A good read on Samsung in this month's Fortune
(raj - repeat after me....ohwah...tanas...siam)
fortune.com
Samsung's Golden Touch
Once a copycat, the Korean giant has money, market share, and strong new products. Now it wants respect.
FORTUNE
Monday, April 1, 2002
By William J. Holstein
Last summer Chin Dae Je, the head of Samsung Electronics' digital media division, sent a laptop to Michael Dell. The two men had never met, but Samsung had recently signed a multiyear $16 billion deal with Dell Computer to provide components to the Texas PC maker. The laptop--thinner and lighter than a Sony Vaio--made such an impression on Dell that he sent one of his executives from Japan to South Korea to get a better look. Now Samsung is making a similar model that will be sold in the U.S. under the Dell label starting in April. And Dell himself, a spokeswoman confirms, travels with a Samsung-made laptop.
Chin's impulsive move is a sweet triumph both for him and for Samsung Electronics, the most profitable part of Korea's most valuable chaebol, or industrial group. "Five years ago we had to buy chips from Sony or Matsushita, so we were always behind," says the wiry, combative Chin, 50, sitting in his office in Suwon, south of Seoul. Now, he says, "we can be No. 1. There's no doubt in my mind."
This is Japan's worst nightmare. Fujitsu, Hitachi, Matsushita, NEC, and Toshiba are all losing money. Sony has been limping along, barely profitable. Meanwhile, Samsung Electronics, which started out in 1970 making cheap 12-inch, black-and-white televisions under the Sanyo label, is entering the top tier of the world's technology companies. It's no longer a copycat, making stuff designed by others. And it's no longer emulating the Japanese corporate model by promoting and rewarding employees on the basis of seniority alone, or by propping up losers.
Instead, Samsung Electronics has become a truly innovative company, creating cutting-edge technology across a spectrum of product lines, including combined cellphone and handheld devices, flat-screen TVs, and ultrathin laptops. Last year it ranked fifth in the world in patents, behind IBM, NEC, Canon, and Micron Technology--but ahead of Matsushita, Sony, Hitachi, Mitsubishi Electric, and Fujitsu. The company "can't be classified as a replicator of other people's technology" anymore, says Jonathan Dutton, head of equity research for UBS Warburg in Seoul.
Samsung Electronics made $2.2 billion in 2001, on sales of $24.7 billion--not its best year by a long shot, but not bad considering the times. It has built strong positions in memory chips (the world leader), thin-film displays (first, again), and wireless communications (fourth in handset production). At home it is the strongest of the four major chaebol. Hyundai (No. 2) is being split up among the sons and relatives of founder Chung Ju-Yung. LG (No. 3), the former Lucky Goldstar, has fumbled major investments and is losing money. Daewoo, the smallest, has suffered a spectacular meltdown, and founder Kim Woo Choong is in hiding abroad. With more than $100 billion in revenues, the Samsung Group is by far the largest corporate presence in South Korea, the equivalent of what a combined IBM-Intel-Citigroup-Caterpillar-Aetna would be in the U.S. And of the 25 companies that make up the chaebol, by far the most important is Samsung Electronics, which accounts for a quarter of the group's total revenues and three-quarters of its total net income.
But Samsung Electronics is not content with being one of Korea's most successful companies or even with outsmarting its Japanese rivals. It wants to become Korea's first great global company. To do that, it has to change its image in the world's largest market, the U.S. The company has already established its brand as a top-of-the-line choice for consumers in places like Russia and China. And it is a valued partner to U.S. firms like Dell, Hewlett-Packard, Compaq, and IBM, for which it makes components. But Samsung wants to be more than a supplier with a good reputation. It wants its brand to be seen in the West as just as good as, say, Sony. So it's spending $400 million this year on a stylish marketing campaign, including a high-profile role at the Salt Lake City Winter Olympics. And it's changing the way it sells, pulling out of big discount chains like Wal-Mart and Kmart and moving its products into more upscale stores. It's an expensive gamble, but if it works it could elevate Samsung's image--and its profits.
