Samsung

Giant in Transition

Samsung - lede

In South Korea, when people talk about big business, they mean big: sales of the five largest companies are roughly equivalent to two-thirds of South Korea’s gross domestic product. None of them is bigger than Samsung, a collection of about 70 companies whose revenues are about equal to a quarter of GDP, a scale that has led some to refer to South Korea as “the Republic of Samsung.” Like the country’s other family-run, government-supported conglomerates known as chaebol, Samsung has grown by fast following, a strategy that has made it the world’s largest electronics company by revenue and South Korea the world’s fifth-largest exporter. Samsung in 2011 became the leader in smartphone sales, setting off a titanic series of patent fights with Apple. Samsung is trying to shake that copycat image. It’s also facing a generational transition, as are many other chaebol. Its ruling family is trying to use the moment to tighten its control over the company. That’s being challenged by a prominent American investor.

The Situation

Samsung is in the midst of a wideranging restructuring that was set in motion after Lee Kun Hee, Samsung’s chairman and South Korea’s richest man, suffered a heart attack in May 2014. Since then, Lee’s heir apparent, his only son, Lee Jae Yong, has been revamping the conglomerate’s tangled ownership, partly to meet government criticism of chaebol and partly to allow the younger Lee to cement the family’s control. The move, however, prompted a lawsuit by billionaire activist investor Paul Elliott Singer, who charged that the company was shortchanging shareholders. In a move widely  to Samsung and other chaebol, the welfare ministry’s National Pension Service, the country’s largest investor, objected to a similar merger of two companies dominated by a single family. A South Korean court, however, dismissed Elliott’s complaint that the price was set unfairly. Shareholders approved the restructuring move, though the vote was close. Meanwhile, Samsung is also facing tougher competition in mobile phones, which the elder Lee had made the company’s focus. Chinese rivals with cheaper, feature-packed devices like Xiaomi are gaining in emerging markets, while Apple has added oversized phones to its lineup as well as boosting iPhone sales through a partnership with China Mobile.

Source: Strategy Analytics
Source: Strategy Analytics

The Background

Lee Kun Hee became chairman of Samsung in 1987 upon the death of his father, founder Lee Byung Chull. Samsung began with 40 employees in 1938, exporting rice, dried fish, noodles and produce before diversifying into insurance, sugar, paper, textiles, property development, and electronics and appliances. In the 1960s, dictator Park Chung Hee turned to the chaebol to spur export growth: Companies such as Samsung and Hyundai were protected by steep tariffs and encouraged through government financing to branch out and develop heavy industry, chemicals, shipbuilding and construction.  The strategy led to rapid export growth but backfired in the 1997-98 Asian financial crisis, when the huge, debt-laden chaebols helped trigger a spate of bank failures. Many trace Samsung’s rise in electronics to the day Lee made a bonfire out of shoddy handsets and proclaimed the slogan of “Quality First.” The company went on to become the world’s largest manufacturer of smartphones, TVs and memory chips, and Lee became the country’s richest man, worth an estimated $12.1 billionIn the convoluted world of chaebol, Lee’s family has been able to retain control of Samsung while owning a combined stake estimated at less than 2 percent of shares.

Source: Korea Fair Trade Commission
Source: Korea Fair Trade Commission

The Argument

While the chaebol helped make South Korea an economic success story, many politicians and investors argue that the system is a cultural relic poorly suited to the 21st-century economy. The shares of chaebol-linked companies trade at lower multiples of earnings than their peers in the U.S., Europe or Japan (a phenomenon called the Korea discount) because of concerns over cronyism and cross-ownership — the focus of  Singer’s lawsuit. Park Geun Hye, the current president and the daughter of Park Chung Hee, has clamped down on deals in which chaebol steer business to companies controlled by friends or relatives, and has banned further cross-holding of shares. The sheer size of Samsung and other giants raises concern they’ll leave no room for the small ventures seen as engines of innovation in other countries. Younger, Western-educated chaebol executives promise to make their companies nimbler. Even so, the immense political clout of the chaebols may make them resistant to change. In 2008, Lee was convicted of evading taxes on about $5 billion, only to receive a presidential pardon a year later.  Despite Park’s push on corporate governance, she, like her father, looks to them to drive growth. It’s possible, though, that the combination of political pressure, challenges by more investors and generational change might lead to some more shareholder-friendly restructurings by Samsung and the nation’s other giants.

The Reference Shelf

  • A profile by Bloomberg Businessweek of Samsung and Lee Kun Hee.
  • This Bloomberg News article sorts through the complexities of chaebol ownership in light of the expected generational transition — the chaebol “timebomb.”
  • A Vanity Fair article on the patent war between Apple and Samsung.
  • In 2010, the Economist surveyed “Korea’s Industrial Giants,” with a focus on Samsung.
  • A book, in Korean, called “The Samsung Way,” by two business management professors at Seoul National University based on a Harvard Business Review paper. Publication of an English translation is scheduled for August.

Bloomberg TV: The Silent, Omnipresent Leader Controlling Samsung

First Published on May 29, 2014

To contact the writer of this QuickTake:

Jungah Lee in Seoul at jlee1361@bloomberg.net

To contact the editor responsible for this QuickTake:

John O'Neil at joneil18@bloomberg.net