R&D EMPLOYEES, R&D INTENSITY AND PRODUCT ASP

In the ICT industry R&D expense as a part of revenue is an important index to evaluate how a company emphasises innovation. Another index that usually has a high correlation with R&D expense is R&D engineers as a part of the total employees. In order to catch up to foreign world market leaders, Samsung Electronics expanded from 12,000 R&D engineers in 1997, to more than 20,000 in 2003, and 27,000 in 2005. There were 7,000 cellular phone R&D engineers in 2005 among its total R&D team. The ratio of R&D engineers to total employees was 22% in 1997, moving to 36% in 2005.

Figure 13. Product ASP of major cellular phone vendors in the world Source: Financial statements and newsletters of these companies

Figure 13 shows the cellular phone ASP of the major vendors in the world. We find that Korea’s cellular phone makers, such as Samsung and LG, do not use the low cost oriented strategy to gain market share. On the contrary, they focus their attention on the global mid-to-high end cellular phone market. Samsung’s ASP, for the most part, is above US$180 and the highest in the industry. In contrast with Samsung, the industry’s average ASP is under US$160 from 2002 to 2005.

Table 21 shows the P-values of the Mann-Whitney test of the cellular phone ASP between

100 130 160 190 220

02Q1 02Q2 02Q3 02Q4 03Q1 03Q2 03Q3 03Q4 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4

Nokia M otorola S am sung LG Industr y AVG

US$

S am sun g

L G

No kia Mo to

AV G

South Korean and other foreign firms. The result shows a significant ASP between South Korean and other foreign firms. Compared with Samsung’s high-end focus, LG mainly aims at the mid-to-high end market as well while Nokia, Motorola, BenQ-Siemens, and Alcatel have a relatively wider range of product lines.

Table 21. The P-values of Mann-Whitney test of the cellular phone ASP between South Korean and other foreign firms

Nokia Motorola Industry AVG Samsung < 0.00001*** <0.00001*** <0.00001***

LG <0.00001*** 0.02918** 0.02875**

Note: *** represents significance at 1% level; ** represents significance at 5% level.

As low-end products are the major part of sales growth, and price wars have erupted in this market, the ASP and operating margins of cellular phone firms have decreased. Major global brand cellular phone companies are divided into two categories in terms of their profit capacity. The first category group is Samsung and Nokia, whose profitability maintained around 20-25% before 2004. The other group includes Motorola, Siemens (its cellular phone division was acquired by BenQ in 2005), and other small and medium-sized companies with profitability below 10% (Table 22).

Researchers suggest that companies put more R&D resources to raise the quality of products (Galan and Sanchez 2006). However, in spite of Samsung’s high-end focus, there is no evidence that Samsung’s R&D expenses and intensity are superior to Nokia or Motorola.

Table 22 shows a comparison of R&D expenses, R&D intensity, and revenue of major cellular phone vendors in the world. Samsung increased its R&D expense from 5.86% in 2000 to 10.08% in 2005. Tables 23 and 24 show the P-values of the Mann-Whitney tests for R&D intensity and R&D expenses between South Korean and other foreign firms. The P-values represents a significant gap between South Korean and other foreign firms. The R&D intensity and R&D expenses of South Korean firms were significantly lower than other foreign firms in the past. However, South Korean firms are beginning to catch up and even to leapfrog.

Table 22. R&D expenses and revenue of major cellular phone vendors in the world (Million US$)

2000 2001 2002 2003 2004 2005 Samsung Cellular Phone Revenue

5168 6769 10202 11920 17085 16849 Samsung Cellular Phone R&D Expenses

302 399 595 710 1430 1700 R&D Spending of Revenue (%)

5.86 5.88 5.83 6.00 8.37 10.08 Operating Margin (%)

12.00 17.00 26.80 20.50 15.00 12.00 LG Cellular Phone Revenue

1248 2191 2814 4355 7265 7421 LG Cellular Phone R&D Expenses

59 98 113 170 366 447 R&D Spending of Revenue (%)

4.76 4.47 4.03 3.91 5.04 6.02 Operating Margin (%)

