Samsung’s Rebounding Lee Sees Product Crisis With Surging Sales

Choi Gee Sung, president and CEO of Samsung Electronics Co.
Choi Gee Sung, president and chief executive officer of Samsung Electronics Co., arrives for morning sessions at the 28th annual Allen & Co. Media and Technology Conference in Sun Valley, Idaho on July 7, 2010. Photographer: Matthew Staver/Bloomberg

About an hour south of Seoul, bulldozers are demolishing the last vacant factories at Samsung Electronics Co.’s Suwon campus, erasing signs that South Korea’s most valuable public company once made its headquarters in a smoke-fuming industrial complex.

In their place are ice cream and pizza parlors, research labs and open space that’s been groomed as parks. Engineers in T-shirts play basketball on this sunny June morning before heading to their choice of nine cafeterias for a free lunch featuring Korean, Indian and Western dishes prepared to please employees from 50 countries.

Women, who until recently were forced to wear conservative business suits and were absent from top jobs, stroll through gardens in slacks and formerly banned open-toed shoes, Bloomberg Markets magazine reports in its October issue.

The 28,000 engineers, designers and marketers who arrive by bicycle or one of 556 company-funded buses at this bustling center could be in Silicon Valley or a technology park in India except for a sign at the eight-lane entrance: Samsung Digital City.

The campus, along with required English lessons for managers and research into everything from solar cells to humanoid robots, are part of Samsung Electronics’ mission to vault itself into the ranks of the world’s great innovators and become one of the top five brands.

Apple, Google, Facebook

“The global list of top companies is being replaced by the likes of Apple, Google and Facebook,” says Choi Gee Sung, 59, who -- in a partial nod to the recently relaxed dress code -- is tieless in his navy-blue pinstriped suit and white shirt with light-blue stripes for his first interview since becoming chief executive officer in December. “Our job is to prepare the organization for the next generation so it can continue to evolve into a truly great company. We need to be on our toes.”

To be successful, Samsung -- a company with a history of top-down managers and obedient employees -- will need to shift strategy, a process for which it has few guideposts.

“Samsung today is in an incredible position to create the evolution of consumer electronics,” says Shaun Cochran, who heads Korean research at brokerage CLSA Asia-Pacific, which rates Samsung Electronics a “buy.” “The problem is, in a place like Apple, it’s a culture of trying to be creative as a matter of who they are. At Samsung, the way of thinking has always been, ‘We can do it faster, better and cheaper.’”

Going Global

Samsung Electronics has already taken giant steps from its early days as a copycat appliance manufacturer. Now, as a consumer electronics behemoth, it has expanded beyond South Korea and the nation’s industrial, conglomerate-run shipyards, steel mills and auto plants.

In the past decade, Samsung Electronics has rocketed past Sony Corp. as the largest maker of flat-panel TVs. It has edged out Hewlett-Packard Co. in color laser printers that scan, fax and copy. It’s also the biggest in other technology-dependent areas such as liquid-crystal-display TVs and computer monitors.

No. 2 in mobile phones, Samsung is pushing the Galaxy S smartphone to challenge Apple Inc.’s iPhone and narrow the gap with leader Nokia Oyj. Samsung claimed a 22 percent global mobile-phone share in the first quarter, up from 14.4 percent in 2007, when it overtook Motorola Inc., market researcher Strategy Analytics says.

All of this gear has helped Samsung Electronics quadruple annual revenue to 139 trillion won ($116 billion) in the 10 years that ended in 2009. During that time, Samsung Electronics shares rose 10-fold.

‘Buy’ Ratings

Since Choi became CEO on Dec. 17, the shares rose 1.4 percent as of Aug. 30 after peaking at a record 870,000 won per share on April 5. Thirty-seven of 38 analysts who track the stock rate it a “buy.”

The company is aiming to increase revenue again -- this time more than tripling it from 2009 to $400 billion by 2020.

Choi, under the direction of reclusive Lee Kun Hee, 68, son of the founder of parent Samsung Group and now chairman of the electronics unit, is driving Samsung’s expansion into solar batteries, medical diagnostic tools and biopharmaceuticals.

