By Geoffrey Cain
Nikkei Asia Review
Feb 13, 2014
SEOUL — Lee Kun-hee, chairman of Samsung Electronics and head of the Samsung Group, is working to instill a sense of crisis in his companies’ ranks, urging staff to shed old ways and help Samsung reinvent itself.
“Our leading businesses are constantly being challenged by competitors, while time is running out for our less dynamic businesses,” Lee told 1,800 executives at Samsung headquarters in Seoul on Jan. 2 in a speech broadcast and translated for 270,000 employees around the world. “It is therefore time to change once again.”
Lee is known for spurring executives on with cries of continual crisis. This time around, Samsung Electronics is grappling with a maturing market for smartphones, fierce competition with Apple in North America and the growing popularity of more affordable products from rising Chinese manufacturers such as Huawei and Lenovo in their home market.
Analysts forecast the coming year could be the most difficult for Samsung Electronics’ handset business since 2007, with Samsung Electronics’ operating profit declining or at best growing in the low single digits. In the fourth quarter of 2013, the company posted its first operating profit decline in two years, with earnings slipping 8% from a year earlier to 8.3 trillion won ($7.72 billion).
The king is dead
It is a familiar story in the fast-changing electronics industry, particularly with mobile phones: the market leader becomes complacent and ignores crucial trends. Lee, 72, is trying to avoid the lethargy that brought low such giants as Nokia, BlackBerry and Motorola, and saw big Japanese brands like Sony, Panasonic and Sanyo slide into near irrelevance.
The Japanese electronics companies held a wide lead over Samsung Electronics in the 1990s, but fell behind due to corporate infighting, sluggishness in embracing new TV and audio technologies, and a confusing array of similar products. Samsung, now the world’s largest maker of smartphones by sales, was then ridiculed as a maker of cheap TVs and refrigerators.
Lee, who took the reins of the Samsung Group from his father in the late 1980s, gets credit for its rise to the top, which was built on the company’s army – like discipline and ability to quickly seize new opportunities. The group’s leadership now faces the challenge of finding new growth areas to match its prescient investments in liquid crystal displays and NAND flash memory chips in the early 2000s.
“Samsung’s competitive advantage is in its seamless, extreme execution that is (made) possible due to its top-down command and control management structure,” said Jasper Kim, a former investment banker now teaching at Ewha Women’s University in Seoul. “At some point, there will be downsides to this, in which innovation, rather than similarly situated products, will be needed to remain a pre-eminent tech titan. But so far, Samsung is where Sony was during its apex in the 1980s.”
Hit and miss
Samsung Electronics retains considerable strength, including a $49 billion cash pile, equivalent to about 20% of its market capitalization, and a lucrative position as a top supplier of chipsets, batteries and displays.
Last year was marked by difficult product rollouts. The Galaxy S4, the latest update to the company’s flagship smartphone line, fell short of the company’s sales target of 50 million phones in its first six months on the market, although it outsold the S3, the previous model. A $9,000 curved organic light-emitting diode TV also failed to generate excitement. Samsung Electronics beat Apple to the market with a smart watch, the Galaxy Gear, but the company’s reluctance to publish sales figures suggests to analysts that it has not met expectations.
“Finding a new growth engine was a very big concern for Samsung while I was there,” said Michael Kim, a senior Samsung manager from 2008 to 2010 involved in planning investments in medical equipment. He cited electric-car batteries as an interest of younger Samsung group executives, including the chairman’s son Lee Jae-yong. Other company officials signaled at the International Consumer Electronics Show in Las Vegas in January that as with batteries, Samsung is seeking to translate its success in smartphone components — including memory chips, cameras and LCD displays — to auto parts.
Branching out
In 2010, Samsung Electronics announced plans to invest $19.8 billion in medical equipment, solar panels, LED lighting, electric-vehicle batteries and biotech drugs, with a goal of generating annual sales of nearly $50 billion by 2020, and to shift the company’s focus from consumer gadgets to “life-care” products.
The company has also been looking at opportunities in software, one of its weak spots. Samsung Electronics set up a $1.1 billion “innovation fund,” held its first developer conference and, last year, opened a $300 million campus in Silicon Valley.
With Intel, Samsung Electronics is developing Tizen, an open-source smartphone operating system. A previous attempt, Bada, did not get far but Tizen could reduce the company’s dependence on Google’s Android operating system and let it pursue the vertical product integration it prefers.
When it comes to Android phones, “The problem is that Samsung doesn’t have control over the full product,” said Jay Elliot, who oversaw corporate planning at Apple under Steve Jobs and founded software company Nuvel. “It only has the hardware.”
While some observers, such as Ewha’s Kim, think Samsung Electronics’ power has peaked, it has repeatedly shown a knack for identifying new product areas that are just on the cusp of going mainstream, helped by signals it picks up from customers for its component technologies. The elder Lee is right to warn against celebrating its victory in the smartphone wars too much.
The article was originally published in Nikkei Asia Review
