To managers of Samsung Electronics' sprawling television plant in Suwon, South Korea, it seemed like a no-brainer. During the depth of the country's economic crisis in early 1998, the Korean won was wallowing at 1,800 to the dollar--less than half its value of a year earlier. That provided a golden opportunity to throw production lines into overdrive and flood export markets with TVs while the currency was still cheap.
But rather than giving the green light, Samsung Electronics President Yun Jong Yong delivered his eager managers a rebuke. Just a few months earlier, he had shut down the Suwon plant for two months because so many unsold TVs and other appliances had piled up in Samsung warehouses. The costs of carrying that inventory had been devastating to the company's balance sheets. Samsung wouldn't repeat the mistake. Declaring that "piling up inventory is a vice," Yun announced that henceforth, Samsung factories would only produce goods after orders were in hand and profitability assured.
Putting profitability before gross sales is basic business common sense in the West. But it was a radical concept at Samsung and other Korean industrial conglomerates, which for decades had been obsessed with export growth and setting production records. Now, Samsung Electronics managers hail Yun's profits-first decree as pivotal in a remarkable corporate comeback. "Shutting the TV plant sent a very strong signal to the staff," says Park Sung Chil, Samsung's director of supply chain management. The just-in-time approach to production has enabled Samsung to shave $3 billion in inventory costs and accounts receivable.
Yun is spearheading what may well be a revolution in Korean industry. Since he took the helm of the sprawling Samsung Group's electronics businesses in January, 1997, Yun, a 30-year company veteran, has been reversing many practices that have long characterized Korea's chaebol. Samsung Electronics has dramatically reduced its debts, sold or spun off dozens of assets unrelated to its core businesses, set up financial and managerial fire walls between itself and other Samsung companies, and cut a third of its workforce. And it is striving to abandon its dependence on cheap commodity products to focus instead on high-end goods employing innovative designs.
The ultimate aim is to guide the company into the global electronics elite. With core strengths in microelectronics, telecom equipment, PCs, and consumer appliances, Samsung is positioned in each major segment of the so-called "digital convergence" and aims to rank alongside the likes of Sony Corp. and Philips Electronics. In the coming years, Samsung plans to spin out a full range of Next Age products, from affordable digital televisions and "smart cards" loaded with movies and data to sleek wireless phones enabling users to access the Web, watch TV, and listen to music.
BUSINESS AS USUAL? The management transformation is hardly complete. And many chaebol critics warn that the lack of accountability to outside shareholders means the founding families behind groups such as Samsung could resort to business as usual once they are safely out of crisis. A new controversy flared in August, for example, after group chairman Lee promised to use $2.4 billion of his own shares in Samsung Life Insurance Co. to cover losses from his disastrous plunge into autos. It turned out that Lee had paid about $7.80 for his shares in the unlisted insurance unit, but claims they now are worth $609 apiece. When Samsung Motors' creditors objected, Samsung Electronics and other chaebol affiliates promised to make up the difference if the stock turned out to be worth substantially less. Samsung Electronics denies it did so at Lee's request, but critics see a warning. "Sure, Samsung has built up competence in its core businesses," says Korea University finance professor Jang Ha Sung. "The problem is that changes in its financial and business structures could be temporary without a change in corporate governance." What's more, Samsung's emphasis on goods developed in-house is risky at a time when agile rivals are outsourcing production and design.
But there's little doubt the improvement has been dramatic. After weathering a harrowing free fall in profits and sales that started with the 1996 slump in memory chips, Samsung Electronics is stronger than ever. This year, Salomon Smith Barney figures the company should post a net profit of at least $2.7 billion on a 24% increase in sales, to $22 billion. The results even account for a $700 million write-off of Samsung Electronics' investments in cars and failed U.S. computer maker AST Research Inc. "Samsung has been an exemplary student," says Lee Hun Jai, chairman of the Financial Supervisory Commission, which is overseeing Korea's corporate and financial overhaul.
Of course, a strong rebound in demand for Samsung's bread-and-butter product, dynamic random access memory (DRAM) chips, accounts for a good chunk of this turnaround. Since June, prices for 64-megabit DRAMs have surged from around $4 to $10. Samsung, one of the few big memory chip producers that kept investing in capacity through the down cycle, benefited the most, blowing past such rivals as NEC and Hitachi.
But memory chips are not the whole story. Although DRAMs probably will account for 45% of 1999 profits, other sectors also are coming on strong. Samsung Electronics has emerged as the world's leader in thin-film transistor flat-panel displays for computers, another sector where prices have leapt. Samsung's telecom division, bolstered by soaring demand at home for its $380 voice-activated SCH-A100 cell phone and a rising share of the U.S. cellular market, now ranks among the world's top six producers of wireless handsets. It also is the world's leading producer of computer monitors. All 15 of Samsung Electronics' main product groups, including the consumer appliance unit that had lost money for five years, are now in the black. That's a claim Samsung couldn't make even in the fat mid-'90s.
