Wednesday, April 21, 2010

Return of South Korea's industrial giants

A tycoon comes back as the saviour of Samsung Electronics, leader of South Korea’s remarkable business success. But where’s the crisis?

LEE KUN-HEE is a man of few words. So when the 68-year-old decided to come out of court-induced purgatory this month to retake the helm of Samsung Electronics, now the world’s biggest technology company, it was appropriate that he chose Twitter, a keep-it-brief social-networking site, to spread the news.

Mr Lee’s message was not just for employees of Samsung Electronics, by far the biggest part of his empire, but also those of the other 64 firms within the conglomerate that he controls. It was delivered with the sort of attention-grabbing hyperbole that any tweeter would be proud of: “It’s a real crisis now. First-class global companies are collapsing. No one knows what will become of Samsung. Most of Samsung’s flagship businesses and products will become obsolete within ten years. We must begin anew. We must only look forward.”

It did not quite have the pithiness of Mr Lee’s rhetoric in 1993 when he said Samsung was a second-rate company and that its employees should “change everything except your wife and children.” But his words had the same urgent ring of truth about them.

How can that be? It is a question that could be asked by anyone who has recently turned on a flat-screen television, bought a mobile phone, stored masses of data on a flash memory or watched Chelsea’s footballers in shirts sporting Samsung’s name. Far from being a disaster in the making, Samsung Electronics has become one of the world’s strongest brands, known for sleek design, razor-sharp technology and good value.

Think of anything with a screen, from a few centimetres square on a mobile phone, to a laptop, a wide liquid-crystal display or a giant 3D television, and Samsung Electronics will be one of the top two firms in the world making it—or at least the memory chips inside it (see chart). The company’s global market shares are staggering: more than 40% of the flash memory used in sophisticated electronics like the Apple iPhone, almost one in five of the world’s mobile phones and one in six of its television sets. It even makes screens for Sony’s TVs.

Having invested aggressively in new products in 2008, Samsung Electronics sailed through the global financial crisis, almost doubling its operating profit in 2009. This year analysts expect it to generate record profits of over $10 billion. Sales are forecast to be about $130 billion, which is likely to confirm its lead over America’s Hewlett-Packard as the world’s biggest technology company by revenue. Not to be outdone, other parts of the Samsung group have notched up successes. The construction division recently completed the tallest building in the world in Dubai and Samsung Heavy Industries is flush with shipbuilding orders.

In a way that General Motors can only have dreamed of, what has been good for Samsung has been good for South Korea. The group’s products account for about 20% of the country’s GDP, making it huge even by the standards of an economy top-heavy with big firms. When the won tumbled in 2008, raising fleeting fears of a currency crisis, exporting champions like Samsung, Hyundai and LG quickly took advantage, betting that their customers would be willing to buy newer, better models if the price was right.

South Korea’s conglomerates were also well diversified globally—only one-tenth of the country’s exports go to America. That meant sales lost in America were partly made up for by those gained in fast-growing emerging markets like China. Thanks to generous promises of government stimulus, South Korea, one of the rich world’s most export-dependent countries, pulled off the surprising feat of surviving the worst slump in global trade since the second world war with only a fleeting dip into recession.

For that, South Koreans give much of the credit to their industrial conglomerates, or chaebol as they are known, and the rich, inscrutable families who control them and live like royalty in South Korea. Yet Mr Lee’s comeback causes nervous speculation. If Samsung really does face a crisis, what does that mean for South Korea? If Mr Lee believes he is the only person who can avert disaster, what does that say about the business acumen of his potential successors? And if he can walk back into the corner office without even having board approval, can it really be argued that the country is progressing to Western-style standards of corporate governance? Business people have watched, with a mixture of suppressed glee and dread, former role-models such as Toyota and General Motors struggle with huge financial and technical problems. Could this be the fate that Mr Lee fears for his firm?

Get out of jail free
These are pertinent questions for Korea Inc, the business model that has so recently undergone a remarkable rehabilitation. Just over a decade ago, when the South Korean economy was reeling from its near collapse in the Asian financial crisis of 1997-98, it was the chaebol that were widely blamed by the public, the centre-left government of the time and the IMF.

The extent of the mismanagement was shocking. In the 1960s and 1970s, under the dictatorial regime of Park Chung-hee, the chaebol soaked up cheap government financing and relied on official protection from foreign competition. Loosely, the models were the zaibatsu conglomerates that had helped turned Japan into an imperial—and militaristic—power before the second world war.