“When other global companies hesitate, we must move ahead decisively to take this opportunity,” Lee told executives on May 10, according to a statement in which Samsung Group unveiled plans to invest 23.3 trillion won by 2020 in five new businesses, including light-emitting diodes and batteries for hybrid cars. “This will also benefit the country’s economy.”

Branching Out

Samsung Electronics, which supplies 60 percent of its parent’s revenue, will probably invest about 9.3 trillion won of that total.

That’s on top of the record 26 trillion won it’s spending this year -- up 61 percent from 2009 -- to increase manufacturing at its mainstay semiconductor, display, television and mobile-phone units and on research for the next wave of electronics.

“We are facing a real crisis,” Lee said in a March statement announcing his return to the chairmanship. “Many global companies are experiencing enormous challenge and uncertainty of the future, and Samsung is no exception. In 10 years, the majority of products that represent Samsung may no longer exist. We must have a new start. There is no time to hesitate.”

Samsung is trying to inspire employees to take up Lee’s call to innovate by softening a culture that encourages obedience over creativity.

Softening Culture

The company began letting workers wear casual clothes, instead of suits, in 2008. Last year, it offered flexible work time as long as employees put in eight hours a day.

The company has eased its boot camp for new recruits, which once woke them up with a blaring alarm for a 6 a.m. jog. It shortened the training to five days from 27 days in the early 1990s. And it is hiring more female and foreign workers.

“We are at an inflection point,” says Choi in a 37th-floor meeting room overlooking the 425-acre (172-hectare) campus. “We want to transform ourselves to create new value.”

Not everyone is sure transformation is possible.

Samsung’s strengths -- single-mindedness, swift execution and unquestioning employees -- are weaknesses in a creative environment, says Chang Sea Jin, a business professor at the National University of Singapore.

“Can Samsung really push against the inertia of decades of culture and become a radical innovator? Perhaps. Can they do that while continuing to excel at what they’re doing now? I doubt it,” says Chang, who chronicled the rise of Samsung and fall of Sony in “Sony vs. Samsung” (John Wiley & Sons, 2008).

Software Innovation

Samsung has grown by studying rivals and then improving manufacturing and design. Now it has to imagine totally new products and create them from the ground up.

“Leading radical innovation in the tech world today requires strength in software, not just hardware,” says David Yoffie, a professor at Harvard Business School in Boston. “Software innovation requires a very different culture than a traditional consumer electronics or semiconductor company.”

Analyst J.J. Park at JPMorgan Chase & Co., who has the only “hold” rating on Samsung Electronics, says earnings may drop because of an oversupply of dynamic-random-access memory chips, the most common type of computer memory. Competition among TV makers is also heating up.

Park’s worries haven’t panned out yet. Second-quarter net income jumped 83 percent to a record 4.28 trillion won, fueled by memory chips.

Korean Economy

Samsung Electronics and other top units of family-owned industrial groups, or chaebol, such as Hyundai Motor Co. and LG Electronics Inc., are feeding an already thriving South Korean economy.

The nation’s global competitiveness rose by four notches to 23rd in the World Competitiveness Yearbook for 2010 published by the International Institute for Management Development in Lausanne, Switzerland. The institute tracks efficiency and economic performance. For the first time, South Korea outpaced Japan, which ranked 27th.

“The Koreans have an industrial ecosystem that is geared toward being very productive,” Cochran of CLSA says. “For one country to take a market share from another country takes decades. Korea has been able to do that.”

Encouraged by an improving global economy and soaring overseas shipments of semiconductors and cars, the central bank increased its 2010 growth forecast for South Korea to 5.9 percent in July from 5.2 percent in April.

Credit Rating

Moody’s Investors Service raised the nation’s credit rating to A1 from A2 in April. Korean exports surged 33 percent to $263 billion in the first seven months of this year.

