Samsung: Defying the Skeptics

The company's online trading ventures are showing promise. Profits are next

Roh Sang Hong can't stop talking about his latest coup. The 51-year old Roh, who's fluent in Japanese, English, and Korean, has just returned to Seoul from Sapporo, on the Japanese island of Hokkaido. He's beaming because Japan's third-largest fish market has agreed to trade $10 million a year worth of salmon, tuna, and crab on, the online marketplace for frozen fish he runs. As president of FishRound Inc., Roh has snagged 271 of the largest wholesalers and retailers in the Pacific Rim. Already, $94 million in frozen fish has changed hands, and Roh expects trading to almost triple by December and then double again next year. He says he will be profitable by March, 2002, the company's one-year anniversary.

It's the kind of speedy growth that's a throwback to the heady days of dot-com optimism--not the harsh reality of today, when e-marketplaces are getting flattened. But Roh is no lucky entrepreneur, and FishRound is no ordinary startup. He's a 25-year veteran of Samsung Corp., the trading arm of South Korea's largest and most profitable family-run conglomerate, or chaebol. Samsung trades everything from semiconductors to steel--to the tune of $25 billion worth of goods moved last year, netting the trading arm $366 million in transaction fees. It also owns 70% of FishRound and has sent Roh half his customers, who were lured by fees that are up to 75% cheaper than offline charges. Roh is using low fees to woo new customers such as the Sapporo Fish Market who, in turn, buy higher-margin services such as shipping, warehousing, and insurance.

Samsung isn't keeping that formula on ice. Starting in April, 2000, the company began launching four other e-marketplaces that swap steel, chemicals, textiles, and medical supplies--all products it trades offline. And more are likely to follow. Samsung's goal is to eliminate most of its time-consuming order matching and let buyers and sellers trade directly on their e-marketplaces. The company expects the lower trading fees it charges on its sites will drive a 20% bump in demand for offline services. By yearend, Samsung expects its five online marketplaces will handle $2.8 billion in trades, skyrocketing to $7 billion next year. Better yet, at least 50% of those trades come from new customers, helping generate an estimated $45 million in fees for the sites this year. By mid-2002, Samsung expects all the sites to be profitable. "Samsung has a clear idea of where B2B [business-to-business] fits in its future," says John Lee, an associate at McKinsey & Co., Seoul.

It all adds up to what the company's chief strategist, Lim Young Hak, calls Samsung's "10-year war" to become the world's most-wired trading company. "We want to be among those setting business standards in the 21st century," says Lim, who expects a combination of cost savings and new cash cows to push Samsung's profits up 160%, to $150 million, by 2003. To get there, the company will move its frozen fish products and textiles departments completely online.

Samsung doesn't have much choice. The role of middleman is steadily eroding. Trading companies act as intermediaries for their clients, making money by brokering sales, providing escrow finance to buffer clients from buyers who don't pay on time, selling insurance in case ships run aground, and handling the reams of paperwork that tax authorities require. In the past, they have flourished because each country has complex trade and tax laws. But in the past decade, the World Trade Organization, European Union, and others have standardized or eliminated rules governing cross-border trade so more companies can trade internationally without having to use a trading company.

The Internet, too, has connected Korean companies directly to assemblers overseas and helped them find the best prices, something Samsung charges thousands of dollars to do in the real world. In fact, Samsung Electronics Co. (SSNHY ), the world's biggest maker of memory chips, built online links to its 2,000 suppliers, saving $3 billion in procurement and inventory costs and doing away with most of the tasks that Samsung Corp. used to handle. That's one reason Samsung's trading revenue fell 12%, to $366 million in 2000.

The real wake-up call, though, came in 1997 when the Asian financial crisis hit. Samsung Vice-Chairman Hyun Myung Kwan, then CEO, asked his brain trust for a way out of shrinking businesses and into high-growth markets. One answer from Lim and others: the Net. So Hyun told Lim to study how others were using the Web and how Samsung might adopt and profit from the best practices.

By late 1999, Lim chose five marketplaces that played to Samsung's strengths, could turn a profit in three years, and that didn't compete directly with other Asian sites. Lim then pumped $50 million into building Samsung's e-marketplaces. To run the online markets, he insisted on recruiting managers with at least 15 years offline experience to be sure they knew the ins and outs of international trade and had deep industry contacts.

The 47-year-old Lim is something of a hero to his charges. After growing up poor in the mountains in southeastern Korea, Lim won a scholarship to study at Seoul National University, Korea's answer to Harvard. At Samsung, he quickly worked his way up the ranks, winning posts in Libya, London, and the Netherlands, where he built a successful business distributing computer monitors. A dreamy-eyed, soft-spoken man, Lim looks more like a college professor than a corporate high roller in his rumpled suits. He does his best thinking on the weekends, when he hikes with his wife in the mountains surrounding Seoul.

Lim meets with his e-marketplace managers monthly for three hours over lunch. There, he drives home that partners in the exchange should double as traders to ensure a steady flow of orders. At GSX, an e-marketplace for swapping steel on the spot market, the founders--Samsung, Cargill, and European traders Duferco and TradeArbed--each committed $500 million in trades to the site over the next two years. Samsung expects that will add another $100 million in business for services such as shipping and insurance.

Samsung's partners wouldn't make such financial commitments if it weren't easier to do business online. At the steel exchange, for example, Samsung streamlined the auction process. Offline, a pipemaker in, say, Taiwan who wants 2,000 tons of steel will phone Samsung and ask for a bid. One trader then checks prices and availability with producers in Russia, where 40% of the world's spot steel is made. Another lines up transportation, stevedores, and warehousing. A third trader asks the finance department to organize a $500,000 line of credit for the buyer and several million dollars for the steel mill, since Russian manufacturers want to be paid upfront. The finance department does a credit check, and two days later, Samsung faxes back a bid and follows up with e-mails and phone calls.

Then buyers comparison-shop by calling three or four other trading companies, a process that can take two weeks, quadrupling the time it takes to close a deal. Some buyers call more than one trading company at a time, hoping to use the bid from the first trading company to gain leverage against a second trading company. And with more than 100 types of steel sold on the spot market, buyers often ask for additional quotes for other types of steel if they are unhappy with one set of bids. That generates dozens of faxes from traders to confirm prices and other elements of the contract.

By contrast, GSX users type in the product they want to buy or sell, when they want it, a target price, and how long they want the auction to last (often one day). Participants bid in real time. With lists of "bids" and "offers," the site looks like a foreign-exchange trader's computer screen. Each bid generates an e-mail message that's sent automatically to buyer and seller. According to McKinsey, GSX users save 8% per trade, which is typically priced at $400 a ton.

GSX earns a 1.8% fee for hosting the trade, about two-thirds less than offline. That's O.K. with Samsung. Using the Web, it doesn't need to run credit searches because clients are screened before they join the site. The instant bargaining eliminates dozens of faxes and phone calls. Better still, deals are closed in as little as a day, so traders have more time to sell insurance or tanker space, products that produce up to three times more revenue. "If the Internet is a success, there will be no room for traders to broker deals in 10 years, but buyers and sellers will always need people to arrange services," says James Hong, a GSX director.

When that day comes, Lim wants to be sure Samsung is fully wired. If all goes according to his 10-year plan, Samsung will look nothing like it does today. It hopes to morph from an Old Economy trading company into the globe's first e-chaebol. That's the one lofty peak Lim hopes to climb.

By Ken Belson and Moon Ihlwan

Before it's here, it's on the Bloomberg Terminal.