Samsung : The soft succession
As he gradually takes the reins of the South Korean conglomerate, Lee Jae-yong will have an even tougher job than his father did when he took over 28 years ago
May 23rd 2015 | From the print edition
WHEN Lee Kun-hee took the helm at Samsung just two weeks after the death of his father, the firm’s founder, in 1987, he set himself a seemingly unachievable goal: turning a middling South Korean conglomerate into a global giant in the mould of IBM or General Electric. He had a clear vision of how to climb that mountain: making big bets on emerging technologies and going for scale at almost any price. And he had the sort of management style that would have made Zeus proud. Every few years he hurled lightning bolts into the group’s headquarters in Seoul, where he would otherwise rarely show up. In 1993, for instance, he ordered all his senior managers to drop everything and fly immediately to Frankfurt, where he gave them a speech that lasted three days.
Today, nearly 30 years later, Samsung boasts annual revenues of more than $300 billion. It is now the world’s largest electronics manufacturer, with two-thirds of the group’s revenues coming from smartphones, semiconductor chips and assorted other components. The rest comes from a grab-bag of lower-tech offerings, from washing machines and container ships to theme parks and life assurance.
Once again, the colossus is in the midst of a dynastic succession. Mr Lee, now 73 years old, suffered a heart attack last year. It is said that his physical condition has stabilised but that he cannot communicate, and is not expected to return to work. Gradually, his only son, Lee Jae-yong, 46 (who calls himself Jay), has been stepping towards the limelight. on May 15th it was announced that he would become chairman of two family foundations. These hold some of the various small stakes in Samsung companies that allow the Lees to control the group despite owning only a few percent of it. The foundations are also seen in South Korea as the family’s public face: they support good causes, such as child-care centres for poor families, and the stunning Leeum museum in Seoul.
Taking charge at the charities will help cement the younger Mr Lee’s image as a softer, more reflective leader than his father. It is also seen as one of the final steps before he ascends to the corporate throne. He is expected to take a leadership role at the group’s most important division, Samsung Electronics, in the coming months.
Until recently, precious little was known about the group’s new boss. Articles about him, especially in Western news media, have tended to repeat the same few points: that he is more soft-spoken than his father, that he was involved in a disastrous e-commerce venture during the late-1990s dotcom bubble and that analysts regard his managerial abilities as unproved.
Indeed, when 50 fund managers, stockmarket analysts and other experts were recently polled about 11 heirs to the chaebol, South Korea’s dominant business conglomerates, Mr Lee ranked seventh on leadership ability and last on legitimacy to inherit his father’s wealth. South Koreans as a whole have become less tolerant of corporate “princelings”, but in Samsung’s case at least it helps that the family’s third generation—Lee Jae-yong and his two sisters, who already run smaller bits of the empire—are seen as having clean hands. The younger Mr Lee gained credit for pushing the company, a year ago, to apologise swiftly to employees who had apparently contracted leukaemia while working in its semiconductor plants.
Quietly passionate
Those who have met Mr Lee say he is indeed low-key and even a bit shy, but that he can also be insightful, funny and even passionate—for instance when he talks about Samsung’s plans to become a big contract manufacturer for drug companies, a project he has been known to describe as his “baby”. And although he does not (yet) sit on the board of Samsung Electronics and has only the rank of vice-chairman at the firm, it would be naive to assume that he had no say in the firm’s recent big moves.
One example is the release earlier this year of the Galaxy S6 smartphone. It does not seem to be selling much better than its predecessor, which received poor reviews, prompting a fall in Samsung’s market share (see chart 1). When the S6 was launched, Korean news media called it the “Lee Jae-yong phone”—an echo of the “Lee Kun-hee phone”, the SGH-T100, which the older Mr Lee launched in 2002 and which became Samsung’s first big hit, selling more than 10m units.
Although he is unlikely to subject his staff to three-day speeches, the younger Mr Lee will probably emulate his father in another respect, by keeping out of day-to-day matters to concentrate on broad, strategic issues. In a number of ways, those issues raise far tougher questions than the ones his father faced from 1987. Although Mr Lee senior’s path to greatness was steep, at least it was relatively clear. Now, besides having to oversee a far larger group—consisting of around 80 firms, with almost half a million employees around the world—the new boss will have to manage three simultaneous balancing acts: between competition and co-operation, between hardware and software and, most importantly, between Samsung’s Korean roots and its global present and future.