The chaebol, some of which were started by war racketeers, had the same vast ambitions, albeit for industrial conquest—and they had public money to back them. Samsung expanded from sugar and wool into electrical goods, chemicals and engineering. Hyundai’s founder, Chung Ju-yung, started building roads and then decided to build the cars to drive on them. But many chaebol overburdened themselves with debt as they tried to move up the technological ladder in the 1980s. As they borrowed lavishly to buy capital equipment, South Korea’s current-account deficit soared. Some thought the chaebol had become so big the government could not let them fail. They were spectacularly wrong.

The wheels of industryThe conglomerates failed in droves. The collapse of Daewoo in 1999 was followed by the bankruptcy of more than half of the then top 30 conglomerates. Four of the country’s five carmakers (even Samsung had ventured into the market) went bust. South Koreans, many of whom had flocked to hand over their gold jewellery in a patriotic gesture to help pay off the foreign debt, were appalled at the level of government and business collusion that came to light.

Under two consecutive left-of-centre governments, many of the chaebol bosses—some now being run by the children of their founders—were prosecuted. Suspended sentences were handed out to the boss of SK in 2003, the former chairman of Doosan group in 2006, and the owner of Hanwa group in 2007. But this was justice for the rich—quite different from justice for the rest. Chung Mong-koo, chairman of Hyundai Motor (which also owns Kia, the country’s second-biggest carmaker) was convicted of embezzlement in 2006. But his prison term was reduced to community service and a $1 billion donation to charity because of his economic importance to the republic. Then in 2008 Mr Lee was convicted on tax-evasion charges, but also spared prison after paying a fine.

Partly chastened, both business and government have embarked on reform. Balance-sheets have improved, as has corporate governance, increasing the rights of minority shareholders and the responsibilities of company directors. Since then, some—though by no means all—of the cross-shareholdings used to disguise the weakness of subsidiaries and protect them from hostile takeovers have been rooted out and replaced with more transparent holding-company structures.

A friend in the Blue House
The reputations of the chaebol—especially in the eyes of South Koreans—recovered further during the 2008-09 global slump. So much so that when you ask experts in Seoul how their conglomerates fared during the crisis, some ask: what crisis? It was not just Samsung Electronics that sparkled. Hyundai increased market share in America every month last year, as its small, well-equipped cars with long warranties benefited disproportionately from the cash-for-clunkers programme.

For the first time in many years the chaebol have a political wind behind them. Lee Myung-bak, who became president in 2008, is a former chief executive from within the Hyundai extended family of firms. In December he pardoned Mr Lee, freeing the way for his return to Samsung. The same month he championed a successful bid by a chaebol-heavy consortium under the aegis of the Korean Electric Power Company to provide nuclear power to Abu Dhabi, pulling the rug from under industry leaders in France and Japan. This year, his government is pushing to relax holding-company laws that would make it easier for the chaebol to own financial firms. “The business community has not seen a political environment this accommodative in the past decade,” CLSA, a broker, said in a recent report.

Japan looks on aghast as the chaebol catch up with more of its large firms. “Of all their competitors on the global stage, the Japanese fear the South Koreans most,” writes Mark Anderson, author of Strategic News Service, a technology newsletter. Some Japanese industrialists acknowledge this publicly. “Korea is much more full of vitality than Japan,” Osamu Suzuki, head of Suzuki Motor, lamented in a recent talk to foreign journalists in Tokyo. “Japan is coasting.”

All of which makes Mr Lee’s strident warning, as the head of South Korea’s most successful company, more puzzling. The charitable view is that it may have been just a rhetorical device to soften up opponents to his rehabilitation—and to the eventual transfer of power to his son, Lee Jae-yong, Samsung Electronics’ chief operating officer. But it may also reflect deeper fears that the days of relying on manufacturing as a growth strategy, for all its technical sophistication, are numbered. The most obvious cause for concern is China. The acquisition on March 28th of Volvo by Geely, a Chinese carmaker, is the latest example of low-cost Chinese producers’ determination to build global brands.

In computer chips, Samsung Electronics is comfortably ahead of China for now. But the skills needed in that business are described by one Samsung expert as like running a “digital sashimi shop”—the trick is to get products so swiftly to market that they do not lose their freshness. There is no inherent reason why Chinese firms cannot eventually catch up. What is more, as Mr Anderson points out, China is more open to imports and foreign direct investment than South Korea, which helps China’s quest for intellectual property.

