In times of uncertainty, Samsung thinks hard about bringing back centralized management structure
By Kim Yoo-chul
Korea's overall industrial ecosystem is represented by the existence of the chaebol, a combination of the Korean words "jae" (wealth) and "beol" (clan or clique). It also stands for plutocracy and rich business families.
From a business standpoint, chaebols have a huge influence on the Korean economy because the country's top four family-controlled entities ― Samsung, SK, Hyundai and LG Group ― account for more than half of the nation's exports. In fact, these leading chaebol help bring in the majority of Korea's capital.
While it's true that there have been numerous controversies, debates, criticism and setbacks regarding their role in Asia's fourth-largest economy, the point is that consolidating greater market resources to these top-tier industrial conglomerates puts the overall stability of Korea at risk, should they fail.
Samsung, for example, represents more than 20 percent of Korea's gross domestic product (GDP). The global leader in memory semiconductors, screens and smartphones, Samsung is the largest and most powerful of them all.
However, Samsung's key businesses are losing their sheen. That doesn't mean the country's top chaebol is worrying about its sustainability, but it's fair to say that the heyday for Samsung's traditional profit drivers such as TVs, smartphones and memory chips is likely over.
Samsung has admitted that it faces increasingly difficult challenges in terms of accelerating corporate innovation to explore new business areas of growth. While it has set Taiwan's foundry king TSMC as its chief competitor, analysts say tremendous efforts and continuous large-scale spending are necessary for Samsung to narrow its market gap with the rival in the promising and highly lucrative foundry chip sector.
|A woman walks past an ad for the Samsung Galaxy Z Flip4 smartphone at the company's Seocho building in Seoul, Oct. 7, after Samsung Electronics expected its third-quarter operating profit to fall 31.7 percent quarter-on-quarter. AFP-Yonhap|
"Yoon Suk-yeol's decision to grant a special pardon to Lee Jae-yong, Samsung's leader, is because the Yoon government wants to increase Samsung's contributions to the national economy amid rising inflation, interest rates, geopolitical risks and supply chain disruptions. Given the country's unique chaebol structure, Lee is the only person who can make critical decisions on investments and mergers and acquisitions (M&As). Within that context, Samsung must have a kind of a control tower," an official at a U.S.-based private equity firm said by telephone.
Some reform advocates claim the country needs to end its decades-long reliance on these big businesses. But the dismay of critics over the Samsung leader's special pardon isn't backed by the broader populace, as more than 65 percent supported the pardon, according to various polls. This is a reflection of the expectations of Koreans that Samsung needs to expand and grow during these troubled times, especially with the specter of a potential economic downturn.
No sizable M&As, revival of new nerve center?
Lee's official signoff is required for many major decisions at Samsung, according to company officials. Samsung sources say that chances are high for Lee to officially take over as group chairman next month at the earliest.
"In Korea, CEOs act more like COOs (chief operating officers) as only owner families have the full authority for crucial decisions regarding a corporation's path and growth. This has also been very true for Samsung. It's necessary for Samsung to have a vehicle to help Lee make key decisions such as investments, acquisitions and restructuring," one insider said.
Despite its 200 trillion won in cash and cash-equivalent holdings as of this month, Samsung hasn't been very active in making sizable acquisition deals, acquiring only 29 companies including seven in the last five years. A total of four acquisitions involved private equity firms (PEFs). Samsung's largest-ever acquisition was its purchase of Harman for $8 billion in 2016, one year before it decided to dismantle the "control tower" unit within its structure. For Samsung, acquisitions are a sound way of reaching its growth goals.
In 2017, Samsung disbanded its corporate strategy office as it was the center of criticism for its controversial role in a massive graft scandal that shook the nation at the time. The office had some 250 elite staffers who were hand-picked from the group's core affiliates before being dismantled. The office had been considered the group's nerve center. Since then, Samsung's leadership structure is currently being led by separate task force teams in three group affiliates.
|The American and Chinese flags wave at Genting Snow Park ahead of the 2022 Winter Olympics in Zhangjiakou, China, Feb. 2. The U.S. Commerce Department is tightening export controls to limit China's access to advanced computing chips, as well as its ability to develop and maintain supercomputers and make advanced semiconductors. AP-Yonhap|
"Discussions are underway for the establishment of a new control tower with a Samsung-established compliance monitoring committee navigating the best possible ways for the conglomerate to better perform the functions of a new nerve tower. Given the vast scope of businesses, the creation of an independent entity assigned to help address group-level affairs is necessary," another insider said on condition of anonymity citing the sensitivity of the issue.
Representatives at Samsung headquarters in Seoul said they are not in a position to comment on this issue.
The benefits of having a control tower are ensuring end-to-end visibility, reduced costs, increased productivity and implementation of the most effective target strategies. But critics say that because the 2017 decision to disband its corporate strategy office was due to its control over all critical affairs, the new office if created, will likely have reduced responsibilities in terms of defending the interests of the Samsung owner family.
"I would expect an announcement of Samsung's new nerve center will come after the completion of the specifics of an operations manual by its own compliance monitoring committee. The new control tower will have to highlight its transparency when it comes to the operation as Samsung is set to move forward with more corporate revamp plans," said Kim Kwang-jin, an analyst at Hanwha Investment.
Lee, who holds the title of vice chairman of Samsung Electronics, is directly involved in discussions with senior members of its compliance monitoring committee, as he is moving towards more board-focused management to improve corporate governance. Lee was a board member at a now-defunct flat-screen joint venture between Samsung and Japan's Sony, S-LCD, although it remains to be seen whether he will take a role in Samsung Electronics' board in its annual year-end reshuffle.
Last year, Samsung merged its smartphone and home appliance units to develop a Galaxy-branded ecosystem that goes beyond smartphones and into other consumer electronics, mimicking Apple's corporate structure.
Analysts said because the key competition point is moving away from devices themselves to developing ecosystems, Samsung has to be quick to address growing investor concerns over the flat growth of its key businesses, as well as its current stale vision for the future.