Samsung | Samsung faces the crisis that could reinvent Samsung
Photo: Reuters
Photo: Reuters
SamsungBusinessAnalysis

Samsung faces the crisis that could reinvent Samsung

South Korea's biggest company is likely to survive and wide reforms may follow.

April 11, 2017 10:36 AM (UTC+8)

At a Samsung Group meeting in Frankfurt in 1993, founder Lee Kun-hee gave a speech that is regarded in the company as the lynchpin upon which it started its conquest of global markets.

Speaking to hundreds of Samsung executives flown in from around the world, the chairman delivered a three-day talk later compiled in the book New Management.

“Change everything but your wife and children,” was one statement Lee made in what became known as the Frankfurt Declaration in the South Korean corporation. This became a key elements of the document: “Change begins with me.”

Samsung, which became the biggest of the South Korean conglomerates known as chaebol and one of the world’s leading electronics companies, has come full circle to asking that question of itself and facing the need for reinvention.

The crisis facing Samsung is, of course, the one facing Korea itself after the impeachment and later removal of President Park Geun-hye from office on allegations of bribery and influence-peddling.

Same old song: Samsung Group's Jay Y. Lee leaves a Seoul court hearing. Public outrage at the latest scandal involving the country's chaebol may finally force real reforms... or not. Photo: Reuters
Samsung Group’s Lee Jae-yong leaves a Seoul court hearing. Could public outrage finally force real reform at Korea’s chaebol? Photo: Reuters

Lee Jae-yong, the vice-chairman of Samsung Electronics and as the only son of the founder the de facto leader of the group, is currently awaiting trial on charges of bribery and embezzlement relating to the scandal.

As he was held in custody, concerns grew about how the business would suffer in his absence and whether the reforms he has been pushing since taking over from his father in 2014 would be abandoned.

But Samsung has faced crises before and responded to them by hunkering down until the storm passes.

In this case too, because a conservative South Korean society that owes much of its modern development to its chaebol, the position of Lee Jae-yong, as the only heir of the Samsung empire, doesn’t seem to be threatened even if he is sentenced to imprisonment.

He will continue representing the founding family, but moreover the Samsung leadership has made sure his succession at the top of the group’s management will be eased through the merger of two Samsung affiliates.

Samsung Electronics chairman Lee Kun-Hee's daughters, president and chief executive of Hotel Shilla Lee Boo-jin (C), vice president at Cheil Industries and Cheil Worldwide Lee Seo-Hyun (L) and his only son Samsung Electronics' chief operating officer Jay Lee are seen after the Ho-am prize award ceremony in Seoul June 1, 2012. REUTERS/Seo Jae-hoon/Pool
The Samsung kids. Lee Boo-jin, president of Hotel Shilla (center); Lee Seo-Hyun, vice-president of Cheil Industries (left); and Lee Jae-yong, Samsung Electronics’ chief operating officer in Seoul on June 1, 2012. Photo: Reuters

The controversial merger sealed in 2015 made Lee’s family the biggest investor in Samsung Electronics, the crown jewel of the Samsung Group. It is this merger, made possible with the approval of South Korea’s pension fund, that lay at the heart of the bribery scandal.

Thus the founding family holds power not only through complex webs of cross-shareholdings between subsidiaries, family members in key positions and the loyalty of staff, but also by its ownership stake.

Meantime, the reforms Lee announced in 2014 should continue, so as to ensure not only the survival of the conglomerate, but also its competitiveness and its growth.

Last year’s recall of the Note 7 took a toll on the brand’s reputation. Photo: Reuters

Samsung has taken an important step toward greater independence for its 78 companies by disbanding the Future Strategy Office that has been the link among the conglomerate’s heads, government officials and politicians for more than 50 years.

Also, it has decided to abandon the regular meetings of its CEOs, the internet homepage and blog for the Samsung Group, and the Samsung Broadcasting Channel.

The turmoil caused by the scandal did not dent Samsung’s businesses as some might have expected as it recorded a nearly 50% jump in its fourth-quarter  operating profit.

Despite the Samsung Note 7 debacle last autumn that saw the recall of more than 2 million devices and the suspension of its production only two months after launch, the Asian giant achieved its highest profit in three years.

But the Note 7 took a toll on Samsung’s image, as it fell from seventh place to 49th in the Harris Poll of corporate reputations.

The company has rebounded with the launch of the Galaxy S8, which has won mostly positive reviews and shows that even amid crisis Samsung doesn’t disappoint when it comes to innovation.

Samsung’s leadership appears focused on both reforming the working, management and organisational culture, and the business direction. It’s shifting from hardware to a more software-orientation.

The scandal that brought down the country’s president has increased South Koreans’ anger toward the chaebol, which are perceived as traditionalist, corrupt, greedy and too powerful.

And the mood of the general population is not lost on the political elite, with some of the presidential candidates in the May election listing chaebol reform as central to their campaigns.

Samsung isn’t the only conglomerate to face these accusations, but it is the largest in the country and the first forced to confront the consequences of the presidential impeachment scandal.

If there was ever a time for Samsung to put the Frankfurt Declaration into practise, it’s now. 

Andreea Zaharia is a fellow at the Romanian Institute for the Study of the Asia-Pacific (RISAP), where she analyses the security of the Korean Peninsula, South Korea’s economy and internal affairs, and its relations with China.

Comments