.

Samsung’s investments in Vietnam represent something of a cautionary tale for China. As costs increased in China, local governments pushed up wages, Chinese competitors emerged, and the Chinese government began to favor Chinese companies over foreign companies more overtly, Samsung wound up investing about as much in Vietnam in six years as it had in China in 20. While in the short run, most of the jobs and production that were located in Vietnam involved relatively simple assembly, Samsung was moving to put higher value-added production into Vietnam as rapidly as possible, and it was pulling other companies into Vietnam to do the same.

Conclusion

Samsung went from producing in China for export to producing in China for China as well as the rest of the world. In the process, the company almost created a ‘second Samsung’ outside of Korea. However, the Samsung case also shows as China becomes more expensive, the market tougher, and perhaps not as hospitable to foreign firms as it might be, foreign firms can look to other countries for their investment.

[This paper contains an excerpt from a larger project initiated by the Hinrich Foundation and undertaken by Enright, Scott and Associates on the impact of foreign investment and foreign enterprises as a whole on China’s economy. The results of the larger project were published in a book by Michael J. Enright, Developing China: The Remarkable Impact of Foreign Direct Investment (Routledge, 2017).]

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