The crisis of Samsung is still a mystery, as nobody knows who has started it. But it’s seen who has to deal with it now – Lee Jae Yong is still in shock after a scandal featuring the company’s exploded phone.
In fact, he was responsible for that from the very beginning, as he was the main person at the South Korean conglomerate for a certain amount of time. His responsibility is proven by his promotion to the main board that took place last week.
This promotion has also put in order the continuity of the company that suffered a lot lately. 48-year old Mr Lee is the Samsung founder’s grandson, and his father was also running the company once. Mr Lee Kun Hee made Samsung a high-quality brand and one of the world’s leaders in technologies. Unfortunately, Mr Lee was forced to resign in 2008 because of a slush-fund scandal. Though he reclaimed his title as chairman, he never rejoined the board.
Worse was to follow in May 2014, when Mr Lee Sr suffered a severe heart attack. Now aged 74, he has been in no condition to run the company since then, is rarely seen in public and has been the subject of increasingly morbid rumours about his health. The norms of Korean culture mean that Mr Lee Jr cannot take on the role of chairman while his father is alive.
Not that he hasn’t been busy. Since becoming vice-chairman of Samsung Electronics in 2014, the younger, Harvard-educated “crown prince” has tried to eradicate the top-down, militaristic corporate culture that has long hamstrung Samsung.
“The corporate culture at Samsung has been enormously successful,” Geoffrey Cain, a journalist based in Seoul, said, “but they have been trying to reform their culture for years. There is a huge conflict between the cosmopolitan Samsung that the company wants to be and the militaristic Samsung, which is where the company has come from.” Under the present system, he said, “if you are not from headquarters, you don’t matter”.Workers are unwilling to point out problems, fearing retribution from seniors who do not wish to rock the boat.
In March, the company launched an initiative to move towards a model where workers have more autonomy. “We aim to reform our internal culture, execute as quickly as a start-up company and push towards open communication,” it said.
Then, in October, Samsung Electronics’ priorities changed again. The company was forced to discontinue sales and production of its Galaxy Note 7 phone after reports that the Note was spontaneously combusting. It said that it would recall 2.5 million of the phones and prepared to take a billion-dollar hit to profits.
True, the Note is a niche line for Samsung, whose upmarket phones are in the Galaxy series. The debacle, therefore, can be seen as an isolated incident, or as part of a bigger, broader problem. With the Galaxy 8 due out early next year, Samsung will have to act quickly to reassure consumers.
“The danger for Samsung is that the Note 7 recall affects sales of other models in its portfolio,” Tim Coulling, of Canalys, an industry analysis provider, said. “In this case, several vendors, including Apple and Huawei, will see higher-than-expected demand.”
Failing to act is unlikely to lead to an existential crisis. Samsung is a giant, far bigger than the electronics division best known for its mobile phones and memory chips. It includes Samsung Heavy Industries, a shipbuilder, the construction businesses Samsung Engineering and Samsung C&T, Samsung Life Insurance and Samsung Everland, which operates the Everland Resort theme park.
But it is also a target for an impatient public and a frustrated government, tired of the economic dominance of South Korea’s large family owned businesses, and increasingly vocal retail shareholders and activist investors, none of whom will have been impressed by the most recent set of numbers that really matter. Samsung Electronics’ results for July to September, released last week, showed that profit had fallen by 30 per cent overall and by 94 per cent in the mobile division.
Other sectors, such as displays and semiconductors are performing strongly, however, and it maintained its guidance for the full year. A sign, presumably, that Mr Lee and his company are determined to put their present troubles behind them. The question, though, is how.
Chaebol is increasingly being lost in translation
Samsung matters in South Korea. Seen from overseas, it is the country’s corporate flag-bearer, its star name on the global stage. From a domestic standpoint, it is even more important, boasting sales equivalent to about a fifth of South Korean GDP.
Yet it is also among a cabal of multinationals being increasingly challenged on home soil. The chaebols, or family controlled conglomerates, are a curiously South Korean phenomenon. The likes of Hyundai, Daewoo, LG and Hanjin have come to dominate the country’s economy, but concerns are growing that they are too powerful.
Voters punished the business-friendly President Park Geun Hye in parliamentary polls this year and the national assembly is now pushing for higher corporate taxes and a crackdown on chaebols, making reform at Samsung all the more important.
That, though, will not be easy. By many definitions, Samsung is not really a corporation at all. It grew out of the turbulent postwar period in east Asia, when governments planned their economies, supported centralised conglomerates and paid little attention to corporate governance.
In addition to its mobile phones and televisions, it builds ships, sells insurance and property, and operates a theme park. At home it is ubiquitous but not legally a single entity.
Cross-shareholding holds together the loose network of companies that make up Samsung. Each is ostensibly independent, but directly answerable to the Lee family.
Critics say this has kept the company’s different strands from realising their true value. “Samsung Electronics is a leading global technology company that has for years failed to deliver true shareholder value,” Elliott Management, the American activist hedge fund, wrote in a recent presentation. It added that Samsung should move to a holding company structure to increase transparency and improve governance.
Elliott also thinks that Samsung Electronics, which gets around half of its revenue from smartphones, should be demerged. It claims that shares in Samsung Electronics, “despite its impressive business achievement”, trade at a discount of up to 70 per cent of its value when compared to its closest peers, which include Apple.