“South Korea’s exports are booming, and Samsung Electronics personifies that,” says Oh Suk Tae, a senior economist at SC First Bank Korea Ltd. Oh has raised his 2010 GDP forecast twice this year -- to 6 percent in early July. “Korea’s sandwich position between advanced Japan and rising China turned out to be a good thing because it allowed Korean companies to offer products that optimize quality and price.”

South Korea’s long-standing love-hate relationship with its chaebol hasn’t moderated.

Supporters praise the conglomerates for pulling the country out of the ashes of the 1950 to 1953 Korean War and transforming it into the world’s 13th-largest economy.

Yet even President Lee Myung Bak, in what some analysts described as a populist move to shore up voter support, said in July the chaebol must help the nation’s struggling smaller companies as conglomerates rack up profits.

Smaller Firms Struggle

Lee, who himself is a former CEO of Hyundai Engineering & Construction Co., was elected in 2007 after campaigning for pro-business policies.

The company responded by announcing a plan on Aug. 16 to create a 1 trillion won fund together with Industrial Bank of Korea to support its subcontractors.

Samsung Electronics has been caught up in a price-fixing controversy.

European Union regulators fined nine memory-chip makers -- including Samsung, Hitachi Ltd., Infineon Technologies AG and Toshiba Corp. -- a total of 331 million euros ($420 million) in May for conspiring to fix prices.

Choi says the company set up a compliance team to improve employee training and corporate accountability. “Samsung accepts the findings of the commission’s inquiry and is committed to conducting this business operation in full compliance,” the company said in a May statement.

Founder’s Rise

Samsung Group’s founding family, which went on to start Samsung Electronics, has never loosened its grip on the company whose name means three stars.

Lee Byung Chull opened his first business, a forerunner of today’s Samsung, with 40 employees in 1938 when Korea was under Japanese occupation.

Lee’s company -- like South Korea’s other conglomerates -- expanded with government financing designed to build the country’s shipmaking, car, steel and oil-refining industries. Lee moved into transportation, real estate, brewing and insurance and opened Samsung Electronics in a Quonset hut in 1969 to make black-and-white TVs. Today Samsung Group has 67 units.

Employees who have questioned the family have hit roadblocks.

Kim Yong Chul, Samsung Group’s former top lawyer, alleged in 2007 that the group ran a slush fund to bribe government officials, prosecutors and journalists.

Tax Evasion

The Supreme Prosecutors’ Office said in April 2008 that it had found no evidence of bribery. It did charge Chairman Lee with evading 4.5 trillion won in taxes and breach of duty for causing losses at information technology services provider Samsung SDS Co. by selling bonds to his son, Lee Jae Yong, at artificially low prices.

Lee was convicted and fined 110 billion won for tax evasion and breach of duty for causing the loss. He quit as chairman of the group and Samsung Electronics in April 2008. The Seoul High Court suspended his three-year prison sentence in August 2009, and he served no jail time.

Four months later, President Lee pardoned the former chairman, a member of the International Olympic Committee, so he could help Korea’s bid for the 2018 Winter Games. Lee returned to Samsung in March, three months after his son had been promoted to chief operating officer.

‘Chaebol Dynastic Model’

“Investors are correct to worry about Samsung’s future, if it continues to follow the chaebol dynastic model,” says Henry Seggerman, president of New York-based International Investment Advisers, which manages the $25 million Korea International Investment Fund.

Mark Mobius, who oversees more than $35 billion in emerging-market stocks at Templeton Emerging Markets Group, isn’t worried about Lee’s comeback.

Foreign investors, such as Templeton, held 49 percent of Samsung Electronics’ common stock at the end of June. Lee and his family owned 4.69 percent. Samsung affiliates, local institutions and individuals held the rest.

“There’s nothing wrong with family management,” Mobius says. “Chairman Lee showed good leadership and business insight in the past as he directed the company to become a world-class electronics manufacturer.”

Mobius says he may buy more shares if Lee meets one condition: “He must consider shareholders first when there’s a case that conflicts with family interests,” Mobius says.

Interim Dividend

Samsung Electronics in July announced a 5,000 won interim dividend, 10 times more than the 500 won it paid in each of the past five years. Lee’s stock holdings were estimated at 8.57 trillion won as of Aug. 30 by, which tracks rich Koreans.