SMART FOCUS. Samsung Electronics' diversification mean its business is much better balanced than before the crisis. In 1995, memory chips accounted for 90% of corporate profits and half of all sales. They now account for about 20% of sales, with the rest spread more evenly among computer and telecom products. In addition, Samsung is making steady gains in nonmemory chips, where it badly lags U.S. and Japanese producers. The focus is now on chips used in Samsung's array of digital phones, TVs, cameras, and smart cards.
Samsung Electronics executives concede none of these vital changes would have occurred were it not for two disasters--the crash in memory-chip prices, followed in 1997 by Korea's financial collapse. The $3.2 billion profit in 1995, when 16-Mb DRAMs fetched $40 apiece, offset steady losses in many of the company's other businesses.
When DRAM prices plunged, Samsung Electronics realized that its reliance on a volatile commodity product "was a very, very risky strategy," says Yun. The company long knew it had to improve efficiency, restructure, and pare back its workforce. But even after newly elected Korean President Kim Dae Jung ushered in laws enabling chaebol to lay off workers, Yun adds, "emotionally, we couldn't do it."
Nor did Samsung Electronics seriously tackle its wasteful manufacturing practices. In TVs, Samsung was carrying up to three months of excess inventory by 1997. Not only was Samsung paying to finance the inventory, but also prices for its electronics products were dropping sharply. They often were worth 30% less by the time they were sold. Back then, though, such considerations didn't matter. "In the past, we were evaluated by unit manufacturing cost alone," explains supply-chain director Park. "So we produced and produced and produced, not caring whether or not it was sold."
The big push for change came in mid-1998, when global oversupply and plunging prices in a variety of goods deepened Samsung's losses to an alarming level. Deflation had grown so intense in computer monitors, for example, that prices were dropping by 1% each week.
RECKLESS BORROWING. At the same time, Samsung Group was under intense public fire. Chairman Lee Kun Hee, son of late group founder Lee Byung Chul, had forced Samsung Electronics and other profitable units to subsidize ill-considered investments, such as Lee's $3.5 billion plunge into Korea's already glutted car industry in 1994. Also, the chaebol were widely blamed for causing Korea's economic collapse with reckless borrowing. In 1997, for example, Samsung Electronics' $18 billion in long-term debt was triple its equity. In 1998, the government ordered the chaebol to slash their debt levels to 200% of equity by yearend--or get cut off from new bank credit.
Chastened, Chairman Lee handed over authority to restructure group companies to executives such as Yun. So far, Samsung Electronics has sold or spun off 57 businesses, from refrigerators and pagers to satellite receivers. It even sold all its golf club memberships and laid off 100 chauffeurs--then set them up in their own company. It now contracts the chauffeurs' services. The asset sales, plus equity offerings and lower inventory costs, have enabled Samsung Electronics to slash long-term debt by $10.8 billion, reducing debt to under 100% of equity.
Another big departure from the past is ending lifetime employment. Samsung used to keep Korea's militant unions at bay by paying its people well and providing job security. But since 1997, it has cut the number of employees from 84,000 to 54,000. "That was unthinkable in old Samsung culture," exclaims Park Kyung Min, chief investment officer at SEI Asset Korea Capital Management Co. The payroll cuts saved around $430 million.
The restructuring moves helped persuade bankers to keep Samsung's credit lines open at a critical time in the semiconductor cycle. Yun had bet that the market for memory chips was ready to rebound in 1999. He calculated that Japanese competitors were too financially weak to keep up with costly new silicon wafer plants. So Samsung continued to build state-of-the-art production lines capable of making 64-MB chips. When the cycle turned to boom again, Samsung was one of the few DRAM suppliers with adequate capacity. In September, the price for the chips reached $20. Korea's weak currency, meanwhile, gave Samsung a price edge. "Now, the winds of consolidation are sweeping through the industry, and Samsung is neck-and-neck with Micron Technology," says Peter Wolff, ING Barings' managing director for technology research.
Cost savings from better supply-chain management and corporate reengineering have played an equally big role in Samsung's turnaround--and one that may be more lasting. By ending the sales-at-all-costs approach and implementing modern management methods, Samsung Electronics has halved inventory from an average of $3.6 billion in 1997.
By linking up all its production, marketing, and distribution units with a single computer network, Samsung Electronics now says it can deliver goods to 95% of its Korean clients within five days of an order. "Samsung has by far the most advanced supply-chain system among Korean companies," says Hwang Seong Young, a Seoul-based director for SAP, the German software firm.
Samsung's next goal is to rank alongside the top consumer-electronics giants of Japan and Europe. In handheld wireless devices, Samsung is challenging Nokia and Ericsson. And it aims to rival Sony, Philips, and Matsushita Electric in Digital Age home electronics. After trying to catch up for the past two decades in analog technologies, says Chin Dae Je, Samsung Electronics' chief technology officer, "we are on the same starting line as far as digital products are concerned."
