Apple Envy Drives Samsung Shakeup

At first glance, this might seem an odd time to push through a shakeup at Samsung Electronics. The Korean giant has weathered the financial crisis far better than Japanese rivals like Sony (SNE) and Panasonic (PC). Samsung is the world's largest maker of memory chips and its market dominance is unquestioned. When it comes to building a powerful brand, no Korean company has been more successful. As Americans shop for Christmas and Hanukkah presents, Samsung's TVs and digital phones are among their top choices, while Samsung's mobile phones are so popular that the company is now second only to Nokia (NOK) among cell phone makers worldwide. Yet on Dec. 15 the company announced a management reshuffle that marks the exit of an older generation of leaders who built up Samsung as a prominent hardware maker. The world's top maker of TVs on Dec. 15 named Choi Gee Sung, the head of its TV and cell phone business, as CEO, replacing Lee Yoon Woo. Perhaps more important, the company created a new position, that of chief operating officer, for Lee Jae Yong, the only son of former chairman Lee Kun Hee. Why make the change now? Some Samsung watchers have a one-word answer: Apple (AAPL). For all its success in consumer electronics, they say, Samsung is an also-ran in the battle to win customers away from Apple's iPhone. This means the company needs a new direction if it has any hope of meeting the challenge from Apple and its smartphone. "Samsung must have taken a whopping blow from the revolutionary popularity of the iPhone," says Park Kyung Min, a longtime watcher of the biggest Korean company and chief executive of fund manager Hangaram Investment Management. "To emulate Apple it needs a new start." Lee Jae Yong's restoration to powerIt's not clear that the changes Samsung announced today are sufficient to meet the Apple challenge. The appointments did not come as much of a surprise. Choi has been the widely expected candidate to succeed 63-year-old Lee Yoon Woo, who has been seen as only a transitional leader since he took over the top job from respected CEO Yun Jong Yong in May of last year. Choi, 58, is a former chief design officer who won credit for steering Samsung past Sony in 2006 to become the world's No. 1 TV brand. He's best known as a marketing expert and his appointment is a departure from Samsung's tradition of picking leaders from among its pool of engineers. For the long term, Lee Jae Yong's return is an indication of where Samsung is likely headed. Lee was the chief customer officer until the spring of last year, when his father resigned as chairman to take responsibility for a damaging financial scandal embroiling the family. At the same time, the junior Lee, 41, gave up the fancy title that was created for him (and has been abolished with his departure). Lee's appointment shows that Samsung execs expect no further fallout from the tax evasion scandal, which led to a three-year suspended sentence for former chairman Lee and the resignation of former CEO Yun. After the scandal, Samsung pushed aside a handful of old leaders whom Korean prosecutors alleged had arranged illegal business deals to benefit the Lee family at the expense of other shareholders. The prosecutors also said that the Lees owned more than $4 billion worth of securities in accounts held in other people's names to avoid paying hefty taxes. Samsung's record quarterly earningsSamsung executives have since been seeking an opportune moment to push through a restoration. Kim Sun Woong, head of the Center for Good Corporate Governance, an independent think-tank that monitors management of the chaebol, or Korea's family-controlled conglomerates, notes that the family and loyal executives have been looking for a good time to seal the young Lee's succession. "Having widened a gap with rivals during the global downturn, it appears an ideal time to push [Jae Yong] into the spotlight," says Kim. "He can take credit for the company's financial success." The rise of the junior Lee comes two months after Samsung reported record quarterly earnings. Operating profit almost tripled to $3.2 billion in the three months through September, from a year earlier, thanks in part to a recovery of the memory chip industry that had suffered sharp price falls in the previous two years. The Korean electronics giant is poised to benefit handsomely from a pickup of memory chip demand amid signs of recovery in the information technology sector. Industry analysts forecast that Samsung will continue to gain from a recovery in coming quarters. That's because it kept investing in the latest production technologies and equipment while others cut back in spending. Song Myung Sup, electronics analyst at brokerage HI Investment & Securities, projects Samsung's profit will rise to $13.8 billion next year, from around $9.5 billion this year. Corporate watchers say the new management team of Choi and the junior Lee will try to refocus the company to provide total solutions, including creative software, to customers. Micheal Min, technology specialist at Seoul-based fund manager Tempis Capital Management, expects Choi to announce a string of new measures and investment plans aimed at giving Samsung a new image.

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