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November 30, 2000

From Our Correspondent: Hirohito and the War
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From Our Correspondent: Making Enemies
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Asiaweek Time Asia Now Asiaweek story

NOVEMBER 12, 1999 VOL. 25 NO. 45

The Big Squeeze
Samsung has been the most successful chaebol in slimming down and getting control of its debt. But the hardest part is yet to come
By TIM HEALY and LAXMI NAKARMI Seoul

In the expansive marble-floored lobby of the Samsung Group's headquarters in downtown Seoul, a white elephant is on display. Not a real white elephant, actually, but a potent symbol just the same. It is a white 4-door sedan, named the SM5, and it represents the most expensive gamble in the company's 61-year history. Samsung spent about $3.5 billion to build a car company, which is now more than $3 billion in debt. Samsung Motors' production plant in Pusan was shut in December 1998 after just nine months in operation. Today, the fate of Samsung Motors rests mostly with the company's creditors, who hope to find a foreign buyer (General Motors is said to be interested). A year ago, the building's lobby was essentially a new-car showroom, but now most of it is devoted to Samsung Electronics, the group's star performer (there is not much competition) and a top global producer of computer monitors and dynamic random access memory (DRAM) chips, the workhorses of computers.

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The lonely SM5 remains on a pedestal. "The car is collecting dust," says Kim Jong Han, a bank clerk in the building. "It is indeed a sad story and a blemish in Samsung's history of successes." Times have changed. Samsung Group Chairman Lee Kun Hee at one time boldly launched Samsung Motors with the words, "I want to make good, quality cars that can be sold worldwide." But today the Samsung motto might be: "Think small." At least compared with other big Korean chaebol, or family business conglomerates, it has done just that. In the 22 months since the Asian Crisis seriously hit South Korea, Samsung has sold more than $3 billion worth of assets and reduced worldwide employment by nearly 30% to 118,000. The efforts have been noticed by investors. Today, Lee says that Samsung has about one-fifth of all assets of the big-five chaebol, but its market capitalization is nearly one-half of the group.

Not that the job is close to being over. Samsung has been able to surpass the target set by President Kim Dae Jung for the chaebol to achieve a debt-to-equity ratio of no more than 200% by the end of this year. According to the government, Samsung's ratio is already 192.5%. However, in spite of a slew of mergers, sales and divestitures, the company remains a bloated, sprawling conglomerate. Chairman Lee admits there is still much work to do before the company becomes efficient and nimble. "I'll continue to emphasize restructuring and consolidation to achieve higher capital productivity," he told Asiaweek in a rare interview. He says his goal is to eventually achieve four-fifths of the group's sales and profits through two basic divisions: electronics and financial services. The group will keep a handful of other units, he says, such as advertising, tourism and home security. But as important as the restructuring is, Samsung also needs to rethink its corporate culture. If it doesn't, these reforms and consolidation will simply not have the desired long-term effect.

Samsung Electronics is the company's model - at least in terms of profitability and performance. A $16.7 billion company last year, Samsung Electronics expects to grow four-fold over the next six years. It is easily the group's most profitable division: 1998 earnings were $260 million, more than twice as much as the next most profitable piece. In 1999, the company is expecting to make $3 billion on sales of $20 billion. By itself, Samsung Electronics is nearly 15% of the nation's total stock market capitalization. The company accounts for 10% of total merchandise exports. Samsung Electronics' chief executive, Yun Jong Yong, has cut 27% of the workforce, 16,000 people, since he arrived at the beginning of 1997.

Even the company's one big failure, its $700 million investment in Samsung Motors, could be seen as a backwards-kind-of-success - at least to the extent that Motors is allowed to fail and Electronics takes a big hit. In the past, an important company in South Korea would not have been forced to experience such a loss. But if Samsung Electronics takes the full loss this time, says Jang Ha Sung, a professor at Korea University and one of the foremost proponents of improved corporate governance in South Korea, it will be a valuable lesson: You cannot count on the government to bail you out simply because your loss is huge.

The shutdown of Samsung Motors in December 1998 represents one of the key achievements of President Kim Dae Jung's fight to rein in the chaebol. Samsung has certainly helped Kim's crusade, divesting itself of several businesses including a petrochemical company, a construction equipment unit, its aerospace business unit and a semiconductor facility. It has sold stakes in several joint ventures, including one with Hewlett-Packard. "The market has given high marks to Samsung's efforts," says chairman Lee. But Lee Hun Jai, chairman of the Financial Supervisory Commission (FSC), which is directing the nation's corporate and financial restructuring, says it isn't enough. "Samsung has to do more to become a globally competitive company," says the FSC chairman. "There are still many units in [the company] that are not related to its core business."

Consider a short list of Samsung's key challenges if it is to attain the chairman's goal of becoming a focused, world-class competitor in a limited range of products. First, while it has reduced debt to less than twice shareholder equity, that is still a high ratio for a conglomerate with uneven cash flow. Some company officials have said they want to reduce debts to 50% of equity. Second, the company continues to be saddled with many unnecessary workers in marginal businesses. That's why both the chairman and the government acknowledge the need for more consolidation. A third problem is harder to quantify, but it may be the most difficult one for the company to address: Samsung suffers from a tradition-bound corporate culture that shies away from innovation or change.

