Wednesday, April 23, 2014

Practical Alliances: When Two Rivals Ally to Counter a Third

The news came out a few days ago that Samsung and Globalfoundries had initiated a collaboration that would make Globalfoundries users of Samsung developed production technology for the latest generation of 14 nanometer chips. This is interesting news because such production technologies are important sources of competitive advantage in chip production, and there is little indication that Globalfoundries were failing in their efforts to generate their own 14 nanometer technology. They still decided to abandon it and use Samsung's technology.

The motivation is actually different. With both companies using the same technology, they can make identical chips. That can be convenient for customers who want multiple sources of their chips and who order many enough chips that they have some ability to negotiate. Apple would an example. So, the alliance is helping their customers by giving better service. But, the service improvement in this case is actually that Samsung and Globalfoundries are giving away power by making it easier for the customer to set up competition between them. What exactly would be the benefit of that? Well, the answer is simple. Neither Samsung nor Globalfoundries is the largest chip producer (foundry) in the world – Taiwan Semiconductor Manufacturing Co (TSMC) is bigger. Apple is known to have increased interest in TSMC because they see the irony of fighting Samsung in the smartphone market and courtrooms while depending on their chips. And, the competition does not stop there. Intel also can make 14 nanometer chips, and is known as a pretty competitive firm.

So, to understand this alliance it is necessary to see the entire market, and to see how it is a way for two firms to gain some advantage over the competition. In many ways Samsung and Globalfoundries are not ideal alliance partners – if you follow the analytical methods of our Network Advantage book you would find problems with the match between them especially related to whether they really will have shared interests and goals in the long term. But, in the short term TSMC, and Apple, is a big enough problem for them that they are willing to collaborate. This will be an interesting alliance to watch, especially in the long term.

Clark, Don. 2014. Samsung, Globalfoundries Agree to Adopt Same Production Process. Wall Street Journal, April 17 2014.