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Samsung 3.0

11 August 2016 By Robyn Mak

Samsung’s next leader faces two big challenges. Heir apparent Jay Y. Lee must keep politicians and investors onside as he reshapes South Korea’s biggest conglomerate, while also finding new sources of growth.

South Korea’s largest chaebol, or family conglomerate, is unrecognisable from the trading company started by Jay Y.’s grandfather, Lee Byung-chull, almost 80 years ago. Samsung Group has prospered as the country has industrialised and thrived on export-led growth. In three decades, GDP per capita has increased fourfold, while the value of Samsung Electronics – the group’s crown jewel – has soared from less than $400 million to more than $200 billion.

Today, Samsung Electronics is the world’s largest manufacturer of smartphones and memory chips. At home, the Lee family empire spans financial services, hotels, shipyards and refineries. All in all, global revenue for the 70-plus Samsung Group companies topped $288 billion in 2014 – equivalent to almost a quarter of national economic output.

20160805 Samsung Electronics searches for growth

Yet Samsung faces existential challenges. A momentous generational change is underway as 48-year old Lee prepares to take the helm from his father. Lee Kun-hee has retreated from the public eye after suffering a heart attack in 2014. Since then, the younger Lee has kicked off a big restructuring which has tightened the family’s grip on the group.

Backlash

The first major trial is to maintain the trust of outside stakeholders, both in the financial markets and in the government.

The Lee clan’s direct equity stake in Samsung Electronics is less than 5 percent. Instead, it effectively controls the group through a web of cross-shareholdings among the Samsung companies. Last year’s $9 billion merger between Cheil Industries and Samsung C&T strengthened the Lees’ hold on the enlarged C&T. C&T in turn controls key stakes in several companies, including Samsung Electronics, making it the de facto holding company of the Samsung empire.

But the reshuffle angered investors, who have long accused the family of prioritising their own influence over shareholder returns. The clan narrowly escaped an embarrassing defeat at the hands of activist fund Elliott Associates.

More broadly, Samsung Electronics shareholders want it to share more of its wealth – it had $59 billion of net cash at end-June. Dividend payout ratios have historically looked stingy compared to rivals like Taiwan’s TSMC or Apple. Encouragingly, in October it vowed to buy back $10 billion of stock within a year, and return 30 to 50 percent of free cash flow to investors over the next three years.

The overhaul is also complicated by growing public opposition to chaebols. President Park Geun-hye’s business-friendly Saenuri party was dealt a surprise defeat in April’s parliamentary elections by an opposition seeking stricter regulations of conglomerates and higher corporate taxes. Samsung – and the rest of corporate Korea – face a possible crackdown from a rising political force.

Next big thing

This backdrop would test the boss of any large company. But Lee faces an even more daunting challenge: staying at the vanguard of some of the world’s most fast-moving and competitive industries.

In smartphones and semiconductors, technology cycles are shortening: the next major innovation may be just months or years away. Established competitors are racing to stay ahead and new rivals are emerging. As vice chairman of Samsung Electronics, Lee will be keenly aware of competitors that fell by the wayside, like Blackberry, Nokia or Sharp.

Meanwhile, earnings are under pressure from slowing sales growth in smartphones. Three years ago, when annual growth in handset shipments was a breakneck 40 percent, Samsung Electronics’ earnings hit a high of over 30 trillion won. Analysts expect the company to earn less than three-quarters of that this year.

Future growth has to come from elsewhere. Hence, Samsung has ploughed big sums into everything from virtual reality, next-generation memory, and flexible displays to electric-vehicle batteries and healthcare. It is preparing to float Samsung BioLogics, a unit that aims to be the world’s largest contract manufacturer of biopharmaceuticals. Samsung SDI, an $8 billion affiliate, is already the world’s third-biggest battery supplier after Panasonic and LG Chem.

Investors will trust the Lee family even less if Samsung Group fails to deliver growth. As a third-generation leader, Lee neither founded the company, nor can he replicate the extraordinary growth of his father’s reign. Maintaining Samsung’s leadership in complex and rapidly changing markets will be the best way to cement his own legacy.

Peter Thal Larsen also contributed to the article.

 

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