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Samsung Electronics Put on Hold in Making Massive Investment, M&A Deals
Absence of Key Decision-Making
Samsung Electronics Put on Hold in Making Massive Investment, M&A Deals
  • By Michael Herh
  • August 8, 2017, 07:15
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During the past six months when the vice chairman was detained and the management vacancy continued, virtually all investment plans were stopped at Samsung.
During the past six months when the vice chairman was detained and the management vacancy continued, virtually all investment plans were stopped at Samsung.

 

On August 7, prosecutors demanded 12 years in jail for Lee Jae-yong, vice chairman of Samsung Electronics, not only Samsung but the business world was stupefied. This bombshell is spreading as concern about the survival of the IT giant beyond regret about the absence of the head of the company.    

In a fiercely competitive environment, a ten-year period is said to be enough time to determine a company’s life and death. This fact exemplifies the history of Samsung Electronics which became the number one global player in terms of operating profit by posting 14 trillion won (US$12.6 billion) in the second quarter.

Nine years ago, in the fourth quarter of 2008, Samsung Electronics posted a stunning operating loss of 40 billion won (US$36 million). At the time, the US subprime mortgage crisis was having the global economy reeling. When uncertainty escalated and every company was cowering, Samsung made a bold decision.

During the New Year’s Day holidays in 2009, Lee Yoon-woo, president of Samsung Electronics quietly met with chairman Lee Kun-hee and declared "Super-Gap Strategy" in February of that year. Samsung poured over 23 trillion won (US$20 billion) into semiconductors and displays for two years. That year, German semiconductor maker Qimonda went under and Samsung survived the fierce "chicken game" and returned with operating profit of 11 trillion won (US$9.9 billion).

The fate of Samsung was decided in 2012, five years ago. At that time, Japan's Elpida, which was the world's third largest semiconductor economy was falling apart due to a slump in the world semiconductor industry. Chairman Lee Kun-hee, who went to the headquarters office in Seoul every day, ordered “Super-gap expansion.” The order was to occupy an overwhelming first place by further widening Samsung’s technology gap with the second ranker. That year, Samsung concentrated more than half of its operating profit of 29 trillion won (US$26 billion) from sales of the Galaxy S on semiconductors and displays. The current golden age of the "semiconductor super boom" that Samsung enjoys now is the fruit of the investment that was made at that time.

This miracle of Samsung Semiconductor happened thanks to the harmony of a bold decision of the group leader and affiliates’ self-controlled management. Samsung made the optimal investment decision, predicting a big spike in semiconductor demand triggered by the 4th industrial revolution. However, in general, it is said that now Samsung cannot expect another miracle after 10 years.

"A bold decision about investing tens of trillion won cannot be made by a CEO. It is a well-known fact that the head of a business group chews over future growth engines that can ensure the group’s survival in the future and comes to a key decision," said an official of the Samsung Group. "Is there any future for a company that does not make a bold attempt due to the absence of its head?"

During the past six months when the vice chairman was detained and the management vacancy continued, virtually all investment plans were stopped at Samsung. Since November of last year Samsung Electronics acquired Harman for nine trillion won, a company specialized in automotive electronic devices, the Korean electronics giant has not cut any major M&A deals so far. In the first place, vice chairman Lee proposed a blueprint to show an autonomous drive platform within five years by taking over autonomous and artificial intelligence-related companies after the acquisition of Harman, a US company, at the end of last year.

Samsung Electronics, which was aggressive and vigorous in discovering a future growth engine has become passive and defensive since the arrest of vice chairman Lee. In this process, companies that Samsung Electronics set as targets for mergers and acquisitions were taken over by competitors. Although the top management in each division is already implementing business plans made in the past, it is difficult for them to make core management decisions such as long-term, fundamental investment or new business development.

"Not only did vice chairman Lee Jae-yong made key decisions at the Semiconductor Investment Committee, but made the most of his global networks in business including cutting M&A deals and bringing in president-level talent," said a senior Samsung Electronics official. "Samsung became a global company for large-scale investment and new business development which could put the company at risk. This winning strategy will pay off no longer.”

If the semiconductor division of Samsung Electronics collapses and fails to find new business items, its competitiveness in the electronics business will be severely damaged. Most of Samsung's flagship business items including smartphones and TVs, have grown along with semiconductors. Samsung Electronics has a business portfolio where semiconductors make money in an off-season of set products and semiconductors are in an off-season, set products make money. If its semiconductor division loses competitiveness due to the lack of investment opportunities in this structure, the entire portfolio is bound to collapse.

"The merger between Samsung C&T and Cheil Industries is a result of "private autonomy" among shareholders through the stock market. It is a mistake to regard it as a close relationship between political and business circles," said professor Cho Dong-keun of Myongji University. “If the head of the Samsung Group is convicted in a manner of courts of public opinions, the Samsung Group may consider leaving Korea."