SIGNIFICANT STRIDES. Samsung Electronics has made the biggest strides in cellular phones. In Korea, the company expects to sell around 7 million wireless handsets this year--roughly one for seven Koreans. It already is marketing the new SPH-M100 phone, which has a flip-up touch screen that allows users to send e-mails and access English/Korean dictionaries, the Bible, Buddhist songbooks, and electronic games. In early December, it released a prototype of a cell phone with a 1.8-inch TFT liquid crystal display and a built-in video receiver that can play TV programming. And it's marketing a 50-gram phone, billed as the world's lightest, that is worn like a wristwatch and takes voice commands. After launching these products in Korea, the plan is to export them next year. The focus on design and technology "illustrates our departure from an emphasis on quantity," says Bae Byung Kwan, chief executive of Samsung Electronics' telecom division.
Samsung Telecom already has made significant strides in the U.S. Thanks largely to a partnership with Sprint PCS, with whom it collaborates out of a design and marketing center in Dallas, Samsung Telecom has grabbed 19% of the U.S. market for handsets based on the CDMA standard. A particular hit is the SCH-3500 model, a silver $149 set that dials numbers on voice command. "They come out with more models faster than others and with more features," says Andrew Sukawaty, president of Sprint's personal communication systems business. And because Samsung test markets its products in Korea, "when they hit here, we have a product that's absolutely ready to go." Samsung's exports of cellular handsets have quadrupled this year, to 10 million units, and it has struck up new partnerships in five European countries.
Samsung is making a similarly bold bet on digital TVs, currently a niche market in the West because the average sets cost around $7,000. In contrast to Japanese companies like Sony and Matsushita, which are focusing on high-end sets, Samsung is launching a full range, hoping to grab 10% of the market when prices fall within reach of middle-class families.
Because the markets and technologies in digital home appliances are evolving so rapidly, it's too early to tell whether Samsung Electronics will emerge a winner. Kimihide Takano, a Tokyo-based electronics analyst with Dresdner Kleinwort Benson Asia, warns that the consumer electronics sector is poised for a shakeout that could even capsize established Japanese names. To survive, he says, a company "won't be able to just churn out commodity products." That is a major reason why Samsung Electronics is now plowing much of its profits from DRAMs into non-memory. By producing cutting-edge chips with telecom, graphics, and processing capability in-house, executives hope the company's digital appliances will have an edge over producers who depend on outside suppliers for key components.
Samsung Electronics clearly has its work cut out. Whereas it can dominate the DRAM industry by being a leader in manufacturing technology and having enough capacity, success in central processors and specialty logic chips depends much more on innovative designs. "The Koreans have never been great in coming up with creative ideas," says chip analyst Koo Bon Jun of Good Morning Securities Co. in Seoul.
But Samsung Electronics executives think they're making progress. Alarmed at the DRAM collapse in 1997, the company moved many of its key semiconductor managers, including chief technologist Chin, into nonmemory research. This year, the division hopes to earn up to $200 million on sales of $1 billion, with 50% sales growth expected in 2000.
"FORMIDABLE COMPETITOR." By next year, the nonmemory unit hopes to supply half of Samsung's internal needs for telecom chips. It recently began making its own chip sets for CDMA phones; it used to purchase key chips from Qualcomm Inc. Samsung also is among a handful of home electronics companies making chip sets for digital TVs. And within six months, it will start marketing Alpha microprocessors under license from Compaq Computer Corp. Although the 1-gigahertz Alpha chips can process four times as much data as Intel Corp.'s 550-megahertz microprocessors now used in high-end PCs, they command a small market share. But in part, Samsung Semiconductor is producing them to gain knowhow. Whereas Samsung was years behind U.S. and Japanese chipmakers in nonmemory in 1997, "we have narrowed the gap to several months now," boasts Chin.
As with digital appliances, trends in chip technology are moving too rapidly to predict whether Samsung can emerge as a winner. But with Samsung's strength in memory chips as well as in wireless telecom, says Carl R. Johnson, president of Irving (Tex.) chip consultant Infrastructure Inc., "I pretty much assume they will succeed" in some nonmemory areas. Kenji Tokuyama, who will head NEC's new DRAM venture with Hitachi, agrees. "This is a company that is investing in technology and new equipment to stay ahead," Tokuyama says. "We regard it as a formidable competitor."
The bigger question may be whether Samsung Electronics will continue to maintain its financial discipline long enough to fulfill Yun's vision, especially if the government's chaebol watchdogs let down their guard. Insider practices and a single-minded obsession with expansion are traits deeply ingrained in Korea's industrial psyche. But the memories of Korea's economic catastrophe will be just as hard to erase. If Samsung Electronics continues to win applause for profits and innovation--rather than size--it could have plenty of motivation to finish the job of reshaping a sprawling conglomerate into a focused, truly global enterprise.