Lee, a high-school wrestler who was treated for lung cancer in 2000, is rarely seen in public.

He runs the company by conferring with top executives who deliver his messages through Samsung’s broadcast and computer networks. When Lee was enraged by poor quality in 1993, he urged employees to “change everything, except your wife and children.”

The next year, he ordered executives to recall faulty phones. When 150,000 units came back, he invited workers to a bonfire where they burned all they had recalled, valued at $15 million, according to Samsung.

In a similar push, Lee set the tone for Samsung’s innovation drive in 2006.

New Journey

“Samsung has long been chasing leading corporations, but now it is in a position to be chased,” he said in his New Year’s message. “We have to start a difficult journey as a pioneer.”

The Samsung Advanced Institute of Technology, or SAIT, which founder Lee had conceived and the younger Lee started in 1987, was prepared for this mandate.

Researchers in a marble building nestled among Samsung’s semiconductor plants in Kiheung, outside Seoul, explore technologies the company bets will become mainstream in 10 years.

The institute has a $300 million annual budget, or about $230,000 for each of the 1,300 researchers. They can tap into a cluster of 1,830 computers to simulate everything from the efficiency of a thermoelectric material to convert waste heat into electrical energy to the flexibility of a film called graphene, which may allow Samsung gadgets to fold.

On top of that, Samsung Electronics is increasing the number of employees who work in research to 50,000 from 44,000 this year as it spends 8 trillion won on R&D. These researchers, a quarter of Samsung Electronics’ 188,000 employees, work at 18 centers around the globe.

No. 2 Patent Winner

The company trailed only International Business Machines Corp. in U.S. patents last year, getting 3,611 to beat Microsoft Corp. and Canon Inc., Wilmington, Delaware-based IFI Claims Patent Services says.

“What I saw in Samsung was a spirit more like what we used to have in large U.S. corporate research labs decades ago,” says Ben Goertzel, a Washington-based author of eight books on intelligence and other topics who lectured at SAIT in November. “Samsung did more than what’s really targeted to their immediate products.”

Goertzel says he was wowed by a robot maid that Samsung hopes to commercialize.

Samsung Techwin Co., the security-camera-making unit of Samsung Group, has developed a machine-gun-equipped sentry robot and is working with South Korea’s defense ministry for possible deployment to guard the demilitarized zone between North and South Korea.

Today’s innovation drive dates to the early 1990s.

Turning Point

After the elder Lee died in 1987, control fell to Lee Kun Hee, his third son and current chairman of Samsung Electronics. While flying to Frankfurt in June 1993, the younger Lee read an evaluation by Japanese adviser Shigeo Fukuda that blasted Samsung for having no concept of design, according to Samsung. Lee ordered executives to Frankfurt on June 7 and demanded that they focus on quality and design.

That day, Japanese software engineer Ryozo Yoshikawa says he got a call from one of the executives in Frankfurt.

In fluent Japanese, the Korean manager said Samsung was in a crisis and Lee wanted to meet with Yoshikawa. The two had hit it off five years earlier in Tokyo when they discussed technology until 5 in the morning, Yoshikawa says.

“He looked as though he’d aged 30 years,” says Yoshikawa, recalling their second meeting, also in Tokyo, as he sips iced tea at a Tokyo hotel bar. “The chairman just sat there in silence. Finally, he put his fists on the table, bowed and said, ‘Please help me.’ I still remember that. The chairman was asking for my help.”

‘An Emperor’

Yoshikawa, now 70, joined Samsung Electronics as managing director in 1994. Yoshikawa says Lee never spoke to him again, but it was clear he wielded power like an emperor.

“When he came to the company, all work would stop,” Yoshikawa says.

He also remembers Lee’s foresight.

“What was so incredible about the chairman was that he was always thinking 100 years ahead,” Yoshikawa says.

As early as 1993, Lee told Samsung to poll people in emerging markets to find out what products they wanted. The same year, Lee told Yoshikawa that Japan’s economy was headed for trouble, something Yoshikawa didn’t yet see.

