Samsung: Korean Sony-killer

A 1960s startup in a dust-blown field, Samsung survived the Asian financial crisis of 1997 to become a hi-tech colossus. Its wily boss Jong Yong Yun, driving force behind Samsung, now has his Japanese rival in his sights.

by Andrew Saunders
Last Updated: 09 Oct 2013

First impressions of downtown Seoul at night are that it looks a lot like Bladerunner. Skyscrapers soar, beams of searchlights randomly probe the darkness, streets are packed with surging humanity and huge video screens are everywhere, filled with perfectly made-up faces silently mouthing imprecations to buy, buy buy. From mobile phones and computers to cars and cameras, the hard sell is pervasive: 21st-century consumer capitalism in its purest, most rampant form.

It's an appealingly dystopian analogy, and not far off the mark, except for a couple of minor snags. There are no flying cars (yet), and Seoul is far too cheerful a place to be the product of Ridley Scott's stygian imagination. Far from trying to escape, the people of South Korea's buzzing capital (there are plenty of them - with 22 million inhabitants it's the second most populous city on the planet) seem to be having a pretty good time tonight, judging by all the smiling faces.

And why shouldn't they? Modern Seoul is a city freshly wrought, a place that owes most of its new-found high-rise prosperity to high-tech electronics - specifically, the mobile phone, which here achieves its global apogee in both technical sophistication and cultural significance. Both handsets and networks are at the cutting edge - mobile TV is already booming here - and even old ladies sport phones well in advance of anything available in Europe.

One company in particular has become synonymous with the South Korean economic miracle - Samsung. Its ads are all over the city, and increasingly all over the world. Since the late '90s, when a new generation of high-performance mobile phones took European and American rivals by surprise, Samsung's products have become a byword everywhere for the latest technology, desirably packaged.

From the humblest of beginnings - a Nissen-hut factory in a dust-blown field - Samsung's electronics division today is snapping at the heels of Japanese giant Sony, the firm that invented the modern consumer electronics industry of the 1970s and '80s.

MP3 players, digital cameras, laptops, and now next-generation flat-panel LCD and plasma high-definition TVs and Blu-Ray DVD players - as well as high-end white goods - have joined the ranks of those must-have mobiles, as the Samsung brand has raced upmarket all over the world. It's also a big player in core electronic technologies, and the world's leading producer of DRAM memory chips.

The person responsible for the past decade of this remarkable transformation is the vice-chairman and co-chief executive of Samsung Electronics, Jong Yong Yun. Softly spoken, extremely courteous and thoughtful of mien, Yun, 61, is nonetheless a wily old bird who pilots his ship with a firm hand on the tiller. And he knows exactly what course to steer - in 2005, Samsung became the first Korean name in the Top 20 most valu­able global brands, alongside Coca-Cola, McDonald's - and Sony.

Brand-building is the name of the game now, and sports sponsorship is also booming. In the UK alone, Samsung sponsors events as diverse as Crufts and the Horse of the Year Show, and it signed a five-year, £50 million deal to sponsor Chelsea Football Club last April.

It's no secret in the immensely competitive world of consumer electronics that Yun has got his eyes firmly on the top spot occupied by his Japanese rival. ‘Currently our sales revenues are $80 billion and our profits peaked two years ago at around $10 billion,' he says. ‘I am not satisfied with this. By 2010, I want Samsung to be the tier-one company of the world, the most excellent premium brand company of the world.'

It's not an idle boast - the firm's ability to take desirable products from the drawing board to the global marketplace at dizzying speed has been unrivalled in recent years. In the mobile phone sector, it has famously slashed the product development cycle time to less than five months. Yun says the company's breakneck pace is rooted in raw memories of the disastrous 1997 financial crisis. ‘We have a very strong sense of crisis - we know that we could always go bankrupt next year. That makes us very agile and we can adjust very quickly to changing markets.'

The crash was the consequence of uncontrolled expansion in the so-called Asian Tiger economies. In South Korea, cheap government-backed loans added a local banking crisis to the mix, and after a series of massive falls on the Seoul stock exchange, the International Monetary Fund stepped in; to this day, the crisis is referred to by the locals, rather resentfully, as ‘The IMF'.

