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Korea Tech Strategy November 13, 2012 The Age of Transition Korea Tech Strategy The outlook for IT from a “disruptive innovation” perspective Daewoo Securities Co., Ltd. James Song +822-768-3722 Mobile revolution: From revolution to evolution [email protected] The mobile revolution has been a history of „disruptive innovation.‰ And at the heart of Wonjae Park this remarkable shake-up lie Apple, Samsung Electronics (SEC), Google, and Amazon. +822-768-3372 Notably, the global IT industry is currently facing several major shifts and issues, [email protected] including: 1) AppleÊs „innovatorÊs dilemma‰; 2) a reshuffling of global supply chains; 3) Jonathan Hwang the return of Microsoft; and 4) the zero growth of the PC industry. How Korean IT +822-768-4140 players approach these issues will create significant implications for the memory, [email protected] display, components, and electronic materialsÊ markets in 2013 onwards. Will Cho “Apple without SEC” vs. “SEC without Apple” +822-768-4306 [email protected] Apple is now one of the most valuable corporations in the world. However, SEC sells Young Ryu more smartphones than Apple does. Unsurprisingly, global investors are paying keen +822-768-4138 attention to the competition between Apple and SEC, their innovations, and their [email protected] potential breakup. Our analysis suggests Apple is increasingly leaning toward „sustaining innovation‰ while SEC pursues a strategy of differentiation. At the same Brian Oh time, in reshuffling the global supply chain, we expect Apple could have difficulty +822-768-4135 [email protected] procuring parts supply without SECÊs contributions, while the Korean giant is likely to see very limited impacts from the absence of demand from Apple. SEC: Disruptive innovation and strategic decisions In the late 1990s, Nokia focused on disruptive innovation on its way to achieving massive global expansion. In the 1980s, Intel made a key strategic decision to move from the memory sector into the CPU sector, a shift that led the company to become the global CPU leader. This year, SEC has followed in the footsteps of both Nokia and Intel. SECÊs mass customization of smartphones reminds us of NokiaÊs expansion strategy, which enabled Nokia to obtain a global handset market share of more than 40%. And, just as Intel did in the 1980s, SECÊs semiconductor division is shifting its focus from the memory unit to the System LSI unit. In 2013, we believe SEC is likely to face a key strategic decision in its pursuit of fresh disruptive innovation. Disruptive and sustaining innovation in the mobile industry Innovation Disruptive innovation: Revolution ? Strategic decision (e.g., entering into a new market) iPad Sustaining innovation: Evolution Nokia 9000 iPhone Sustaining innovation: Evolution StarTAC Time 1995 2000 2005 2010 2015 Source: KDB Daewoo Securities Research Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the U.S. [Prologue] Moving from revolution to evolution .........................................................................4 Mobile market: From revolution to evolution.................................................................................4 Mobile revolution: A story of disruptive innovation........................................................................5 Strategic decisions: Lessons from Intel of the 1980s ...................................................................6 Gearing up for the next disruptive innovation ...............................................................................7 IT sector investment strategy for 2013..........................................................................................8 I. Apple: “The innovator’s dilemma”...........................................................................................12 Why the “innovator’s dilemma?”..................................................................................................12 Two issues facing Apple..............................................................................................................13 Growth of new smart devices......................................................................................................14 SEC’s differentiated smartphone lineup......................................................................................15 SEC: “It doesn’t take a genius” ...................................................................................................17 Innovation from content producers .............................................................................................18 II. Global supply chain reshuffle..................................................................................................21 Implications of Apple’s supply chain change ..............................................................................21 Apple without SEC Greater supply chain risk ........................................................................22 Exclusion of SEC from Apple’s supply chain would have a limited impact ................................24 Exclusion from Apple’s AP supplier list to have minimal impact on SEC...................................25 TSMC could begin supplying APs to Apple from late 2013........................................................26 Risks and opportunities for SEC’s System LSI unit....................................................................27 III. Losers’ league: Competition among second-tier makers to intensify...............................29 Second-tiers to continue the fight for survival.............................................................................29 Who will exceed the 40mn threshold? ........................................................................................30 Nokia: Windows 8 may be the company’s last shot in smartphones..........................................33 HTC: Standing out in the low- to mid-end market.......................................................................34 Leaders in the Chinese smartphone market: Huawei vs. ZTE ...................................................35 LGE: LTE + vertical integration ...................................................................................................36 IV. Return of Microsoft: Windows 8 and tablet market growth..................................................................38 iOS 6 vs. Jelly Bean ....................................................................................................................38 Differentiating features of Windows 8: New user experience + productivity ..............................39 Windows 8: New growth driver for the tablet PC market ............................................................40 Tablet market to expand by 64% YoY in 2013 ...........................................................................42 Medium- to long-term change in OS market competition ...........................................................43 Beneficiaries of tablet PC market expansion ..............................................................................44 V. Farewell to the PC era!: Zero PC growth and its implications for the memory industry .47 PC industry headed for zero growth ...........................................................................................47 Memory industry’s dynamics have completely changed ............................................................48 The Micron-Elpida merger: Bang for the buck? ..........................................................................49 The age of mobile memory: Competitiveness & growth hinge on product mix ..........................50 [DRAM market issue] Will a mobile DRAM supply shortage occur? ..........................................52 [NAND market issue] Will prices rise further given limited supply growth?................................53 2 VI. Best tech migration play: Semiconductor materials ...........................................................57 Delays to EUV development to slow tech migration...................................................................57 Materials offer solution to limitations of lithography....................................................................58 Core material 1: Spin-on hardmask (SOH).................................................................................59 Core material 2: Spin-on dielectrics (SOD).................................................................................60 Core material 3: High-k/metal gate (HKMG)...............................................................................61 Core material 4: Double patterning technology (DPT)................................................................62 VII. The ongoing innovation of displays: AMOLED vs. Retina display ...................................64 Proliferation of high-resolution displays: Form factor counts!.....................................................64 Apple: Retina displays to be adopted across Apple’s product lineup.........................................65 Apple: Form factor differentiation via in-cell touch displays........................................................66 SEC: Improved resolution of OLED displays ..............................................................................67 SEC: Differentiating itself with flexible OLED technology...........................................................68 [Supply and demand] Limited supply in 2013 to drive gradual recovery....................................69
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