The man credited with turning Samsung Electronics into a profit machine is CEO Yun Jong Yong, 58, who spent part of his career in Japan and speaks Japanese. But it's telling that of the three top executives he has put in place--Chin; Lee Ki Tae, who runs the telecommunications division; and Lee Yoon Woo, head of the semiconductor division--two of them speak English. That may sound like a small thing, but it says a lot about the cultural revolution that is continuing to transform the company: The three are the front-runners to replace Yun when he retires in the next year or two.
One ingredient of Yun's success is Korea's love of gadgetry. This nation of 47 million has gone gaga for wireless communications and broadband Internet access. According to official figures, 56% of Koreans own a cellphone. On the street, though, it seems everyone does, from street sweepers to CEOs. Twentysomethings with red-streaked hair use seriously fast broadband connections to play online war games in Internet cafes. More than half of Korean households are broadband subscribers, according to UBS Warburg, compared with 2.3% in Japan. The hothouse effect created by the public's readiness to fall for the Next New Thing is similar to that in Finland, another small, proud, technology-obsessed nation.
Samsung has been able to use its home-field advantage as a kind of test market for the world. Gartner Dataquest says Samsung has just nudged Siemens aside to become the No. 4 maker of cellphone handsets, with 7.5% of the market. No. 3 Ericsson is in its sights, while No. 2 Motorola (15.7%) has been losing market share for a decade. So it's not hard to imagine that the competition for dominance in the world cellphone market could come down to Samsung and No. 1 Nokia (33.4%).
To make itself look and operate more like a Western-style multinational, Samsung Electronics has opened its operations to foreigners and appointed three non-Koreans to its board. "The Japanese are very closed in comparison," says one of them, Franz-Hermann Hirlinger, the Tokyo and Seoul representative of Germany's Bayerische Landesbank. Samsung Group Chairman Lee Kun Hee, son of founder Lee Byung Chull, remains the largest single shareholder. Still, the presence of foreigners on the board has been reassuring to foreign investors (who own 60% of the shares) because it implies an acceptance of international financial standards and practices. This means, for example, that the Samsung Group will be much less likely to ask Samsung Electronics to cross-subsidize money-losing subsidiaries or to engage in the kind of incestuous financial dealings that drive foreigners to drink--or worse, to disinvest.
Samsung Electronics has also expanded its geographic reach; it manufactures in 14 countries, including China and Mexico, and generates 70% of its revenues outside Korea. To manage all this, it has devolved decision-making to its global brand managers. In the old days any question more important than what brand of pencil to buy had to be made at the highest levels in Seoul. Says Jeffrey D. Jones, president of the American Chamber of Commerce in Korea and a 22-year veteran of the country: "Samsung Electronics has become a global company living in accord with global standards."
It's a far cry from what Samsung Electronics looked like in 1988. That was the year the Seoul Olympics helped spotlight the country's economic and technological ambitions. And it was just after Chin returned to Korea from an eight-year stint in the U.S., getting a Ph.D. in electrical engineering from Stanford and working as a researcher at IBM in New York. He wanted a challenge, he says, instead of a life in the IBM "country club."
With his first assignment, Chin certainly found one. He was ordered to jump-start Samsung Electronics' memory-chip business. Skeptics said it couldn't be done. The industry was depressed, the company was years behind the competition, and Japan Inc., which dominated the field, was just too powerful. Worse, Chin ran smack into the hierarchical and deferential Samsung culture. Full of ideals and more than a little attitude, Chin was essentially told to keep his mouth shut. "At strategy meetings, no one asked questions," Chin recalls. (Asking unscripted questions can be considered rude in Korea; if a person doesn't have the right answer, he might be embarrassed.) "But I didn't understand things. So I asked questions. People blushed and turned red. They were upset. I didn't care. I just kept asking questions."
