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5-Year Sentence to Vice-Chairman Lee Extends Samsung’s Future Uncertainty
Absence of Head
5-Year Sentence to Vice-Chairman Lee Extends Samsung’s Future Uncertainty
  • By Michael Herh
  • August 26, 2017, 03:30
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As vice-chairman Lee Jae-yong of Samsung Electronics was sentenced to five years in prison, the uncertainties of the Samsung Group are growing.
As vice-chairman Lee Jae-yong of Samsung Electronics was sentenced to five years in prison, the uncertainties of the Samsung Group are growing.

 

Vice-chairman Lee Jae-yong of Samsung Electronics indicted on charges of bribing former President Park Geun-hye and Choi Soon-sil was sentenced to five years in prison in the first trial on August 25, prolonging the absence of Samsung’s head. With chairman Lee Kun-hee's failure to recover from a long-suffering illness, vice-chairman Lee Jae-yong has been virtually playing the roles of his father for several years. So the court ruling will extend the vacuum of the head of the Samsung Group kindled by vice-chairman Lee Jae-yong’s arrest in February. The judgment fueled the uncertainties of the Samsung Group.

However, any apparent change in management or sales performances is not likely to take place right away as it was not over the past six months. Samsung Electronics and other group affiliates have stable professional management systems, which enabled Samsung Electronics to post the highest-ever operating income of 14.7 trillion won (US$13.2 billion) in the second quarter of this year after vice-chairman Lee's arrest and invest 12.52 trillion won (U$11.2 billion), the highest-ever, in semiconductor facilities in the first half of this year.

Owner Risk Halts All Large-Scale M&A Deals

But inside Samsung, there is growing concern. First of all, a brake was put on its active M&A deals. Samsung Electronics cut three major M&A deals in 2015 and struck six big M&A deals last year. But this year, virtually, the company has not sealed any deals yet.  

With chairman Lee Kun-hee sick in bed, vice-chairman came forward as de-facto leader of Korea’s largest business group and actively pursued M&As more than ever. Vice-chairman Lee Jae-yong decisively made a change in the group’s time-honored strategy to stick to independent technology development and promotion in order to overtake rivals or frontrunners.

In 2014, Samsung Electronics acquired Canadian mobile cloud solution provider PrinterOn and the US IoT platform developer Smart Sync. In 2015, the company took over US mobile payment solution company Loop Pay and US commercial light emitting diode company Yesco Electronics among others. Last year, the company acquired American automotive electronic device company Harman after acquiring American cloud service provider Joyent, US luxury appliance brand Dacor and artificial intelligence (AI) platform developer Viva Labs. All of these companies have technologies indispensable in the era of the Fourth Industrial Revolution.

However, Samsung's M&A engine stopped after an allegation surfaced that Samsung Electronics was involved in the manipulation of state affairs. Samsung Electronics made some equity investments or took over small companies this year, but made no large M&A deals as last year.

"As Samsung Electronics achieved the best-ever business results, the company is financially stronger than ever before," said an official at a large company. "Judging from Samsung Electronics’ recent moves, a management power vacuum after the arrest of vice-chairman Lee Jae-yong seems to have had a decisive impact on the company’s cutting no major M&A deals."

While Samsung without its final decision maker has been struggling, global information technology (IT) companies such as Intel are expediting their entries into the automotive electronics business. Intel recently bought advanced driver assistance system (ADAS) developer Mobile Eye for US$15.3 billion. The company also said it would produce 100 self-driving cars within this year to become a frontrunner in the automotive electronics business.

Recently, Apple, one of Samsung’s archrivals in the smartphone field, officially acknowledged the development of self-driving technology. Apple plans to launch software solutions that can be used for autonomous vehicles. Google which has been developing autonomous cars since 2009 recently announced self-driving sensor Rider and is also working hard on hardware development.

"Semiconductors and smartphones regarded as Samsung's main business areas may face difficulties in the future due to hot pursuit by China," an industry observer said. “Although Samsung should prepare for future threats by diversifying its portfolio, it is not clear whether or not Samsung devoid of its head will be able to find an answer.”

Vice-chairman Lee’s hiatus of business activities based on his international human network will be forced to extend. Vice-chairman Lee has kept in touch with Team Cook, CEO of Apple, Mark Zuckerberg, CEO of Facebook and Larry Page, founder of Google. Even though management using this personal connection is invisible, such management pays off behind the scenes. Regarding a rumor about Samsung’s acquisition of Magneti Marelli, an auto parts subsidiary of Fiat Chrysler of Italy, it is said that the driving force behind it lost steam after vice-chairman Lee stepped down as an outside director of Exor, the holding company of FCA in April of this year. Vice-chairman had served as an external director of Exor since 2012.   

“New Samsung” Plan Will Be in Drift

In particular, vice-chairman Lee’s arrest in February this year led to the dismantlement of the Samsung Group’s Future Strategy Office which played the roles of the control tower of the group. This fact is a factor that expands the risk of the absence of the head of the group. This is because the Future Strategy Office made major decisions in the past although it was criticized that its decision-making process was not transparent and its responsibilities were not clear.

The miscarriage of reshuffling CEOs of Samsung Group subsidiaries has become inevitable for two consecutive years. The Samsung Group skipped a reshuffle of CEOs in December of last year when the Choi Soon-sil Gate’ surfaced. Considering schedules including upcoming appeals, it is said inside and outside the Samsung Group that it will be difficult for the group to execute a reshuffle of CEOs in December this year as well.

