Change everything but your wife and children

    

The popular notion is that young people are somehow naturally more knowledgeable and adept when it comes to technology. I have found that this really means they are better at its application, but woefully ignorant of its core. They can figure out how to get it out of the box and working very, very quickly, but have little or no understanding of binary math, for instance, or how the various internal components function together as a system.

Wall Street, academia and the business press seem to suffer from the same shortcomings. They love Apple for the cool, innovative stuff its products do, but have little understanding or respect for the manufacturing that goes into it.

They do so at their own, considerable risk.

While Apple deserves great credit for its invention of the smart phone and the tablet, it is the hare to the manufacturing tortoise. ABI’s estimates suggest Samsung shipped 106 million handsets including 60 million smartphones in the fourth quarter, while Apple shipped 47.8 million iPhones.” While Apple still leads the tablet market, its share is steadily dropping; falling below 50% for the first time, while Samsung’s is shooting up, more than doubling last year to over 15%.

There is a lengthy but worth reading article in Businessweek describing Samsung’s strategy.

It’s relentless march to the top began in 1993 when “… Chairman Lee gathered his lieutenants and laid out a plan to transform Samsung, then a second-tier TV manufacturer, into the biggest, most powerful electronics manufacturer on earth. It would require going from a high-volume, low-quality manufacturer to a high-quality one, even if that meant sacrificing sales.” He told them to “Change everything but your wife and children…”

“Consider the disciplined way Samsung Electronics moves into new product categories. Like other Korean conglomerates—LG and Hyundai come to mind—the first step is to start small: make a key component for that industry.”

“When Samsung decides to expand operations and start competing with the companies it has been supplying, it makes massive investments in plants and technologies, leveraging its foothold into a position that other companies have little chance of matching. Last year, Samsung Electronics devoted $21.5 billion to capital expenditures, more than twice what Apple spent in the same period.”

“More than 50,000 employees pass through Changjo Kwan and its sister facilities in a given year. In sessions that last anywhere from a few days to several months, they are inculcated in all things Samsung: They learn about the three P’s (products, process, and people); they learn about “global management” so that Samsung can expand into new markets; some employees go through the exercise of making kimchi together, to learn about teamwork and Korean culture.”

“Workers at Gumi are not on an assembly line; production is done on a cellular basis …”

By focusing on making the critical components Samsung is able to understand the product, learn what the players in the market are doing, and most important, control the cost and quality, and continually improve, the core of the product. They know that excellence in manufacturing processes and quality are the keys to long term success.

Corning is the other big, long term winner in the smart phone and tablet business. Their ‘Gorilla Glass’ is almost as important as the inner electronics in the performance of the products. Corning’s success lies partially in the science of the glass, but mostly in their mastery of the manufacturing processes that make the glass economically feasible in high volume with high quality.

Give Apple their due. They invented some great things, but when David Ricardo wrote ‘On the Principles of Political Economy and Taxation’ in which the theory of comparative advantage was introduced (the theory that is so misinterpreted to rationalize abandoning manufacturing) he said, “The first man who knew how to soften metals by fire, is not the creator of the value which that process adds to the melted metal. That value is the result of the physical action of fire added to the industry and capital of those who availed themselves of this knowledge.”

The modern equivalent is that Steve Jobs is not the creator of the value in smart phones and tablets, nor is it created by the legions of developers of cool apps. That value is created by the makers of the semi-conductors, memory chips, microprocessors and specialized glass that make them work.

Samsung is emerging as the big long term winner because they create that value through excellent manufacturing.

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