The semiconductor division was the newest of Samsung Electronics' three major business units--digital media and telecommunications are the other two--and the least ossified. So Chin took advantage of that by hiring a large number of Korean Americans and Koreans with American experience. The result was a more aggressive, shoot-from-the-hip style. And he drove his people relentlessly to improve manufacturing techniques. By 1992, Samsung Electronics ranked No. 1 in DRAMs in terms of market share and revenues. It still does.
Samsung Electronics made another savvy bet in the mid-1990s. It took some of the profits that the chips were generating and put them into wireless communications, producing its first handset in 1994. But apart from its maverick semiconductor division, the company remained locked in its traditional ways.
In 1996, Yun, who had been running Samsung's operations in Japan, was brought in as president and CEO of Samsung Electronics. The culture, he recalls, was "complacent." And things got worse fast: During the Asian economic crisis that began in 1997, the Korean economy went into a tailspin as foreign lenders took their money out of the highly leveraged economy.
By July 1998, Samsung Electronics was losing millions of dollars a month. "If we continued, we would have gone belly-up within three or four years," Yun says. He and nine other senior managers locked themselves in a hotel room for a day that July and decided they had to cut costs by 30% over the next five months. Then they all wrote resignation letters and pledged to resign if they failed. Yun reduced inventory levels, cut costs, sold nonperforming subsidiaries, and even got rid of golf club memberships. In a sharp break with the Japan-inspired tradition of lifetime employment, he fired a number of senior managers (some went to subsidiaries), creating job openings for younger, feistier, English-speaking leaders. By 1999 the company was solidly profitable, and 2000 was even better, with more than $5 billion in net income.
That year, Yun asked Chin to take over the digital media division, the Samsung unit that makes computers and consumer electronics products. From the outset, Chin prodded his engineers to design a laptop both lighter and thinner than Sony's Vaio. And he pushed them to develop a combined cellphone and handheld computer, one with a screen big enough to browse the Web. In order to accomplish both goals, he summoned engineers and designers from across the company. This kind of intradivisional cooperation--mixing wireless, semiconductor, and computer expertise--is central to Samsung's digital-convergence strategy.
Digital means that more and more functions will be packed onto a single semiconductor rather than onto circuitboards or chipsets, which will drive down size, weight, and power consumption. Convergence means that computers, cellphones, PDAs, and other electronic devices are evolving into a new generation of combination products. These products will come in faster and faster cycles--Koreans typically upgrade their cellphones every eight or nine months.
One example of what the company has in mind is the NEXiO (or Next Generation Internet Office), the combined cellphone and handheld computer that Chin's engineers came up with in less than a year. The device has a five-inch screen, large enough for a user to access an Internet site and read a whole page without too much eyestrain. It retails for $850 in Korea but hasn't gone on sale yet in the U.S., largely because of America's relatively feeble wireless-communications infrastructure. The size of the NEXiO, which is much like Nokia's Communicator, could prove a stumbling block because it feels bulky in the pocket. But as engineers whittle down the size, Chin is optimistic that demand could reach two million units within a couple of years.
The NEXiO and the ultrathin SENSQ 760 laptop (the one Chin sent to Dell) display the kind of nimble inventiveness that Yun wants for Samsung. And it's just what's lacking among many of the company's Japanese rivals, who are more wedded to analog technologies and are only now beginning the kind of restructuring that Samsung went through in the late 1990s.
One Samsung product that has already hit the U.S. market is the I300 Smart Phone, which Sprint PCS began selling last November. The $499 device is a combined PDA and cellphone with e-mail capability, comparable to the Handspring Treo. Sprint won't offer specific sales figures but says the model sells well and is particularly popular among business users. In terms of both design and functionality, Samsung Electronics is "pushing the envelope in the wireless industry," says John Garcia, a Sprint senior vice president in Kansas City.
