Samsung: Korea's Great Hope For High Tech

It was the old patriarch's obsession: As founder of South Korea's powerful Samsung business group, Lee Byung-Chull wanted more than anything to narrow his country's technological gap with Japan. Semiconductors were a particular target, so he ordered chip engineers to work around the clock. The pressure was so great that some fled to other companies. But the research money flowed. "Don't worry about the cost," Lee once said. "Just give me the chips."

Although Lee lived to see Samsung make 1-megabit dynamic random-access memory chips, he died before the crucial 4-megabit DRAM saw light in 1988. So, to honor his wishes, executives took the very first of the new crop of chips off the assembly line, headed for Lee's burial place, and laid the chip on his grave.

That sense of mission at Samsung hasn't slackened. The group sees itself as going head to head against the world leaders. Because they are outgunned in money and technology, the Koreans figure the only way they can win the battle is through sheer determination, working late into the night while the Japanese sing karaoke. Today, Samsung ranks fifth among memory-chip makers, with $1.2 billion in sales, according to market researcher Dataquest Inc. Hitachi, Toshiba, NEC, and Fujitsu are the top four.

NO METAL-BENDER. As it emerges as Korea's No.1 technological powerhouse, Samsung is showing the same competitive drive in telecommunications, aerospace, chemicals, and other fields. Chairman Lee Kun-Hee, 49, son of the founder, is attempting to transform Samsung into a competitor against the likes of Sony Corp. and General Electric Co. The U.S.- and Japan-educated Lee, who took over five years ago, has shaken up management across the group by decentralizing decision-making. And he has modernized investment priorities: Today, of all the Korean business groups, or chaebol, Samsung spends the most on research and development, 8.6% of manufacturing sales, compared with 2.2% by Korea as a whole.

With an expected $50 billion in sales in 1991, Samsung is coming to be seen throughout Asia as the most formidable non-Japanese Asian company, dwarfing its Taiwanese and Southeast Asian rivals. While Samsung still depends on some technology from Japan and the U.S., it clearly is breaking out of the pack of the traditional four largest chaebol; the others are Hyundai, Daewoo, and Lucky-Goldstar. In so doing, it has become Korea's best hope for making the leap from a cheap-labor, metal-bending nation to one that competes in advanced technologies.

Once a producer of everything from sausages to ships, Samsung now aims to pare down the empire and concentrate on the core businesses of machinery, electronics, and chemicals (table). Lee vows that the days of emphasizing growth and size over quality are over. Today "we must specialize," Lee told BUSINESS WEEK in a rare interview. "If we don't move into more capital- and technology-intensive industries, our very survival will be at stake."

Lee is relying on several different tools to tame the hydra-headed conglomerate. In some cases, he is selling companies outright and has divested $3 billion worth of businesses since 1989. He is consolidating groups with related businesses. And more restructuring moves are expected in the next three years.

Under Lee's blueprint, Samsung Electronics, the flagship of the Samsung group, will take center stage, accounting for 65% of the electronics business overall. Consumer electronics still is the leading sector, but as costs have climbed and the global nature of the business demanded local production, Samsung has shifted most of its color TV, VCR, and microwave production to 11 plants scattered from Southeast Asia to Europe to Mexico. Semiconductors now account for 22% of Samsung Electronics' $7 billion in total sales as of 1991.

The multibillion-dollar, state-of-the-art microchip plant in Ki Heung is Samsung's monument to its vision of the future. So far, Lee has invested $2.2 billion in the plant and plans to invest an additional $1 billion by 1993. Already, Samsung has the highest global market share in 1-megabit DRAM chips. And it even has ambitions to beat the Japanese in the 64-meg DRAM market when the product comes on stream in 1993. It also has joined with Hewlett-Packard Co. in the joint design and development of sophisticated reduced instruction-set computing (RISC) microprocessors for HP's highly regarded line of workstations.

Samsung's progress in the less advanced chips has made believers out of some former skeptics. "The fact that Samsung has achieved high production levels of 1- and 4-meg memory chips is a sign that the company has made very significant strides," says a Japanese industry executive in Tokyo. Doing it without Japanese or American partners "shows that they made an enormous effort."

LIMITATIONS. Moreover, Samsung has cleared up doubts about its quality by winning IBM's seal of approval as a supplier. "Four years ago, we couldn't find anything we needed in South Korea," says Gordon A. Campbell, chief executive of San Jose (Calif.)-based Chips & Technologies Inc., one of the top U.S. producers of chip sets for personal computers. "But today, they have the technology to support maybe three-quarters of our product lines."

Samsung has a way to go, however. Experts question its R&D and design capability. Although the Koreans have been able to master the manufacturing of memory chips, they still depend on U.S. or Japanese companies for the necessary equipment--a limitation on their technological independence.

Samsung also is coming on strong in digital phone-switching systems. In November, Samsung installed 2,000 lines in St. Petersburg, free gf charge, and signed a $1.2 billion contract with the Russian government to overhaul the republic's telephone system. Now, Samsung is considering deals in Eastern Europe to sell a Korean-designed and manufactured switching system.

In aerospace, Samsung Aerospace won a $2.5 billion contract in November to co-produce 120 of General Dynamics Corp.'s F-16 fighters in Korea. Samsung, as the main contractor and assembler, will lead a consortium of 20 Korean companies. Samsung also will assemble Pratt & Whitney engines for the F-16s. Investing heavily in all its aerospace activities, Samsung expects to plow in $540 million by 1994.

In field after field, Samsung has set ambitious goals. But while it has made impressive progress, Samsung still finds itself maddeningly dependent on its partners' technologies. The group also faces huge management challenges as it attempts to expand overall sales fourfold by the year 2000, to a staggering $200 billion. Indeed, creating a corps of world-class executives requires a virtual revolution in Korean management style. The reason is that Samsung's success, much like Korea's own, was built on a combination of cozy government-business relations, state subsidies, a cheap, hard-working labor pool, and a lock on domestic markets. A succession of authoritarian governments made exports and growth a top priority.

Times have changed. Labor unions have become militant in the wake of democratic reforms, resulting in big wage increases. Although Samsung isn't unionized--all the other big chaebol are--its costs are high: Wages overall have doubled in the past three years, helping to price many of Samsung's consumer products, such as VCRs and TVs, mut of foreign markets.

In the new climate, beating Goldstar or Daewoo no longer is enough. Samsung has to compete against world leaders. It's Lee's mission to bring Samsung into this new age. After a decade under his father's tutelage, Lee is putting his stamp on the company, lifting the heavy, authoritarian hand and challenging managers to be innovative.

STILL TINY. Lee's toughest hurdle is in technology. Japan already has begun tightening up on sharing of secrets, fearing a "boomerang" effect. Americans, too, are becoming more sensitive about giving away their intellectual property. While Samsung may be close to standing on its own technological feet, it needs more time. Its R&D budget is large by Korean standards, but it is still tiny compared with those of its major Japanese and U.S. competitors.

Ironically, the more Samsung succeeds in mustering technological prowess, the less it can expect foreign partners to share critical technologies. "They see us as a threat," says Samsung Electronics Executive Director Kim Hoon. So, even as Samsung works overtime to become a technological powerhouse, it still needs the driving spirit of old Mr. Lee to get where it wants to go.