Is Samsung Doing All Right?

Ichiro Suzuki

South Korea’s electronics giant has not been doing well lately. At the beginning of this decade, Samsung was comfortably ranked on the list of the world’s ten largest corporations. Its equity market capitalization was almost half the size of Apple. That position, however, turned out to be the peak of the company. Since then, Samsung has descended in the rankings. In mid May, the company was ranked No.41. Its market capitalization at $230 billion is half of what it once was. Since the time Samsung came close to global top ten, Apple became the world’s first $1 trillion, $2 trillion and $3 trillion company. It flirted with $4 trillion by the end of 2024. In addition, Samsung today is only two notches above Toyota Motor, Japan’s largest company, which is a car maker that is valued as such unlike Tesla that receives a tech company valuation. There must be something wrong with Samsung.

Samsung was founded in 1938 by Lee Byun-Chul as a general trading house, and grew rapidly riding on South Korea’s economic miracle that began in the 1960s. In 1968, Samsung Electronics was founded. In 1987 Lee’s son Lee Kun-hee took over the company as CEO, and then drove the company to a global tech giant. Samsung originally made products that were seen as cheaper and lower quality versions of Japanese electronics makers that back then ruled the global markets. Then in 1992, K.H. Lee gathered Samsung managers in Frankfurt and ordered “Change everything except your wife and children.” That was the opening of the younger Lee’s quality obsession. At that time, he made a bold decision to invest heavily in semiconductor production facilities at a time when Japanese rivals were caught in a standstill in the aftermath of the Japanese economy’s bubble’s bust. Corporate Japan’s bureaucratic decisions making processing was simply not able to respond to Lee’s boldness. That has left Japanese chip makers behind Samsung for good. By the time K.H. Lee stepped down as CEO in 2008, Samsung’s market value grew close to $200 billion all the way up from $3 billion when he took over the company.

On its way up to global prominence, Samsung never delivered a new, new thing of its own, relentlessly focused on catching up with and move over Japanese electronics makers, notably Sony. When Samsung overtook Sony in production of TV sets, the company’s target became Apple, which had stunned the world with the introduction of the iPhone in 2007. Samsung is well aware of the importance of innovation and the company is pushing itself to create something that have never existed. Doing so, however, is not what’s written in its DNA. For Apple, it doesn’t matter too much if iPhones are outselling Galaxy phones or not. It controls its operating system and have made iOS a global platform. Apple claims a cut in all the sales made through iOS, be they music, movie, book and other products and services. Apple is acting like a landlord in the tech world. This business model is a major reason that drove Warren Buffett to build an huge position on Apple. Despite Buffet’s immense love and Apple’s marked profit and share price performances, Apple under Tim Cook hasn’t brought anything sensational to the world. Apple keeps collecting fruits of its innovation. Steve Jobs has proved that he was one of a kind, whom no one can emulate. 

Unlike Apple, Samsung has no luxury of enjoying a role of a landlord. Galaxy phones are run on Android, an operating system provided by Google. Samsung has developed its own Linux-based OS, Tizen, long time ago, but few use it in a world ruled by iOS and Android as de facto standards.  However sleek Galaxy might be, it is another smartphone that runs on Android. With their own Android phones, Chinese makers are closing in on Samsung. In Samsung’s other products lines, such as TV sets and white goods, commoditization has been in progress for some time. Chinese makers are providing less expensive but good quality products in the same field. This is how Samsung and other South Korean makers beat Japanese forerunners on their way up. 

On semiconductors, it is said that Samsung is getting technologically behind in chip making. Moore’s Law was made possible by ever lasting progress of technology to draw a greater number of circuits on the face of chips. That technology might have gone as far as it could. Then, it is moving to the direction of making chips multi-layered in an attempt to draw even more circuits on one chip. Samsung is not a forerunner in this technology while its South Korean rival LG Hynix is taking the lead. Samsung probably has missed out something. K.H. Lee was as dominant a leader as Steve Jobs, who called the shots and got it right. Not even Lee, however, was able to keep doing it indefinitely. Samsung is moving to the direction of more normal, or ordinary, decision making process, and still wants to be ultra creative. This seems like an uphill battle and even contradictory. If diversity is one of the factors that spawn innovation, Samsung, and Corporate Korea, stand on the opposite polar, with 90% of the managerial class being Korean men. 

On top of these, Samsung and Corporate Korea have been driven out of China. In 2016, then president Park Geun-ye made a strategic decision to deploy THAAD missiles in defense against China. The move has sparked Beijing’s wrath and led to widespread boycott of South Korean products. Consumer goods maker Lotte was hit especially hard since the company provided its golf course for the missile base. Damage has been done to Corporate Korea. With the rise of Chinese makers as well as nationalism, Korean corporations would have suffered serious blows sooner or later. Nonetheless, it has turned out to be a major dislocation on Samsung and Corporate Korea. 

With the second Trump administration, the world of free trade as we know it is gone. The South Korean economy rose to its where it is on exports, starting from total devastation in the aftermath of the Korean War. The ratio of export to GDP is well above 40% for South Korea, more than twice as high as it is for Japan. Loss of the Chinese market and high tariffs to enter the U.S. market are going to weigh heavily on the economy, regardless of a deal that Seoul settles on with Washington. Samsung group accounts for over 20% of the South Korean economy, and its performance deeply affects the country. Other Korean chaebols (conglomerates) are run more or less in a similar fashion as Samsung. How does Samsung and South Korea respond to a variety of challenges in an uncharted territory? 

About the author: Mr. Suzuki is a retired banker based in Tokyo, Japan.