The Crisis At Samsung

Will the giant make needed changes?

Samsung Group Chairman Lee Kun Hee defies easy characterization. As South Korean chaebol chairmen go, he's as autocratic as any. Yet last November, he authored a book, Look Around the World and Think, that urges Koreans to shape their own destinies during times of upheaval. He spends weeks at his palatial home mapping out his grand strategies. Then suddenly he's obsessing about details, browbeating managers over squeaky washing machines, or test-driving a prototype of Samsung's new SM5 sedan.

The chairman--no one at Samsung ever calls him Mr. Lee--has used these tactics to reach a level of influence that no U.S. chief executive could ever match. Koreans shop at Samsung department stores, operate Samsung PCs, stroll through Samsung art galleries, chat on Samsung mobile phones, have operations at Samsung hospitals, and live in houses built by Samsung construction equipment. Many of the companies selling these products and services barely break even, yet Lee has added steadily to this sprawl, thanks to abundant loans from foreign and local banks that have regarded Samsung as the bluest of Korean blue chips. And inside the group, Samsung Electronics, the world's dominant memory chip maker, has bankrolled other Samsung businesses, even guaranteeing $4.5 billion of their debt.

Yet not even a dynamo like Lee can reverse the effects of the Asian crisis and a slump in the global chip business. Both events have conspired to deprive Samsung of what it needs most--ready cash to prop up profitless companies, service billions in debt, and embark on imperial adventures like the new auto business. As a result, Lee faces a choice--change Samsung radically, or risk fatally weakening his group, especially the core chipmaking business. How he and his lieutenants tackle this task could well set the tone for all of Korea Inc.'s restructuring.

"TOUGH LESSON." Lee would not speak with BUSINESS WEEK, but five of his senior executives did. What emerges from these interviews is a willingness to change that no one thought possible just a year ago. Still, no bold plan has emerged to reinvent Samsung. That, say analysts, would involve laying off 20% of the workforce of 230,000, and selling off autos, petrochemicals, aerospace, and other laggards to focus on memory chips, liquid-crystal displays (LCDs), telecom equipment, and financial services.

For now, executives are still adjusting to the idea that the heady days of breakneck expansion are over. "We are realizing that financial resources are very scarce," says Hwang Young Key, senior managing director and a member of Lee's powerful executive staff. "This is a very tough lesson for us." Group earnings, which plummeted 80%, to $67 million on sales of $93 billion in 1996, may even fall into a loss when Samsung releases its 1997 results in late March.

The major problem is debt--oceans and oceans of it, $23.4 billion owed to domestic and overseas banks. That's 267% of equity, and it's getting hugely expensive to service now that local interest rates have skyrocketed and banks are balking at making more loans. Executives are now obsessing about ways to shrink debt to about 150% of equity. In deals valued at some $600 million, Sweden's Volvo has agreed to buy the construction-equipment business, and U.S.-based Clark Material Handling Co. will absorb its forklift division. Samsung is cutting global investments by 30%, selling some $300 million in real estate and other assets, and shelving projects such as a planned 102-story skyscraper in Seoul. Petrochemicals may go.

CHILL WIND. Meanwhile, to inspire the troops, senior managers have taken a 10% pay cut. Lee is donating $70 million from his $2 billion fortune and most of his $6 million salary to company coffers. At headquarters, the thermostat is set so low that execs wear thermal underwear.

The big problem is that the keystone of Lee's empire--Samsung Electronics--is now in a dangerously exposed position. When the price of 16-megabit chips collapsed in 1996, it dragged down the unit's profits 93%, to $194 million, vs. $2.8 billion in 1995. Last year probably wasn't much better. Lee wants to diversify into higher-margin microprocessors, application-specific chips, and other logic chips used in everything from dishwashers to car-navigation systems.

Such a move up the food chain requires scads of cash. But Samsung Electronics is already laboring under $6 billion in dollar-denominated debt, which is much harder to pay off with depreciated won. "Samsung Electronics is still king," says Daewoo Securities Co. analyst Jeon Byeong Seo. "But it's a king without much money." Small wonder that Samsung has started talks with Intel Corp. about a cash infusion. Both sides are keeping mum. But the betting is that Intel will pony up $500 million for equity in Samsung, thus ensuring a steady supply of high-end memory chips when demand for its Pentium II microprocessor spikes at yearend.

Samsung Electronics probably would not be in such a fix if it had not served as the in-house cash machine. When chips reaped windfall profits back in 1994 and 1995, insiders say, profits flowed into questionable projects. The biggest potential blunder was the creation of Samsung's auto division, which got 21% of its paid-in capital from Samsung Electronics. After spending $1.8 billion over four years, Samsung Motors Inc. is rolling out its first car, an $8,500 sedan based on the Nissan Maxima--just when the bottom has fallen out of the Korean car market.

The grim outlook probably drove Samsung executives last fall to sound out Ford Motor Co. about an alliance. The speculation is that Ford might take as much as a 50% stake in Samsung Motors but would insist on taking the helm. But no outside auto company has ever succeeded in calling the shots in a joint venture with a Korean company.

Nor has any chaebol ever succeeded in achieving a dramatic restructuring. Lee certainly grasps the magnitude of the problems. The burning question is whether he's able to abandon the old ways of doing business. When Lee was a student at Tokyo's prestigious Waseda University in the mid-'60s, he became enamored with Japan's keiretsu, close-knit webs of companies cemented by equity ties, investments, and other business relationships. Lee now wants to change his corporate culture--for several years he has been exhorting his troops to "change everything but your wife and children." But most of the top-down management practices remain.

Should Lee manage to remake Samsung, he can make his mark as the chairman that took this proud company to the next step and led the way in reforming Korea's economy. But to do that, Lee will have to repudiate decades of corporate practice--and doubtless reinvent a part of himself as well.

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