- 10.00 9.75 4.80 6.30 6.90 Nokia Cellular Phone Revenue

24076 25532 27789 29342 27595 33184 Nokia Cellular Phone R&D Expenses

1437 1759 2261 2477 2342 3113 R&D Spending of Revenue (%)

5.97 6.89 8.14 8.44 8.49 9.38 Cellular Phone Operating Margin (%)

22.30 20.10 22.80 23.60 17.80 13.60 Motorola Cellular Phone Revenue

13267 10448 10847 10978 16823 17800 Motorola Cellular Phone R&D Expenses

1098 1012 1006 1112 1602 1853 R&D Spending of Revenue (%)

8.28 9.69 9.27 10.13 9.52 10.41 Operating Margin (%)

4.00 -3.10 7.30 4.80 10.40 11.50

Source: Financial statements and newsletters of these companies.

Table 23. The P-values of Mann-Whitney test of R&D intensities between South Korean and other foreign firms

Nokia Motorola Samsung 0.240260 0.0411256**

LG 0.004329*** 0.0021645***

Note: *** represents significance at 1% level; ** represents significance at 5% level.

Table 24. The P-values of Mann-Whitney test of R&D expenses between South Korean and other foreign firms

Nokia Motorola Samsung 0.0043290*** 0.1796536

LG 0.0021645*** 0.0021645***

Note: *** represents significance at 1% level.

Therefore, we explained how South Korean firms achieve competitiveness by comparing R&D efficiencies. Table 25 shows the comparison with R&D efficiency of major cellular phone vendors in the world. Table 26 shows the P-values of Mann-Whitney test of R&D efficiencies between South Korean and other foreign firms. We find that the R&D efficiencies of South Korean firms were higher than other foreign firms. South Korean firms are able to gain more patents under the same R&D resources.

Table 25. R&D efficiency of major cellular phone vendors in the world (Million US$)

2000 2001 2002 2003 2004 2005 Samsung Cellular Phone Patents

469 479 406 392 444 379 Samsung Cellular Phone R&D Expenses

302 399 595 710 1430 1700 Samsung R&D Efficiency

1.5530 1.2005 0.6824 0.5521 0.3105 0.2229 Samsung R&D Efficiency (Logarithm)

0.1912 0.0794 -0.1660 -0.2580 -0.5079 -0.6519 LG Cellular Phone Patents

94 117 141 144 192 163 LG Cellular Phone R&D Expenses

59 98 113 170 366 447 LG R&D Efficiency

1.5932 1.1939 1.2478 0.8471 0.5246 0.3647 LG R&D Efficiency (Logarithm)

0.2023 0.0770 0.0961 -0.0721 -0.2802 -0.4381 Nokia Cellular Phone Patents

350 402 503 628 711 542 Nokia Cellular Phone R&D Expenses

1437 1759 2261 2477 2342 3113 Nokia R&D Efficiency

0.2436 0.2285 0.2225 0.2535 0.3036 0.1741 Nokia R&D Efficiency (Logarithm)

-0.6133 -0.6411 -0.6527 -0.5960 -0.5177 -0.7592 Motorola Cellular Phone Patents

663 441 350 302 333 280 Motorola Cellular Phone R&D Expenses

1098 1012 1006 1112 1602 1853 Motorola R&D Efficiency

0.6038 0.4358 0.3479 0.2716 0.2079 0.1511 Motorola R&D Efficiency (Logarithm)

-0.2191 -0.3607 -0.4585 -0.5661 -0.5672 -0.8207

Source: United States Patent and Trademark Office and financial statements and newsletters of these companies.

Table 26. The P-values of Mann-Whitney test of R&D efficiencies between South Korean and other foreign firms

Nokia Motorola Samsung 0.025974** 0.1320346

LG 0.002165*** 0.0151515**

Note: *** represents significance at 1% level; ** represents significance at 5% level.

Moreover, the South Korean manufacturing strategy is very different from that used by western firms. Samsung and LG do not have an outsourcing strategy, except for a few very low-end products, such as CDMA phones that target China’s market. From 1999 to 2004, South Korea was only behind China as the second largest cellular phone manufacturing base in the world.

7.2 INNOVATION MODELS OF NEW PRODUCTS HAVE LED GLOBAL