Samsung Electronics’ low-cost advantages are clearly visible from the comparison with its competitors’ DRAMs industry. About 35 % of Samsung’s favorable operating margin in DRAMs relative to the other four producers is due to its low cost advantage. Competitors’ costs were, on average, 132.2% higher than Samsung’s. Two most significant elements of the cost structure, such as raw materials and labor, were 36% and 27% lower respectively. The average selling price to costs of Samsung over its competitors exceeded 51 per cent.
The first source of Samsung’s low-cost advantage was that the cost of raw materials was much lower than that of competitors due to this up to 5% of supplier discounts for high-volume buyers. Samsung was the largest producer of all types of DRAM chips. For 256Mbit DRAMs, the total production volumes were 896 million units. However, Micron’s total production volumes were 762 million units. The low-cost advantages related to raw materials could also be explained by better negotiated agreements with suppliers due to the larger volumes of purchases and less shipping and distribution costs that stem from the fact that Samsung’s fab facilities were geographically collocated.
The second source of low-cost advantage was the low-wage labor costs compared to industry average. On average, the competitors’ cost was 137.0% higher than Samsung. In Korea, the labor costs are cheaper than the United States, Japan and Europe. There are also plenty of talented engineers available in Korea. However, Chinese companies SMIC’s labor cost was only the half of Samsung. In terms of labor productivity only Chinese SMIC outperformed Samsung.
The third source of low-cost advantage was the lower R&D costs due to efficient operations. Samsung had an average of 12% savings on fab construction costs in 2003. Samsung had all of its manufacturing facilities in a single central location to take advantage of economies of scale. R&D