An even bigger threat comes from America. Late last year Apple finally got permission from South Korea’s telecoms authorities to waive a rule prohibiting the domestic sale of iPhones. Demand for the iPhone has since exploded, leaving Samsung and its domestic rival LG (which together have sold seven out of ten phones in South Korea), looking uncharacteristically leaden. Smart-phones accounted for just 1% of the market, but Apple has been selling some 4,000 iPhones a day, making South Korea one of the gadget’s hottest markets. Even the finance ministry has launched an iPhone application—the Glossary of Current Affairs in the Economy—to unexpected popular appeal.

For Samsung and LG this problem is magnified at the global level, and not just against Apple but also against firms like Google and Research in Motion, maker of the BlackBerry. For all its success in mobile phones, Samsung is an also-ran in the global smart-phone market. The South Korean company has rushed to remedy that with its own smart-phone platform, Bada, and by producing mobile phones that use Google’s low-cost Android operating system. As a result, Samsung hopes to sell more smart-phones in America than any other firm this year.

To win, however, Samsung needs more than sleek hardware. It is also outgunned by the iPhone’s 140,000 applications, which means it needs more creative input into its products. That will mean encouraging a less hierarchical, more inventive, corporate culture. The fluid ecosystem surrounding mobile technology may mean Samsung will need to engage more openly in partnerships with other firms, as it already has with DreamWorks Animation, creator of films such as “Shrek”, to help in the launch of 3D television. But such team efforts are not naturally in the DNA of a company that likes to keep its suppliers in the corporate family.

To their credit, Samsung executives did not appear to be complacent, even before Mr Lee’s call to action. They do not want to abandon what Samsung does best—making cutting-edge hardware—just because China is on the warpath or to chase Apple. They greatly value the Samsung brand, which has been painstakingly built through good design over many years.

But they do speak of change, albeit in an evolutionary way. They intend to offer affordable smart-phones to the masses, not just to the top of the market. To improve content, they are concentrating on hiring software engineers rather than hardware experts. And to help stimulate ideas they have offered flexible hours to their notoriously hard-working employees, as well as hiring more young people and women. Nor have they stopped benchmarking against their competitors.

But there is still the bottom line to worry about. “Samsung Electronics may be the largest technology company in the world by sales, but it’s far from global number one by profit,” Lee Keon-hyok of the Samsung Economic Research Institute acknowledges. Profit margins leave something to be desired. In the quarter ending on December 31st, Samsung Electronics reported operating-profit margins of 9%. Apple’s were 36%. Moreover, the South Korean firm can hardly dispute that its market-share gains—especially against Japanese rivals such as Sony—were helped by a cheap won. But in a country where being number one is almost an obsession, these are elements that are likely to make Samsung strive harder.

No leeway
Arguably the most difficult challenge Samsung Electronics faces is internal, and as in most things at the company that ultimately comes back to the patriarch. As Steve Jobs has proved at Apple, nothing beats having a visionary leader—and Mr Lee is one of those. It was his decision, back in 1993, to concentrate the sprawling empire on certain world-class technologies, like chips, mobile phones and display screens. He is credited with instilling the mantra of first-class product design among his staff.

But the manner of Mr Lee’s return may raise as many problems as it solves. When he stepped down in 1998, the hope was it would usher in a reform in Samsung Electronics’ corporate governance so that investors outside his sphere of influence—about half are foreigners—would have a clearer view of the way the company was run. His son was given different managerial posts, which groomed him for the top job better than many other “chaebol princes”. A murky Strategic Planning Office that sat atop the Samsung family of companies and allocated resources was disbanded. No one doubted that Mr Lee continued to pull strings from behind the scenes. But the first traces of Western-style corporate governance were apparent.

His return, without a board meeting to approve it, appears to have put that process into reverse. Already there is speculation that he will revive the “control tower” system of group-wide oversight. His comeback may make it even less likely that Samsung will embrace a more transparent holding-company structure as, say, LG has.

Most troubling, argues Jang Hasung, dean of Korea University Business School, is that the “emperor-management” approach suggests Mr Lee is not confident enough in the company’s numerous other executives around the world—including his son—to lead the company into the future. This problem is true of the chaebol in general; succession issues loom everywhere. What’s more, it appears to ignore the lesson so recently exposed by Toyota that family ownership can be a huge weakness as well as a strength.

