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JUNE 11, 2003
Samsung's "Sashimi Theory" of Success [Page 2 of 2] UP-MARKET MOVE. The first step: reducing inventory cycles. At one point in 1996, prices of DRAMs -- which then accounted for 60% of Samsung's exports -- were dropping by 1% every week, or by 50% each year. The longer the chips sat in inventory, the lower the price they fetched on the market. By dramatically shrinking the period between which an electronics product is made and the time it's sold, therefore, Samsung was able to reap higher average prices. Within two years after the crisis, Samsung Electronics was again profitable. One measure of success: Its output of electronics products increased nearly five-fold from 1996 to 2002, while its headcount only rose 12%. Samsung's long-term debt has plunged to less than $2 billion, and net margins have risen from near-nothing to a very respectable 12%. Another key to the turnaround was Samsung's decision to recreate itself as an up-market brand. Not only would it spend heavily on more sophisticated marketing and focus on producing high-end phones and appliances but Yun also declared that Samsung would completely abandon low-end products, even if that meant passing up easy opportunities for big sales. "THE FACE OF SAMSUNG." Again, Yun made his point dramatically. In several European countries, where Samsung hadn't yet introduced expensive digital TVs, he ordered low-end TVs pulled from retail shelves. Why? "TVs are the face of Samsung Electronics," Yun explains. "If we keep selling low-end products, it damages our corporate image. We'll leave those opportunities to latecomers or to Southeast Asia. We believe that 5 to 10 years from now, our future will depend on our brand equity." To bolster management and research and development, Samsung also has recruited more aggressively overseas. "Even during the financial crisis, we invested a lot in human resources," Yun says. Samsung has hired an additional 800 PhDs in the past five years (bringing its total to around 1,900) as well as about 300 MBAs from Western universities. Yun concedes that a historical shift in the electronics industry is another major reason why Samsung has been able to bridge the technology gap with such established electronics powers as Mitsubishi (MIELY ), Sony (SNE ), Philips (PHGZF ), Motorola (MOT ), and Sharp (SHCAY ). That shift was the migration from analog technologies to digital in everything from telecom gear to cameras to home appliances. PLUSES AND MINUSES. "In the analog era, experience and technology were needed," Yun says. "If you were a latecomer, it was hard to catch up. But in the digital era, the field is wide open because most players can gain access to similar technologies. What's most important is intelligence and speed." Despite its strong financial performance in recent years, however, Samsung Electronics' weak first-quarter profits have raised worries that pricing pressures may be catching up with it. Earnings dropped by 41% in this year's first three months and could decline again in the second quarter. To put this in context, though, Samsung had a stunning 2002, thanks to high prices for memory chips. It earned a record $5.9 billion on revenues of $33.7 billion, while the rest of the tech sector was still reeling. Yun contends that Samsung's first-quarter results "were not too disappointing" given that the global market for liquid-crystal displays and semiconductors was soft, and prices dropped sharply. Many analysts expect demand for these products to rise in the second half. Longer term, Yun says he remains confident that Samsung will be able to maintain net margins of at least 10%. TOO MUCH FAMILY? Samsung Electronics also has been dogged by questions over its corporate governance. Even though Chairman Lee Kun isn't involved in day-to-day decision-making, he's still Samsung Electronics' ultimate boss. Lee approves all of the subsidiary's top executives and signs off on major investments. Samsung Electronics recently came under fire for pumping $93 million into a troubled credit-card affiliate -- at the behest of Lee, critics say. What's more, Lee's son is now a Samsung Electronics vice-president and apparently is being groomed for a much higher position. That raises questions about nepotism. Yun agrees the credit-card investment is controversial, but he argues that it isn't unusual for manufacturers to have credit affiliates. Also, he insists that in terms of financial disclosure, investors at least can see what's happening. "We will do this in a very transparent manner," he says. UNCOMMON WISDOM. As for the Lee family's control and worries of dynastic succession, it's a "complicated question," Yun says. In some ways, the involvement of family members who are major investors may be beneficial, he claims -- even though that defies common wisdom about corporate governance. "There are grandsons at Motorola, DuPont, and other U.S. companies," Yun notes. "Then take a look at what happened to Enron or WorldCom (MCWEQ ), which didn't have family ownership. They had professional managers. In Japan, families are owners, but they don't manage. Can you say Japanese companies have better transparency? I don't think so." Samsung's management style and structure may seem dubious to many Westerners, but no one can denying it's riding high both financially and in market share. And for now, many investors seem willing to give Yun the benefit of the doubt.
 By Pete Engardio and Moon Ihlwan in Seoul Edited by Patricia O'Connell Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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