3-D TV

Lee’s foresight extended to technology Samsung is employing in today’s electronics. On this June morning, as soccer’s World Cup kicks off in South Africa, some 250 workers under signs that read ‘Quality Is First’ are building a product that’s been a long time coming: three-dimensional TVs.

These televisions use light-emitting diodes, which consume 40 percent less power than typical LCD displays.

Each employee works in a cell, plugging components into a circuit board and swiping identification cards when they’re done so Samsung can track how the board performs.

Several workers show off their zero-defect records with a yellow flag on their workstation. Automated vehicles, the size of scooters, move the products to be packaged for shipment.

Samsung researchers began exploring technologies for 3-D TVs 10 years ago. They figured out how to change two dimensions into three in real time, says Yoon Boo Keun, president of the visual-display division.

“We used about 5 billion different conversion technologies to get the optimum depth from 2-D to 3-D,” says Yoon, a 32-year veteran nicknamed Mr. TV. “It was a result of years of research and hard work.”

Times Square Launch

Yoon introduced Samsung’s full high-definition 3-D LED TVs at New York’s Times Square with “Avatar” director James Cameron on March 10, ahead of all rivals. Cameron filmed the Black Eyed Peas’ performance in 3-D at the event.

“When you look back 10 years from now and everything you see is in 3-D, you will be able to say, ‘I was there. I was there in the center of the whole wide world when the future began,’” Cameron said at the time.

Yoon, 57, reviews Samsung’s global TV production, inventory and shipments in real time from six monitors in his office. He raised his 3-D TV sales target for 2010 to 2.6 million from 2 million earlier this year and expects to sell 45 million to 50 million flat-panel TVs, securing Samsung’s No. 1 position for a fifth straight year.

CEO Choi says he constantly tracks global inventory because prices of Samsung products can fall 40 percent to 50 percent a year -- an average of 1 percent a week.

‘Further Improvement’

On his desktop computer, he opens Samsung’s proprietary supply-chain management system that shows the company has 1.8 weeks of global personal-computer inventory. “There’s always room for further improvement,” he says.

Samsung’s next battle -- with Apple -- is looming. The Galaxy S smartphone has a 4-inch (10-centimeter) screen, bigger than the iPhone’s 3.5 inches. It runs on Google’s Android operating system and uses a Samsung-invented technology called Super AMOLED, or active-matrix organic light-emitting diode, to sharpen the display in sunlight.

Some 125 carriers in 90 countries, including the four biggest in the U.S., will offer the Galaxy S by the end of this year -- more than any phonemaker, Samsung says.

“It can compete with iPhone 4 among all the smartphones,” says Song Myung Sup, a senior analyst at HI Investment & Securities Co. in Seoul.

Samsung will introduce a 7-inch tablet PC in the third quarter to compete with Apple’s iPad.

Media Tablets

Bryan Ma, a Singapore-based analyst at research firm IDC, says Samsung isn’t late to the party. Global shipments of media tablets like the iPad are forecast to rise sixfold to 47 million in 2014 from 8 million in 2010.

Even so, Choi says he sees potential disasters everywhere.

Seated in front of a 1980 work entitled Footsteps by Korean artist Kim Chang Young, famed for hyperrealistic beach paintings where each grain of sand is visible, he mentions Toyota Motor Corp.

Samsung once benchmarked itself against Toyota to gauge its own efficiency. Now Toyota is working to restore its reputation for quality after recalling more than 8 million vehicles.

“What happened to Toyota is the growing pain of a global company,” Choi says. “Toyota will emerge stronger.”

As for whether Samsung can overcome its own growing pains to become a global innovator, Choi has no doubts.

He says Samsung regularly challenges itself to do what may seem impossible.

Ten years ago, executives pored over numbers and set their 2010 sales goal at $140 billion -- four times the amount in 2000. Sales will reach that level this year, according to the median estimate of 21 analysts -- right on target.

For the one-time imitator to become a pioneer, hitting the numbers will be just the beginning.

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