The Case of Electronics and Pharmaceuticals

Si un Yi(suyi@kiep.go.kr)

April 29th, 2015 Santiago de Chile

Introduction

Display Panel Industry Case study of Samsung Display Co.,

Pharmaceutical Industry Case study of Boryung Pharmaceutical Company

Final Considerations

Analysis on governance structure within a value chain

Motivation and drivers of MNCs to

include SMEs in their supply base

Incentives and challenges for SMEs to participate in GVC

Government policy to evaluate where

assistance is required

Research area: two export clusters--Electronics and Pharmaceuticals

Electronics: Korea is traditionally strong

Pharmaceuticals: small but gradually growing

Methodology: interviews, company reports, literature review

General description of the Industry Knowledge and capital

intensive

Strong vertical operation structure: from electronic components to finished products

Exists cycle of the final products

Strong growth Stagnant

period New

paradigm

2000 2010 2020

LED

OLED

3D

Tablet PC

Flexible, transparent

LCD

OLED

Back Light Unit

Polarizer

Glass

Liquid crystal

Colour filter

Polarizer

Organic materials

Glass (or plastic)

Materials Components Panel maker Set maker

Array glass substrate

Colour register

Colour filter

TAC Film, PVA Film

Compensation film

Protective/release film

Reflecting plate, Light guide plate,

Diffusion plate, Prism

Polarizer

Driver IC

BLU (CCFL, etc.)

LCD PC monitor

Laptop PC

LCD TV

Small LCD monitor

LCD Panel maker

(Samsung Display, LG Display)

World’s leading producers Two dominant global players: SDC, LGD

45% share in the world’s display panel market

Strategically important sector in Korean economy 3.4% of total GDP in 2013

Employed 127,000 people

US$ 34 billion in exports

13.35 9.76 7.59 8.19 8.81

64.85 70.45 78.53 76.8 78.04

2.85 2.34

0.79 0.47 0.52 16.4 14.24 10.91 12.31 9.74

2009 2010 2011 2012 2013

Latin America Asia North America Eastern Europe

Paju Cluster: 26 thousand

employees, LG subsidiaries including LG Display and

related firms, 450million m2,

Tangjeong Cluster: 197 companies related to display panel industry are clustered and producing more than 54% of domestic the production.

Employees: 31,000

Annual Sales: 21,191.6 USD (mil)

Business Description: Develop and manufacture liquid crystal display boards and display panel components for use in the consumer, mobile and IT sectors

Subsidiary of Samsung Electronics, with which creating a strong industrial cluster

Manufacturing plants in Korea, China, Slovakia, and soon in Vietnam

Back Light Unit(BLU): light source of LCDs (belongs to a module assembly)

Accounts for 25% of LCD panel production cost.

Simple process and low value added content.

SDC is purchasing BLUs from about 20 companies.

Supplier Capital

(USD, Mil)b

Number of

employeesb

Major products Notes

E-Litecom 5.5 187 BLUs for mobile phones, medium-sized

liquid crystal modules (LCM)

Delivers to Samsung, LG and Apple

Samjin LND 8.6 175 BLUs for TVs, LED lamps, mould

frame

Display Tech 8.4 224 LCD modules for mobile phones

Kumho Electric 31.4 246 Fluorescent lamps, LED lamps, LED

parts (CCFLs, BLUs)

Inzi Display

Company

Limited

15.4 276 Top chassis for panel modules, BTM

chassis for BLUs

Contractor of Samsung Display.

Deliver product for SESL (Samsung

Electronics Suzhou LCD), SAMAX

(Samsung Mexicana)

Reygen 7.5 201 BLUs for TVs and monitors, light guide

panels (LGPs)

LG and Samsung partner; also exports

to Japan and Taiwan Province of

China.

Fine DNC 8.0 298 Top chassis, bottom chassis for

LCD/LED TVs

Korea

Computer INC.

7.2 273 Modules for LCD TVs and mobile

phones, LED surface-mount technology

(SMT) for laptops

LED-SMT for laptop is exported to

China first and then indirectly

delivered to Samsung Display.

A-Tech Solution 4.5 480 Mould frames, LED lamps, LGPs for

TVs

For Samsung Display Reducing production cost

Flexible management and reduce the risks against volatile cycles of final products and technology change

For BLU suppliers Securing steady demand

Ensuring timely payments

Improving its image and credibility

Overcome the issue of limited capital(R&D, human capital)

For Samsung Display Leaking knowledge non disclosure agreement, short duration of contract

For BLU suppliers Competitive market: few purchasers, large number of

suppliers

High dependency and limit of sales growth

Low value added component, and weak bargaining power for the price

Material and Component Technology Plan, 2012(Ministry of Trade, Industry and Energy, MOTIE) R&D capacity building for SMEs

Display Shared Growth and Cooperation Committee, 2014(MOTIE) Semiconductor Research Corporation model: universities

and research institutes conduct research, MNCs and government invest, remove hurdles for SMEs

Technical Support Centre for Touch Panel Industry in Daegu, 2014(MOTIE) supports manufacturing processes: product design,

certification, pilot production and also marketing, and networking

General Description of Industry Technology intensive with high value

added each time a new drug is patented.

