Aug. 27 (Bloomberg) -- When Samsung Electronics Co. Chairman Lee Kun Hee toured his factories, the preparations were worthy of a head of state.
Workers were told to park behind the plant because their ugly cars would offend the leader’s eyes. Mints were placed in bathrooms lest anyone’s breath smell of kimchi. Guards lined the road to greet his limo and a long, red carpet was rolled out. Everyone was reminded not to gaze down from the windows.
“We literally weren’t allowed to look down on him,” said Masaki Oguro, a Japanese engineer at Samsung’s video-camera business who worked at a plant in Suwon, near South Korea’s capital, for most of the 2000s. “Samsung is a religion, and Chairman Lee is a god.”
Samsung may soon have to depend on someone of a less mythical stature to lead the world’s largest maker of mobile phones and televisions against Apple Inc. and Chinese rivals. The 72-year-old chairman has been hospitalized since a heart attack in May, and the heir apparent is his only son, Lee Jae Yong. The 46-year-old, Samsung’s vice chairman, has kept such a low profile he’s never given a formal interview on the record.
The younger Lee’s personality could suit the Samsung of today. He’s low-key, approachable and fluent in three languages, traits that may help the company shift its focus from hardware to software, content and more collaboration with global partners. He forged a relationship with Steve Jobs that helped Samsung supply components for Apple devices, including the iPod.
Still, his management abilities are unproven, said Chang Sea Jin, provost’s chair in business policy at the National University of Singapore and author of the book “Sony vs Samsung.” While his grandfather founded the Samsung conglomerate and his father built it into Korea’s largest business group, Lee Jae Yong has had few accomplishments visible to the outside world.
“We don’t really know what he can do,” Chang said. “Everyone has always known that he would be the next emperor, so he’s never had to prove anything.”
Samsung Group declined to make Lee Jae Yong, who’s also known as Jay Y. Lee, available for an interview. The vice chairman has stayed out of the spotlight in deference to his father, in keeping with Korean custom, said a person familiar with the matter, who asked not to be named because it’s private.
Lee Kun Hee, Korea’s richest man, has a net worth of $11.6 billion as of Aug. 26, according to the Bloomberg Billionaires Index. Jay Y.’s net worth is $4.4 billion, most of it holdings in Samsung companies he acquired with help from his father.
Chairman Lee’s illness and the transition it may force come at a challenging time for Samsung Electronics, the biggest company in Korea and crown jewel of the family-controlled Samsung Group.
Revenue growth has slowed for four straight quarters as Apple lures premium customers with iPhones and Chinese makers Xiaomi Corp. and Lenovo Group Ltd. offer devices with high-definition screens at cheaper prices. Samsung’s global market share in smartphones slipped to 25 percent in the second quarter from 32 percent a year earlier, according to researcher IDC.
Its lead in higher-priced phones with big screens may come under pressure as Apple releases the next version of its iPhone, reported to have a larger display, next month. Meanwhile, Xiaomi, which overtook Samsung as the top smartphone maker in China last quarter, is expanding into markets from India to Brazil.
“They’re being challenged on all fronts -- high-end, low-end, and middle,” said Warren Lau, an analyst at Maybank Kim Eng in Hong Kong. “Jay Y. will have a lot on his plate.”
Risk and Opportunity
The younger Lee received an undergraduate degree in East Asian History from Seoul National University, the nation’s top school, and a master’s degree from Japan’s Keio University. He also studied for a Ph.D. at Harvard Business School for about five years, though he didn’t receive a degree.
After joining Samsung full time in 2001, he was given a glass-walled suite surrounded by desks of secretaries from each of the business units. They helped him learn about the group’s sprawling empire, according to Ryozo Yoshikawa, who joined Samsung in 1994 and watched Jay Y. grow from a college kid in the 1990s to a young executive.
He has moved through a series of job titles, including chief customer officer and chief operating officer, and was named vice chairman of Samsung Electronics in 2012. Still, his specific responsibilities haven’t been made clear publicly.
Jay Y. has been kept sheltered because Samsung couldn’t risk blunders that would undermine confidence in the succession, said Chung Sun Sup at Chaebul.com, a corporate watchdog group that publishes its reports online.
“Lee couldn’t allow Samsung’s name to be damaged in any way,” Chung said of the chairman.
Even so, an early Internet business Jay Y. started before joining Samsung full-time did fail. In 2000, at the height of the dot-com bubble, he began a business called eSamsung that closed a year later.
In naming Jay Y. vice chairman, Samsung Electronics cited his achievements in boosting branding power and solidifying leadership in smartphones, TVs and components. He was also credited with strengthening partnerships through meetings with Google Inc. CEO Larry Page and Apple CEO Tim Cook.
Jay Y. and the late Apple CEO Jobs struck up a relationship as their two companies worked out a deal that would cement the success of Apple’s iPod, said the person familiar with Lee’s work at Samsung. Apple wanted to switch from hard-disk drives for the music players to smaller, lighter flash chips, and Samsung agreed to invest in new manufacturing capacity to make the chips, the person said.
Discussions between Jobs and Jay Y. also led to Samsung developing organic light-emitting diode displays for future use in televisions that Apple was considering making, the person said. OLED displays are now used in Samsung’s Galaxy devices.