“His decision to come back gives the impression that he’s the only one who can fix whatever crisis it is he’s talking about,” Mr Jang says. With so much of South Korea’s future at stake, maybe it is the next generation of leadership that Mr Lee should be tweeting about.


Sunday, April 18, 2010

In prosperous South Korea, a troubling increase in suicide rate

By Blaine Harden
Sunday, April 18, 2010

Choi Jin-young hanged himself last month with an electrical cord. The 39-year-old actor wasn't getting any work in local TV, police said, and he had been depressed since the suicide of his famous older sister.

The sister, Choi Jin-sil, was known as the "nation's actress." When she hanged herself in her bathroom in October 2008, a wave of sympathetic suicides swept South Korea and 1,700 people took their lives the following month.

Seven months later, former president Roh Moo-hyun jumped off a cliff to his death. "I can't begin to fathom the countless agonies down the road," he wrote in a note. Then a 20-year-old Chanel model, Daul Kim, killed herself, posting a blog entry that said: "Mad depressed and overworked." Another said: "The more I gain, the more lonely it is."

And so it ends for 35 South Koreans a day. The suicide rate in this prosperous nation of about 50 million people has doubled in the past decade and is now the highest in the industrialized world.

The rate of suicide in most other wealthy countries peaked in the early 1980s, but the toll in South Korea continues to climb. Twenty-six people per 100,000 committed suicide in 2008 (the most recent year for which data are available). That's 2 1/2 times the rate in the United States and significantly higher than in nearby Japan, where suicide is deeply embedded in the culture.

Before South Korea got rich, wired and worried, its suicide rate was among the lowest in the industrialized world. But modernity has spawned inordinate levels of stress. People here work more, sleep less and spend more money per capita on cram schools than residents of the 29 other industrialized countries that belong to the Organization for Economic Cooperation and Development.

Still, it remains a taboo here to admit to feeling overwhelmed by stress. The word "psychiatry" has such a negative connotation that many leading hospitals have created departments of "neuro-psychiatry," in the hope that people perceive care as medical treatment and not as a public admission of character failure.

Before he hanged himself last month, Choi Jin-young had been struggling with serious depression, his friends told reporters. But they said he refused to consider psychiatric treatment.

"This is the dark aspect of our rapid development," said Ha Kyooseob, a psychiatrist at Seoul National University College of Medicine and head of the Korean Association for Suicide Prevention. "We are unwilling to seek help for depression. We are very afraid of being seen as crazy."

Denial extends to relatives of suicide victims. Recent attempts by the Ministry of Health and Welfare and suicide prevention groups to interview the families of those who kill themselves have produced little cooperation.

"When we go to the families and ask questions about why it happened, they say to us, 'Do not kill him twice,' " Ha said. "We have tried to interview hundreds of families, but we have only been allowed to talk to a few of them. If one is dead from suicide, everything is a secret."

Incidents of suicide are increasing most rapidly among the rural elderly, government figures show, driven among other things by isolation, illness and poverty. Suicide among the young has been abetted by the long hours South Koreans spend online. Police investigators say the Internet enables young people to meet and plan group suicides, even when they are strangers to one another and live in different cities.

Suicide is the leading cause of death among South Koreans in their 20s and 30s, and it is the fourth leading cause of death overall, after cancer, stroke and heart disease.

Yet what has particularly caught the eye of the public and the news media is a flurry of change-reaction suicides among the rich and famous.

Choi Jin-young's suicide generated front-page headlines, reminding the public of the suicide of his beloved sister, who killed herself after becoming distressed over Internet rumors that linked her to the suicide of another celebrity, comedian Ahn Jae-hwan.

No studies have found a statistically significant increase in suicide among the nation's elite. Still, noisy news coverage of these deaths has caught the public's imagination, and that worries Ha, the psychiatrist.

Government data show that suicides can trigger copycat behavior. Choi Jin-sil's death triggered a 70 percent increase in the suicide rate. It lasted for about a month, resulting in 700 more deaths during that time than would normally be expected.

"Famous suicides have a really bad influence," Ha said.