High initial capital investment and technology intensity: process from discovery to approval accounts almost 70% of the total cost and takes long time.

High regulations of governments for the sake of citizen’s health.

Development of new drugs, production of synthetic raw materials within value chain

Korea Importing large volumes of drugs, repackaging

for final consumption in the local market

Discovery Synthesis Of

substance Clinical

test Approval Manufacturing Sales

University

Big pharmaceutical

company Big pharmaceutical

company Big pharmaceutical company Venture company

Public

research

institute

University

Venture company Public research

institute Venture company

CRO (Chemical service)

CRO

(Clinical test)

CMO (Manufacturing)

Local company

World’s 15th largest producer behind Mexico and Brazil

Small but growing market participation

270 companies producing final pharmaceutical products, 300 companies for drug substances

Technology capability: half way between developing and developed economies(more generic drugs or commercial product than developing new drugs)

High dependency on foreign contract research organizations(CROs)

Development of 32 new drugs since 1988

1,139 1,391 1,530

1,753 2,049

3,917 3,881

4,418

4,915 5,083

2008 2009 2010 2011 2012

Exports Imports (USD, Million)

21 16 24

43 38 50 48

54 58

79

32 38

47

64

87

74

95 93

124

145

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Substance Finished product

Substance Finished Products

Brazil 38

Mexico 22

Colombia 13

Peru 3

Argentina 14

Chile 6

Ecuador 1

Uruguay 3

Brazil 51

Mexico 7

Colombia 14%

Peru 8

Argentina 1 Chile

8

Ecuador 9

Uruguay 2

• Export of Imipenem (a type of antibiotic, API) to Brazil from 2005 onwards. • Received the Good Manufacturing Process approval by the Brazilian Health

Surveillance Agency (ANVISA) in 2013. • Export of the final antibiotic product to Brazil in collaboration with TARGO.

JW Pharmaceuticals

• In 2013, it exported their in-house developed product Nabota (a botulinum toxin formulation) to 15 Latin American countries(Bolivarian Republic of Venezuela, Colombia and Mexico, etc).

Daewoong Pharmaceuticals

• It sold their diabetes treatment, Zemiglo, to the Mexican pharmaceutical company Stendhal. LG Life Sciences

• It established a local subsidiary (Dong-A Participações Ltda.) in Brazil in 2013 and sold its products to Latin America through this subsidiary. Dong-A Holdings

• It has been exporting GC Flu to Colombia, Guatemala, Nicaragua, Paraguay and Peru. Green Cross

Employees: 1,000

Annual Sales: US$ 312 Million

Business description: Manufacture and sell pharmaceutical products

Specialized in producing medicines for hypertension and antiviral treatment.

Developed its new hypertension drug Kanarb in 2010 and export to LACs from then.

R&D: Develop: Boryung’s central lab(5% of total revenues)

Clinical test: Contract Research Organizations developed countries such as Quintiles and Covance(UK), Harland(Switzerland).

Manufacturing: Drug substance supplied by SMEs, and also developed

countries

Sales(distribution and marketing): Partnership with local companies such as Stendhal in

Mexico and Ache in Brazil

Incentives for participating in value chain

Creation of trust for other potential buyers

Regular and timely payments

Challenges for cooperating with MNCs

High dependency and low bargaining power

Regulatory barrier: needs to attain certification of good management practices and approval from Ministry of Food and Drug Safety

Bio Korea International Convention Fairs, to resolve the difficulties in marketing

Medistar Initiative, KOTRA(Korea Trade-Investment Promoting Agency) provides market research, interpretation services,

training, matchmaking with potential buyers, network services and marketing, global partnering service, and R&D

Homologation Agreements with foreign countries reduce institutional barriers

Eg. Ecuador

* Stable demand

* Improve credibility

* Transfer knowledge/skills

* Little negotiating power

* Probability of being isolated

* Institutional and technological barrier

Opportunities

Struggles

Display Panel Industry

MNC’s predominant role in global value chain

MNC’s intents to reduce dependency on foreign suppliers

Open innovation strategy of MNCs that encourages SMEs participation

Government’s focused support to strengthen material and part industry which involves large number of SMEs.

Pharmaceutical Industry

Yet, small participation of MNCs in global value chain

Majority SMEs supply ingredients

Government’s overall support to increase the export of the product, from reducing trade barriers to financing R&Ds.