THIS WEEK IN ASIA — Geoffrey Cain, September 26, 2016
As exploding batteries force recall of flagship phone, can a rising star rethink company’s business model to prevent an even bigger bang?
For Samsung, the Galaxy smartphone was once an unlikely saviour.
First released in 2009, this premium line brought the company out of a mud of obscure competitors and slung it into a duel with Apple. The world of tech entered a new epoch: these little supercomputers were its battleground, as were the giants that made them.
Samsung had spent the previous years overtaking Sony in televisions and this was its first big shot at becoming a smartphone maker in the league of Apple. But it had strengths that doubled as problems. Samsung was (and is) known for its Spartan ethic, obsessive benchmarking and martial command structure. It can accomplish in a few months what other companies can do in a year. Now, with this month’s recall of the Galaxy Note 7 amid concerns faulty components are causing battery explosions, this model is being unmasked as a liability more than ever.
The Galaxy was the culmination of a two-decade experiment under Chairman Lee Kun-hee, an energetic visionary who in 1993 began touring the world with fiery speeches for his executives. A leader with an imperial style – South Koreans call it “emperor management” – he still commands deep respect from a generation of so-called “Samsung Men” who have poured over his booklets and teachings.
These “Samsung Men” built the company from rickety old hardware maker to first-tier multinational. Along the way, they ran into a conundrum that continues to vex the company elite. Samsung’s growth strategy was the opposite of Silicon Valley’s, which celebrates original and risky products like the iPhone. Samsung’s ascendance rested on a very Korean and Japanese-inspired model: authoritarian managers, national pride, cautious and obsessive benchmarking, and the imitation of successful products followed by incremental innovations to them, fast (with a dose of American marketing prowess). The model works for speedy growth, but it’s too rigid for true originality.
Samsung has spent many years trying to inject a more Silicon Valley-minded culture. Despite having its pick of the nation’s (and some of the world’s) best designers and engineers, this is a group so unwieldy and powerful in Korea that it’s more than just a business. So indispensable was Chairman Lee that after two criminal convictions, two South Korean presidents pardoned him without the need for prison time. Samsung Group’s revenues are equal to one-fifth of the economy; this is why South Koreans call their country the “Republic of Samsung”.
By the early part of the decade, the Galaxy emerged as the only serious contender to the iPhone, unifying a scattered product line-up under a premium brand. Despite many patent infringement lawsuits from Apple, and a more recent squeeze from Chinese handset makers Xiaomi and Huawei, Samsung’s performance endured.
Then, the catapult of speed and execution started cracking. Batteries began exploding. Angry YouTube videos surfaced. The recall of the Galaxy Note 7 has become a debacle with no precedent. Some 2.5 million units are being recalled at a cost of up to US$2 billion. On an internal bulletin board, an engineer called the defects “humiliating”.
The episode hit on a long-standing identity crisis as Samsung, in its rapid global expansion, has been stumbling as it finds its way in a Silicon Valley-dominated world. Does it stick with its core talents as a top-down hardware maker, putting out devices that complement Google’s and Facebook software, or should it be more freewheeling and creative like its California counterparts, willing to question bosses and make mistakes and fail?
While Apple and Google had a clear sense of personality to begin with, Samsung’s marketers and designers have long struggled to convey a sense of who the company is and what it stands for.
The rift between the old and new strategies is growing, yet Samsung appears to be stuck in the middle – and this became all the more apparent in the lead-up to the botched release. Upon hearing that the iPhone 7 might be a duller product than usual, Samsung’s mobile division ordered a classic company move: turn up the pressure cooker and beat Apple at everything it could. Suppliers and engineers, unable to question their bosses, were under screeching pressure. A faulty product was the result.
Talk about terrible timing. Previously this year, Samsung had announced it was moving in the opposite direction with a new vision called “Start-up Samsung”. Executives had to sign a document pledging to end the company’s authoritarian ways; a bloat of job titles was cut down. The company also ended the Samsung Summer Festival, where employees performed in bizarre mass games in a show of corporate pride.
Ironed into Samsung’s genetic code is this ageing fervour, holding back an empire that seeks a generational shift towards a more professional and cosmopolitan structure. Chairman Lee, the visionary emperor, had a heart attack in May 2014 and is still in hospital, no longer able to lead the group. His son, the more diplomatic and personable vice-chairman Jay Y Lee, who undertook doctoral studies at Harvard without finishing, is preparing to take the throne with what looks to be a more genteel demeanour.
Jay’s rise comes after the Galaxy phones had propelled the family empire to the top. Yet, as the recall shows, the same Galaxy name – and the company’s model for success – can become a shackle overnight. For a group so prone to bureaucracy, with more than 300,000 employees, Jay may need to be ready to invoke the sense of charisma and crisis that his father did. Whether he chooses to expand on the old hardware strategy, or reinvent Samsung’s very core, he’ll need to be far more consistent and focused than Samsung has been so far. Otherwise, his company’s beloved Galaxy could be at the start of a long and slow decline.
Geoffrey Cain, a Seoul-based journalist, is the author of an upcoming book on Samsung