The consequences were far from trivial - tens of thousands of jobs were lost as the handful of huge, diversified family-controlled firms (called chaebols) that dominate the economy teetered alarmingly. Eleven of the largest went under - most notably Daewoo - an unthinkable event before the crisis. It was a traumatic episode, and to cap it all, being saved by foreigners was particularly humiliating for the proud and pointedly self-reliant South Korean people.

Samsung Electronics - itself a component of the Samsung Group, at that time only a middle-sized chaebol - was not immune. But it did enjoy more foreign revenues than most. Yun skilfully turned the crisis into an opportunity, making his name as a ruthlessly effective strategist. After a painful restructuring involving the loss of 24,000 jobs and the sale of $2 billion-worth of non-core businesses, Samsung Electronics emerged from the crisis in far better shape than any of its domestic rivals.

Yun is hoping that the booming market for flat-screen, high- definition TVs and the continuing trend for ‘convergent devices' (gadgets that combine many functions in one box - smart mobile phones and PC/TV home media centres, for example) will give Samsung Electronics the final boost it needs to knock Sony off its lofty perch.

‘The coming era will be an age of digital convergence - at home you will have a home network, at work the office network, and in your hand you will have the mobile network,' says Yun. ‘I think there are many opportunities for Samsung. Very few companies in the world have such a comprehensive product range, including as it does IT, personal computing, consumer electronics and mobile devices. We have that advantage and we are deeply committed to gaining the lead.'

For a while towards the end of last year, Sony seemed to be doing all it could to help. Delays and shipping problems plagued the launch of its vital new PS3 games platform, and when laptops powered by Sony-made batteries started to spontaneously combust, it looked like things couldn't get much worse. Sony's third-quarter profits suffered a 94% drop. But the latest figures from the company suggest that the financial impact of these high-profile cock-ups has been less severe than expected.

The ironic truth is that Samsung actually needs a healthy Sony if it is ever to be in a position to beat the Japanese firm. Welcome to the world of ‘co-petition', where hard-bitten competitors decide to bury the hatchet in order to pursue mutually beneficial opportunities.

In 2004, Samsung and Sony signed a $2 billion deal to jointly manufacture the flat-panel display units that many of both firms' next generation of products were going to require. ‘The flat-panel display partnership has given both companies a great deal to hope for,' says Peter King, a director of consumer electronics research house Strategy Analytics. ‘The economies of scale are well worth having. These are very expensive plants to set up.'

But he also admits that ‘five years ago, it would have been laughed at'. So what has changed? ‘As everything in consumer electronics moves over to IP (internet protocol) networks, you must have a partnering strategy in order to move forward. Samsung has shown Sony the way.'

Founded in 1969 on a modest site in the Sunwon district, about an hour south of central Seoul, Samsung Electronics started out making cheap black-and-white tellys and white goods. It set up shop in the UK in 1984, by which time the firm - whose name translates as three stars (the star is a Korean symbol of luck and growth) - already had several world firsts under its belt, including the first computer-controlled washing machine, introduced in 1979. But it had yet to become as adept at marketing as it was at technology, and until the '90s, the name remained unknown and unloved, a ‘value brand'. Then the digital age dawned, and with it Samsung's greatest opportunity.

‘In the analogue era Samsung was a follower in so many things, always playing catch-up,' says marketing director David Steel. ‘But we can be ahead in the digital era. You couldn't play an LP through your TV, but a digital file is just data, it will play on anything.'

Steel, a Brit who started out as a consultant for McKinsey, has been with Samsung for nine years and is the first foreigner to make it to the main board. He admits that many of his friends were pretty amazed when he abandoned a career with ‘the masters of the universe' to go to an unknown South Korean maker of cheap microwaves. But he got the last laugh. ‘It's amazing that such a big company can be so dynamic. People here are enthusiastic, ambitious, visionary and even a bit paranoid. I've never seen such an intense desire to succeed.'

The proof of the firm's commitment to new technology - as well as a spectacular yardstick of its almost four decades of headlong growth - is to be found on that original Sunwon site. It's now the size of a small town, home (in some cases literally - there are apartment blocks here too) to 26,000 Samsung employees.

The new $400 million research and development centre is the jewel in the crown, the largest in Asia, with 9,000 of the smartest technology PhDs and research engineers under one roof. A paean to progress, it's so relentlessly high-tech that even the toilets are fitted with electronic keypads. Luckily they retain the more familiar hand controls, presumably for use by visitors from backward places like Europe and the US.