The relationship between the companies later grew more contentious as they sued each other on four continents over smartphone patents. They agreed this month to drop lawsuits outside the U.S.
Greg Tarr, a former Deutsche Bank AG technology analyst turned Silicon Valley venture capitalist, said Jay Y. was responsible for getting Samsung components deep into the guts of the iPhone.
“He was sent over to negotiate with Steve Jobs,” Tarr said. “And guess what? There was only one Samsung executive invited to the [memorial service], and that’s Jay Y. There were some people pretty high up in the food chain here in Silicon Valley who didn’t get invited.”
Jay Y. is widely respected in California’s technology mecca, where Samsung has hundreds of programmers devoted to beefing up smartphone software, and he’s a good match for a company that needs to cultivate a more creative business culture, Tarr said. He met the younger Lee at a 2002 party in Seoul, not realizing who he was talking to until they exchanged business cards.
“He was very down to earth and very unassuming,” Tarr said, recalling an animated conversation about mobile phone technology after Tarr whipped out a clamshell-style Samsung model with a 2-inch color screen. “He was clearly very astute in understanding that the phone wasn’t just a voice device, and this was five years before we even had an iPhone.”
David Herro, chief investment officer at Chicago-based Harris Associates LP, has met Jay Y. several times, including a 90-minute sit-down at Samsung’s headquarters a few years ago. He came away impressed.
“Instead of being a braggart, his attitude was, ‘OK, we’re here -- but it’s not going to be easy to stay here,’” said Herro, who boosted the asset manager’s stake in Samsung by more than 170,000 shares since the chairman fell ill. “One of his biggest concerns was complacency, how to keep the company moving and motivated. To me, that was very mature business thinking.”
“I think some of the children of some of these patriarchs, like Jay Y., will bring a fresher, more modern approach and a realization that the businesses are run for all the shareholders, not just the family,” Herro said.
While the younger Lee may be comfortable among his Silicon Valley peers, Oguro, who was poached from Sony Corp. in the early 2000s to help improve Samsung’s video cameras and stayed for about eight years, said he doubts whether the son of Korea’s richest man really understands his customers.
In 2004, Oguro recalled, Jay Y. asked him why Samsung’s Combo, which played DVDs and videocassettes, was selling so well. When Oguro told him many people still rented videotapes, he expressed surprise.
“Samsung’s products are for regular people, but he had no idea how normal people live,” said Oguro. “His staff brought him whatever he wanted.”
Yoshikawa, hired by Lee Kun Hee as Samsung’s first Japanese executive, recalls meeting the son often in the 1990s, when Yoshikawa worked at Samsung’s Tokyo office and Jay Y. was studying at Keio. He sometimes drove to Yoshikawa’s office in his red Porsche and invited workers to lunch, treating them to ramen and pork cutlets, recalled Yoshikawa, who’s now a researcher at the University of Tokyo.
After Jay Y. began working full time at Samsung, his glass-walled office was stocked with products from Sony, not Samsung. When Yoshikawa asked why, the young man explained he was sending a message that quality needed to be improved.
Compared with Chairman Lee’s methods, it seemed far too subtle. Once in 1995 when the elder Lee discovered faulty models of a new mobile phone, he built a bonfire and burned 150,000 of the devices in front of 2,000 workers. Bulldozers crushed the remains.
“His father had led using the carrot and the stick,” Yoshikawa said. “I didn’t think Jay Y. would have the stick.”
The younger Lee will take over in a new era for Samsung. Samsung Electronics’ revenue last year was 228.7 trillion won ($225 billion) on a consolidated basis, almost 100 times the 2.38 trillion won on a parent basis when his father took over in 1987.
Korea has changed too. Though conglomerates like Samsung and Hyundai Group enjoyed government backing for decades as a way to modernize the country, such support has waned amid concerns the groups, known as chaebol, had become too powerful and stymied innovation.
The Lees have drawn criticism for their influence over Samsung Group’s 74 companies while owning less than 2 percent of the total stock. In addition, Lee Kun Hee was convicted in 2008 of tax evasion and for selling bonds issued by Samsung SDS Co. at artificially low prices to his son. The father was pardoned in 2009; Jay Y. wasn’t prosecuted.
As the succession approaches, the Lees are planning to take public two Samsung businesses to comply with tighter government limits on chaebol and eventually help pay inheritance taxes that could exceed $5 billion. The government has banned new cross-shareholdings and offered tax breaks for chaebol to restructure and become more transparent.
One company going public is the Samsung Group’s de facto holding company, Cheil Industries, in which Jay Y. holds a 25 percent stake. That will increase transparency and create public shareholdings to borrow against to pay the inheritance taxes on their father’s fortune.
By nature and necessity, the younger Lee is likely to be a very different leader than his father. He’ll have to be more democratic and collaborative, which could prove an asset as Samsung Electronics evolves, Chang said.
“He has to show humility and accept that his interventions will be limited, and encourage more initiative from managers and delegate more,” said Chang. “It’s a cultural change. He has to say, ‘I’m human.’”
To contact the editors responsible for this story: Michael Tighe at firstname.lastname@example.org Terje Langeland, Peter Elstrom