Thursday, April 15, 2010

How Korea Fretted Its Way to Success

Years of worrying about being squeezed by China and Japan helped Seoul stand up to its rivals. Now it's obsessed with finding the Next Big Thing

By Moon Ihlwan

The Korean business community thrives on worry. And for most of the past decade its main fear has been what could be called the Big Squeeze Theory. With higher labor and production costs than most Chinese exporters, the theory went, Korea's major conglomerates, or chaebol, would start losing market share to Chinese champions such as Huawei, BYD, or Baosteel. At the same time, Hyundai Motor, LG Electronics, and Samsung would, after a decade of dazzling success, finally be out-innovated by their archrivals in Japan.

The fretful Koreans got it wrong. Helped in part by a cheap won, exports of cars, ships, electronics, and semiconductors are soaring, while China has yet to pose a credible threat to Korean products. Instead, the Chinese are now mostly seen as customers, not rivals. Korea's exports to China jumped almost fivefold from 2000 to 2009, to $86.7 billion. "There's a consensus that China represents more of an opportunity than a threat," says Im Sang Hyug, senior researcher at the Federation of Korean Industries. Thanks partly to the healthy China trade, many companies, including LG, Hyundai, and Kia Motors, posted record profits last year. "Korea is the first country to stage a full V-shaped recovery," says Jeroen Plag, Korea manager for Dutch bank ING Group (ING).

The Japanese aren't putting up much of a fight, either. Case in point: televisions using light-emitting diodes as a light source. Thinner and lighter than other flat-screen TVs, the LED sets also have sharper, brighter images. Every TV maker has to have an LED offering. Yet after just a year, Samsung dominates the category with 85% of the vital U.S. market. The company forged ahead with an investment of hundreds of millions of dollars in 2009 in LEDs, despite the recession, and has trounced Japan's Sony (SNE), Panasonic (PC), and Sharp. In 2009, Samsung Electronics posted a 75% rise in profit, to $8.5 billion.

These big home runs have changed the mood in Korea. "I hear from a lot of people saying, 'Korea is on the rise. We have a lot of hope,'" President Lee Myung Bak told the nation in a recent radio address. Yet at some level, Koreans are still worrying. Big Squeeze Theory may be dead, but in its place is a new one: Finding the Next Big Thing.

The government and the chaebol now fear that some other country—India, China, even the U.S.—will come up with the defining business of the next generation. The Koreans are not sure what that business is, but they're spending billions in private and public money to discover it. They're also refining an old feature of Korean life, government planning, to lead the search.

The Middle East is already enjoying the benefits of Korean foresight. Seoul has been urging Korean construction companies to increase their presence in the Persian Gulf. In 2009, Korean companies priced so aggressively that they won half of all contracts handed out for oil and gas projects in Abu Dhabi, some $30 billion in all, says the International Contractors Association of Korea. A consortium led by state-controlled utility Korea Electric Power snagged Korea's first-ever overseas nuclear contract, beating France's Areva and a joint venture between General Electric (GE) and Hitachi for a project to build four plants in the United Arab Emirates. Soon, Korean companies will be "competing head to head with U.S. and European companies across the world," predicts Kim Kyeho, executive vice-president for Samsung C&T in Dubai. Samsung was primary contractor for Dubai's 162-story Burj Khalifa tower, the world's tallest skyscraper.

Korea's central planners want the chaebol to entertain even bigger ambitions. Led by President Lee, the cabinet last year launched a plan to expand Korea's economic base by promoting robotics, health care, biotechnology, green transportation, renewable energy, and other next-generation ventures, some 17 in all. The goal is to double exports in these areas, to $434 billion, by 2013; create a million jobs; and reduce the economy's dependence on info tech, shipbuilding, and autos. To spur this change, the government plans to spend $22 billion by 2013 to finance R&D.

In robotics, for example, Seoul has already doled out $500 million in R&D and is underwriting pilot projects to test education, entertainment, and disaster-fighting robots. Korea, which saw its robot exports jump 10.5% in 2009, to $809 million, aims to become one of the top three industrial robot manufacturers. It currently is No. 5 behind Japan, the U.S., Germany, and Italy.

For green technology, Lee's cabinet will focus on developing innovations for solar and nuclear, expanding the use of LEDs and stepping up renewable energy mandates across the country. The government will actively promote the convergence of the broadcasting and telecom industries and offer low-cost loans to help develop content for this emerging hybrid business.

Big ambitions. But Korea has a track record now. A generation ago, silicon chips and autos transformed the country and helped pull it out of an Asian currency crisis. If the Koreans succeed in half the areas they're investing in, they'll soon need something new to worry about.