The partnership with Sprint has been important for both companies. Samsung Electronics was willing to make handsets for Sprint at a time when CDMA technology--now the most widely used standard in the U.S.--was considered unproven. Samsung's products and its experience in its phone-happy home market will be key to Sprint's ability to adopt third-generation (3G) wireless technology beginning later this year. In turn, the alliance with Sprint may help Samsung overcome one of its biggest frustrations in the U.S.--the perception that its brand is second tier. "I would guess that prior to their success in the wireless industry, not many people knew what Samsung was," says Garcia. "They might have thought that Samsung built cheap microwaves, and that was it."
In retrospect, Samsung acknowl-edges that it made a mistake by ramping up production of things like microwaves in the late '80s and early '90s and putting them on boats for America. The goods piled up and then had to be discounted, reinforcing the cheap-brand image. Now Samsung is putting serious money into changing this perception. Two years ago, Eric Kim, a Korean-born executive who spent more than 30 years in the U.S. at a variety of high-tech and software companies, came onboard to perform the makeover. As executive vice president for global marketing, Kim consolidated Samsung's 55 advertising-agency accounts into a unified campaign with one agency, Foote Cone & Belding. The firm came up with a campaign of surreal ads featuring a hauntingly beautiful woman whom Samsung refers to as the "snow woman." The whole thing looks expensive and classy--which is the point.
In another move to upgrade its image, Samsung is pulling out of big discount chains like Wal-Mart and Kmart, which emphasize price over quality, and moving products like DVD players, televisions, and computers to Best Buy, Sears, Circuit City, and other specialty stores. The overall effort is beginning to show results: Samsung's brand value rose faster last year than everyone's except Starbucks', according to Interbrand, a New York research firm that has developed a formula to measure brand value.
Success, of course, brings a new set of challenges. For one thing, now that Samsung Electronics is creating more of its own technology and upgrading its brand, its relations with customers and allies will become more complex. It is selling chips to Microsoft for the Xbox, and Bill Gates is a big fan, but at the same time Samsung is developing an instant-messaging phone with Microsoft rival AOL Time Warner (parent of FORTUNE's publisher). Managing a path between these feuding giants will require a delicate balancing act. Sony is also a big customer for Samsung chips, and the Koreans don't want to blow off that relationship either. Yun already has been obliged to go to Japan to apologize to Sony CEO Nobuyuki Idei for news reports that Samsung Electronics was attempting to dethrone Sony. It is, of course, but it's hardly polite to say so.
Asked what Samsung Electronics' largest stumbling block might be, UBS's Dutton replies, "Hubris." Memory-chip prices have tripled since November, indicating that the cycle is turning in Samsung's favor. The American economy shows signs of recovering. And the company's strength in its thin-film-transistor LCDs in smaller screens and its plasma displays in larger screens means it's going to benefit from the long-term trend away from cathode ray tubes. "The next couple of years are going to be megaprofitable," Dutton predicts.
The trick will be deciding how to invest the profits and how to stay focused. When you're playing with and against companies like Microsoft, Sony, and Nokia, relaxation is not an option. But then, Samsung knows this. Its whole corporate culture is intense.
Chin tells the story of how he and other executives were on a golf outing with Yun a few years ago. Whenever they finished a round, there would be an awards ceremony at which winners were encouraged to drink "atomic shots"--beer spiked with hard liquor. On this occasion, Yun donated an expensive driver for an auction: "I will give my driver to the team that [pledges to] drink the most atomic shots," he said. The bidding reached ten shots. Everybody thought that was the outer limit. But Chin, who hates to lose, upped the ante. He and six of his executives blew the other guys away by pledging 15--and then downing them.
It's the kind of spirit that could make Samsung Electronics truly great. Or maybe it's the kind of risk taking that results in a gigantic hangover. Management at Samsung has proved it can deal with adversity. Coping with success--that's a different thing altogether. |