Look no further than a potentially hot product from the group's star - Samsung Electronics - for an example of how inflexibility can hurt. Steve Han helped Samsung Electronics develop a device that will allow consumers to download and play music from the Internet - called an MP3 player. Samsung is calling the player "yepp" (not capitalized), which is close to the colloquial English word for yes. But because the company decided to follow a conservative, tried-and-true formula for marketing the device - selling it only through a distributor, Creative Technologies of Singapore - Han left. He is starting his own Internet company. "Many in [Samsung's] non-technical [people] have no idea what the electronics world will look like five years from now," he says. He thinks yepp could have done for Samsung Electronics what the Walkman did for Sony. "We had the best chance to reach a whole generation of customers who know no difference between Korean and Japanese products."

Yun, the Samsung Electronics chief executive, acknowledges that his company's strong performance in the mid-1990s made executives and employees complacent: "We lost our drive and lacked the urge to try to do a better job." One senior executive within Samsung Electronics says the leadership has done a good job in cutting employment, but it hasn't provided a vision for where the company should go. "Samsung Electronics today is like an orchestra," says the executive, who asked not to be identified. "Its members are the best in their discipline. We have the best pianist, the best violinist and the best base player. But there is no conductor; no one to write a masterpiece."

Remember that this is the Samsung Group's most profitable offspring. The problem is worse in other parts of the empire, say some younger managers. A certain group of long-time Samsung executives seem immobilized between the company's past and future needs, says Cho Sung In, a 27-year-old employee. Hwang Young Key, CEO of Samsung Investment Trust and a close aide to the chairman, says management must forget past successes: "Some issues deserve a fresh [perspective. But Samsung] always tends to look back on our experience when we try to deal with the future." A 33-year-old marketing manager says too many executives at Samsung spent their careers dealing with distributors of the chaebol's products rather than customers: "They seem allergic to dealing directly with customers. They see too much risk in it."

A new generation is coming up through Samsung, and they say they are trying to challenge the company's traditional culture. Chairman Lee acknowledges that there has been friction between different generations of managers, but he contends that since many old-school types have left in the last two years, friction has been reduced. Not so, says a group of young managers and other employees who spoke with Asiaweek about the Samsung culture over lunch recently. "Who should provide the vision and management direction for the company?" asks one. Joseph Lee, who works in the division of Samsung Electronics that produces yepp, says management acts like it is too busy to consider the future. "There seems to be a generation gap between younger, Internet-generation employees and older executives in understanding how information flow could change decision making," says Lim Young Hak, a director in the Internet business division.

How much of the blame belongs to the man in charge? The consensus among the lunch crowd is that chairman Lee must emerge from his Namsan office and find out for himself what the company's new generation thinks. "We can help him provide all of us with the vision and direction that we surely lack," says Song Jin Sook, a female clerk.

But Lee himself says he intends to let his subordinates tackle most of the hands-on management. Analyst Eugene Chung of Jardine Fleming thinks that may be a problem if investors feel in the dark about how involved the chairman really is: "The investors will leave Samsung the moment they see trouble." He adds: "One important issue for many Samsung analysts is the role - if any - played by Chairman Lee in making decisions. That is not transparent and that bothers me."

If the criticism were fair - and it may not be - Lee would come by that management style naturally. His father, Lee Byong Chull, considered the toughest of all chaebol bosses in South Korea, laid out a strict culture of command and control at Samsung that was almost military in its hierarchy. The elder Lee paid his managers well, and demanded a high degree of loyalty in return. He was known to operate by the seat of his pants, making key decisions based on instinct as opposed to rigorous analysis of the costs and benefits.

Lee Kun Hee was the third of three sons (there were four daughters as well, but in rigidly patriarchal South Korea, they were not serious candidates to follow dad at the helm of Samsung). Lee's father picked him as a successor because, it was thought, the older sons had fallen out of favor. But Lee Kun Hee has been notably different from the Samsung patriarch in key ways. He is considered methodical and demanding of every detail before he is prepared to make a decision. He also talks about trying to dismantle some key aspects of the top-down culture at Samsung. He seems to understand the need for transparency and is careful to list all the stakeholders with an interest in Samsung's performance - shareholders, customers, employees and the government - when he talks about whom he should consider when making decisions about the company's future.

The chairman says that he will "continue to emphasize restructuring and consolidation to achieve higher capital productivity, which is a must for long-term growth. Restructuring without strong and efficient management is meaningless and I've begun working to enhance the quality of Samsung's management system." Lee insists that Samsung cannot compete globally unless it has a world-class management team, and he says he has personally taken on the task of improving it.

Perhaps he has his priorities right. Unfortunately, the perception among many younger managers is that he has long ignored the problem. Some veteran executives recall the time Lee took the entire senior staff of Samsung Electronics to Tokyo's Akihabara electronics market and then to Los Angeles to show them Samsung products gathering dust on store shelves. The idea was to shock the executives into realizing that the entire world didn't treat Samsung products with the same enthusiasm as Koreans. It was a come-down for a group that was flying high, but Lee wanted to impress upon them that they had to be even better if they wanted to compete globally. Today, the importance of good management hasn't changed. But this time Lee may need to come up with a stunt to lift the spirits of sagging executives rather than bring them down to size.

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