Restructurings of insolvent affiliates will also be delayed. The Samsung Group’s audit unit led by the Management Diagnosis Team of the Future Strategy Office screened improperly-run affiliates and strengthened the competitiveness of the affiliates through bold restructurings, changes in business structures and closing down non-performing business.  But the audit unit will hardly operate for the time being as the Future Strategy Office was dismantled and the head of the group is absent.  

Vice-chairman Lee has been zooming in on making “New Samsung” over the past three years. He simplified positions and ranks and had horizontal titles used. In October of last year, Lee became a registered director of Samsung Electronics and started responsible management. A representative of the Korean business world said, "Changing the organizational culture requires the management's firm commitment and steady efforts. Considering the present unstable atmosphere at Samsung, the task of improving the organizational culture will be forced to be put on the back burner."

It is also difficult to spread “No.1 Company Spirit” all over Samsung Group affiliates. The Samsung has been endeavoring to expand Samsung Electronics' know-how in becoming the world's number one company to other affiliates. However, a reshuffle of CEOs was put on hold and a reshuffle of executives was also minimized, halting such work.

Business restructurings were also put on hold. In the first quarter, Samsung has been restructuring its business such as unifying overlapped business items among its affiliates into one place and putting an end to unnecessary business operations. Cheil Industries entered the stock market in 2014 along with Samsung SDS. In September of 2015, the merged entity of Cheil Industries and Samsung C&T took its first step. In November, the Samsung Group cut a big deal to transfer chemical and defense affiliates such as Samsung Techwin and Samsung General Chemicals to the Hanwha Group.

This is a reflection of vice-chairman Lee's intention to address the cross-shareholding structure pointed out as a problem and focus on areas where Samsung can excel. As a result, the number of the Samsung Group’s affiliates fell from 73 at the end of 2013 to 60 at present.

There is also a great deal of concern that this conviction will limit Samsung’s business activities and adversely affect Samsung's reputation in the global market. Currently, it is a threatening factor for the US to apply the Foreign Corrupt Practices Act (FCPA) to Samsung for the conviction of vice-chairman Lee. In the case of Samsung, its overseas affiliates may suffer from sanctions under this act because they are subject to US law.

The ruling may also hinder Samsung’s M&As with US companies to secure future growth engines. In addition, it is inevitable that the brand value of Samsung will crash. According to brand value announced by the US economic magazine Forbes in May, Samsung Electronics' brand value was US$ 38.2 billion, ranking global top ten.

Forced to Implement System Management

Experts predict that Samsung may be impregnable in the short term but is likely to be adversely affected in terms of long-term investment plans and coordination among affiliates. Samsung is planning to minimize the vacancy of vice-chairman Lee through management behind bars. But Samsung is unlikely to avoid a drop in its brand value, a delay in investment decisions, a drop in the vitality of its organization and the congestion of promotions among others.  

The biggest concern about vice-chairman Lee's vacancy is whether Samsung's investment timing, which has been perfect, will continue to be precise. Plants of semiconductors and displays, main cash cows of Samsung Electronics, cost more than 10 trillion (US$9 billion) to build per plant. This is a huge investment. It is difficult for even a professional corporate manager to make such a decision.

Until now, Samsung has delegated authority to professional top managers as long as general management is concerned, but large-scale investments have been made in accordance with decisions by chairmen including Lee Kun-hee. Samsung Electronics' earnings surprise this year became possible because of active investment in semiconductors.

Nowadays companies compete with one another at the speed of light. Unless massive investment and R&D is a little delayed, the aftermaths are beyond imagination. One good example is the downfall of Nokia which once dominated the global handset market. It took less than three years for Nokia to fall from the top of the world to become a company forgotten by consumers. Apple's iPhone was launched in 2007 and at that time, Nokia had 125,000 employees. However, they failed to launch a smartphone and fired 76,000 people. In 2013, they eventually sold off their mobile phone business to Microsoft.

Samsung has a relatively well established professional management system. Thus the company has a strategy to minimize vacancies via management behind bars. However, making important decisions through reports without checking projects and plans inevitably increases the risk of making a wrong decision.

One of the most important tasks to tackle this risk is said to be to strengthen the system management. This means that despite the absence of the head of a business group, the business group has to create an environment that can lead the organization smoothly with professional managers taking the lead.

"Smaller decision-making by Samsung affiliates can be done by systems but big decision-making cannot but be delayed," said Lee Dong-ki, a professor of business administration at Seoul National University. "Timing is essential to decisions such as those on massive investment. Consequently, if timing goes wrong, it may become a major problem."

"I think that there will be a negative impact if the absence of the head of Samsung becomes prolonged, which is because the head must make major decisions on big investments such as in electronics and bio business cases," Lee added.

"In order to resolve the vacancy in leadership, a kind of emergency management system should work," Lee said. “For example, a system such as a coalition of professional top managers should play an active role so that decisions which require coordination among subsidiaries can be made smoothly."

"Compared to big Korean companies, big Japanese companies are getting weaker recently. The biggest difference is the existence of owners of big Korean companies," Lee emphasized. "It is important whether or not there is a symbolic leader responsible for important decisions." Professor Lee meant that the stronger a professional top manager-oriented system gets, the more responsibility professional top managers should bear.

"The top management of Samsung should create an environment where they can concentrate more on management," said Yun Se-joon, a professor of business administration at Yonsei University. “If they concentrate on expanding Samsung’s core capabilities while accurately understanding changes in the economic situations of the world, Samsung's future will be brighter. Current top managers at Samsung have accumulated enough capabilities while adapting to a global environment."