But despite this impressive horsepower, one of the most frequent criticisms levelled at Samsung is its failure to develop a killer product, like Apple's iPod or the Sony Walkman. Rather, it has become adept at swiftly mastering technologies and packaging them in products people want to buy. ‘The Chinese are more of a threat to Samsung than Sony,' says King. ‘Samsung doesn't own that much intellectual property.'

Steel's response? ‘People talk about the Walkman and the iPod in the same breath, but they were 25 years apart. Killer products are nice to have but don't come along all that often. You shouldn't rely on them.' Parent company the Samsung Group started life back in the 1930s as a dried-fish exporter. Nowadays, it's the biggest and most successful of Korea's chaebols, a vast family-controlled empire that embraces everything from construction and heavy engineering to banking, financial services and, of course, consumer electronics.

In control of it all is the legendary Lee Kun-Hee, son of the founder and South Korea's richest man. Worth an estimated $3.4 billion, Lee is an Olympian figure in the national consciousness. It was he who first spotted the potential of taking the Samsung brand upmarket, and his two most famous aphorisms are proudly displayed at Sunwon: ‘Defect is a cancer that must be eliminated' and ‘Change everything except your wife and children'.

Despite their undoubted contribution to South Korean success, the chaebols remain highly controversial. They completely dominate political and economic life and are the source of much friction with the international business community.

Almost every Korean firm you've heard of - Samsung, LG, Hyundai ­- is a chaebol and they all have an opaquely byzantine nature. Trying to follow flows of capital through their maze-like structures is notoriously difficult, and despite the big clean-up forced by post-IMF discoveries of widespread bribery and false accounting, rumours - frequently accurate - of price-fixing, graft and heavy-handed responses to dissent still abound.

One expat tells the Orwellian tale of an analyst at an American investment bank in Seoul who changed his recommendation on a chaebol stock (not Samsung) from ‘Buy' to ‘Hold'. Within a couple of weeks of his fateful decision, the hapless analyst was on his way home, having been told - in no uncertain terms - that he could either change his mind or face investigation by the Korean authorities for alleged insider trading. Korea's mobile phones may be high-tech, but its corporate governance regime has a way to go yet by western standards.

Samsung enjoys the reputation of being the best behaved of all the chaebols, but it's not immune from problems - as demonstrated by the company's $300 million fine in 2005 for trying to fix the price of memory chips in the US. In its desire for global domination, it is going to have take a national lead on questions of transparency and accountability, as well as honing its technical excellence and marketing flair.

If it can succeed, not only could Samsung be the new Sony, but South Korea could be the new Japan.

SOUTH KOREA IN A MINUTE

One of the reasons that South Koreans so wholeheartedly embrace the future is that there is so little comfort to be found in their past. Invaded by just about every major power in the region since time immemorial, Korea's modern history began with the forcible Japanese annexation of 1910. The occupation lasted until the end of World War II and - thanks to policies of economic exploitation, confiscation of land, forced labour and cultural genocide - was universally hated.

In 1945, the peninsula became the setting for the start of the Cold War, when the Russians and Americans divided the country in two along the 38th parallel. On 25 June 1950, troops from the Russian-occupied north crossed the border and the Korean war began. By the cessation of hostilities in 1954, an estimated 2.5 million Koreans had died, the vast majority of them civilians.

The economic development of South Korea began after General Park Chung Hee took control in a coup in 1961. As a result of his ‘Miracle on the Han River' (Seoul's river) the economy grew at nearly 10% a year for 20 years. chaebols flourished, achieving a dominance they retain to this day - although the crisis of 1997 cut their numbers almost in half, to around 15 companies.

The first democratic elections took place in 1987. South Korea's 49 million inhabitants live mainly in the urban regions around of the capital and around the southern port city of Busan.

South Korean society remains paternalistic, and its people are hard workers. Long hours in the office are de rigeur, as - until recently - was working six days a week. Paid holiday entitlement is generally modest - five days, typically - as is maternity leave.

In the 1990s, electronics, shipbuilding and steel took over as the main exports, and SK is now the world's 11th-largest economy, its people cautiously optimistic that the days of being bullied by their richer and more powerful neighbours are over. But the split between the communist north and capitalist south, despite being 50 years old, is a raw and angry wound that refuses to heal.

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