Even in technology -- an industry known for bold moves -- a one-year investment plan of $41 billion is breathtaking. Seldom meek, Samsung announced yesterday that it will be spending that sum this year "in order to solidify its dominance in key businesses in the global market and to dominate new growth areas in advance."
The funds, to be split 70/30 between capital investment and R&D, are a thumb in the eye of rivals that have struggled during the recession.
According to Lee Sun-tae, an analyst at NH Investment & Securities, "Samsung's got strong cash flow to make bold bets in new technologies. No other IT company can beat it in terms of investment and that's how Samsung finds new revenue sources ahead of rivals and widens its gap."
Samsung's move is daring but looks well-calculated. In four distinct ways, the huge investment makes sense for the company and holds lessons for others:
1. Forward Integrate to Create Markets -- Analysts speculate that much of Samsung's spending will support a huge expansion of its logic chip and display business. Logic chips are used as mobile processors and sensors for products such as smartphones, tablets, and cameras. In displays, the firm is far-and-away the global leader in OLED technology, which already plays a big role in smartphones and may soon displace LCDs in televisions. The pattern is clear. Samsung has strong businesses not only in these electrical components but is also forward integrated into the devices that use them. The company therefore can commercialize its new technologies fast and awaken demand among consumers. Hitachi doesn't have that luxury, and so it builds its factories with less certainty about their eventual utilization. Business schools might preach that this integration risks conflict with customers; Apple would never buy Samsung chips because the firms are arch-rivals in the smartphone market. But it turns out that Samsung supplies processors for the iPhone and iPad. In fast-moving markets, companies are looking for the best suppliers and may forgive other transgressions.
2. Deter Competition -- Taking on the Samsung steamroller would require serious mojo. Samsung focuses on businesses with high fixed costs due to upfront R&D expenses or the need to build big production facilities. In those circumstances, it is frightening to compete against an unpredictable and free-spending titan. Samsung is playing its cards close to its chest, not saying exactly which businesses will benefit from its $41 billion plan, so companies in a wide range of markets will be sweating as they think about what a flood of competitor cash could do to create cutting-edge products or low-cost factories. They may well prioritize industry segments where Samsung does not play. In fixed cost industries, it pays to be the colossus with the power to up-end industry economics. This is a move borrowed from John D. Rockefeller's brilliant playbook -- Standard Oil could make would-be rivals' investments decidedly unprofitable, so many stopped trying to take the company on. In that situation, smaller players have to attack asymmetrically to survive.
3. Invest Counter-Cyclically -- Samsung's cross-town rival, LG Electronics, cut its 2012 spending by $3 billion. Japanese rivals such as Sony, Sharp, Toshiba and Hitachi are struggling to keep up. While the competition is managing budgets in reaction to the current business cycle, Samsung is looking forward to the next one. A few years from now, demand might be brisk and it will be too late for rivals to respond.
4. Count on Investor Support -- Contrary to the conventional wisdom that the Street cares only about quarterly earnings, there is abundant academic evidence that investors support credible plans for long-term investment. Indeed, Samsung's share price rose 1.2% when the announcement was made, ahead of the rest of the tech sector.
Samsung's strategy has long been to pounce on industries and flood them with cash, daring competitors to follow suit. When a company has the strong cash flows to fund this approach, it makes powerful sense. Big investments may be bold, but they can also be shrewd.