In electronics and other technology-based industries these days, one of the most important skills a boss needs is managing a complex relationship with rivals that is part competition, part co-operation (see Schumpeter). Apple is not just Samsung’s biggest rival in selling smartphones, it is also the biggest customer for Samsung’s semiconductors. Samsung’s smartphones run on Google’s Android operating system, making those two firms partners. But Samsung continues to invest heavily in Tizen, an operating system of its own, that powers its simpler handsets and other devices—a weapon that could be deployed more widely if the need arose.
As Samsung’s “chief customer officer”, a job created for him, the younger Mr Lee has already been in charge of such tricky relations for several years, says Shaun Cochran of CLSA, a stockbroker. Somewhere along the line Mr Lee, a graduate of both Keio University in Tokyo and Harvard Business School, seems to have acquired the knack of managing them. He got along well with Steve Jobs, Apple’s abrasive former boss, and was even invited to his memorial service. His good rapport with Tim Cook, Jobs’s more emollient successor, has helped the two firms repair their relationship following a bitter legal row over patents. Apple won an award of nearly $1 billion after it convinced the jury that Samsung’s Galaxy smartphones copied several aspects of the iPhone.
It is less clear how well Mr Lee will handle his second big balancing act: making Samsung better fit for an age in which more and more profits are generated by software and online services, despite the fact that hardware is the firm’s forte. It now employs thousands of programmers, but its culture is still dominated by hardware engineers—making it tough, for instance, to compete with Xiaomi, an upstart smartphone-maker which has taken a lot of market share from Samsung in China. Xiaomi is often likened to Apple. But a better comparison is Google: the Chinese firm’s devices are essentially loss leaders; its plan is to make most of its money using them to peddle services, content and advertising.
Under the elder Mr Lee, Samsung would have tried to develop the necessary software skills entirely in-house. His son seems open to acquiring expertise. In recent months Samsung has bought two startups: SmartThings, which makes software for the “internet of things” (wirelessly connected appliances), and LoopPay, a mobile-payments service.
To be more plugged into the world of startups, the group has also started to open innovation labs at important tech hubs around the world, notably in Silicon Valley, where Samsung is building fancy new facilities, complete with a clean room for chipmaking and a gym for employees. But all this may not be enough to turn it into a successful software firm. For that, Samsung may have to become more forceful in establishing its own “platform”—like Android, or Apple’s iOS operating system—on top of which other firms can build a variety of services. So far, for all its investment in Tizen, Samsung has seemed hesitant to use it more widely.
Perhaps the most difficult balancing act will be the third one: between staying true to the Korean roots that have served Samsung so well, and becoming truly global. Samsung’s greatest strength has been the discipline and loyalty it instils in its workforce. once the leader has set the goal, employees march in lockstep to achieve it. That culture was easy to maintain while Samsung was still a Korean company full of Korean engineers. But it now employs a far wider variety of people from all backgrounds. It needs to become a more open-minded organisation, and to accept that creativity carries expectations of freedom.
At least Korean corporate culture is not as conformist as Japan’s, where dissent is always discouraged, says Mark Newman, an analyst at Sanford C. Bernstein, a research firm, and formerly a Samsung employee. “At certain times, before the goals are set, speaking up is actually valued,” he says. In other words, giving free-spirited software coders a bit of licence to speak their minds would not be completely alien to Samsung’s management. And the younger Mr Lee, with his part-Western education, should understand better than his father why a culture change is needed.
However the group’s new boss manages all these tensions, he will ultimately be judged on the numbers he delivers. Samsung may not be as profitable as Apple, but at least it remains way ahead of its main domestic rival, LG (see chart 2). That said, most of Samsung’s current money-makers—displays, memory chips and even smartphones—are maturing. To ensure future growth, Samsung is having to make not just one big bet, but several—in the knowledge that it cannot predict which technology will win.
One of its bets is on next-generation batteries; another is on medical equipment. But the most interesting may be the younger Mr Lee’s plan for Samsung to become a giant contract manufacturer for biotech drugs. It has figured out that growing proteins in animal cells, at massive scale in ultra-clean plants with extremely high standards of quality control, is quite similar to “growing” circuits on silicon wafers under similar conditions. By concentrating on this bit of the pharmaceutical business and leaving other firms to design and market the drugs, just as with its microchip “foundries”, it could become as dominant in drugmaking as it is in the chipmaking industry.
That is a long-term project. In the short term Mr Lee may try to please investors through a further untangling of the conglomerate’s Byzantine structure. Already, two of its main companies have gone public, and some non-core businesses, in defence and chemicals, have been sold. Turning Samsung from a corporate hairball into an investor-friendly group with a proper holding company is a work in progress. Some early moves on this will help convince shareholders that Samsung’s leader is heading in the right direction.
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