FT.com / Technology – Lack of innovation clouds Samsung’s future
Lee Kun-hee, the former chairman of Samsung Electronics, has a powerful reputation as an oracle within South Korean business circles. But his pronouncements this month sent shivers down many spines in Seoul.
“Samsung was just like a corner shop 10 years ago, a fifth the size of what it is now,” he was quoted as saying by Korean newspapers at the Consumer Electronics Show in Las Vegas.
“If anything goes wrong, Samsung could end up as a corner shop again.”
Since the company represents 12 to 18 per cent of national exports and 14 per cent of the stock market, such a reversal would be a disaster for South Korea.
At first glance, such fears would seem alarmist, with Samsung set to become the world’s biggest technology company by sales.
It has taken full advantage of the downturn to gain a greater edge over Taiwanese memory chip makers.
It should also gain from Toshiba’s signalled retreat from manufacturing semiconductors.
But analysts reckon Mr Lee was right to look further ahead and question Samsung’s corporate mindset.
“This year it will not be hard for Samsung to maintain growth, as prices for semiconductors and liquid crystal displays are strong and the general economic situation is good,” said Jae Lee of Daiwa Securities.
“But, longer term, Samsung should develop a killer product and new market in the same way Apple launched a tablet PC.”
While Sony became a household name through innovations such as the transistor radio and the Walkman, Samsung’s strength lies in disciplined manufacturing and playing catch-up.
Trying to show it has not been caught flat-footed by another industry trend, it said this week that it would start mass-producing 3D televisions.
Faced with the challenge of innovation, Samsung spokesman James Chung said the company had broadcast a programme on its internal television channel to help instil a fresh mentality.
It showed employees asserting that Samsung should overcome its fear of being first with an idea.
They called for more tolerance, diversity, communication and creativity. All are traditional weak areas.
Chang Sea-jin, professor at the National University of Singapore, said injecting creativity into a company as regimented as Samsung would be tough. He felt the responsibility for such reform could fall to Lee Kun-hee’s son, Lee Jae-yong, who is being groomed for leadership in the role of chief operating officer.
“The challenge for Lee Jae-yong, if he takes over in the next two years or so, will be how to introduce creativity without losing what they are good at,” he said. “Samsung’s core competence is speed of execution. In a commodity industry, like D-Ram chips, where there is a clear technical trajectory, they are very successful at beating the crowd.”
He added: “If the normal trajectory is 18 months, Samsung will take 14 months.”
Behind this success in manufacturing, Mr Chang said, was workers’ fear-driven ethos. This culture has led to a high attrition rate, with about 30 per cent of employees dropping out after three years.
It also made it hard for Samsung to internationalise its culture by bringing in non-Koreans, who were less likely to tolerate the company’s regimented approach.
Unusually for a South Korean company, Samsung has no union.
More immediately, some analysts and Samsung officials speculated that the company could use its deep cash reserves to grow this year through mergers and acquisitions, boosting weaker areas such as white goods.
However, they warned that the company would proceed warily after being stung by unsuccessful US acquisitions in the 1990s.
In the growing market for smartphones, Samsung is way behind its rivals, with a market share of less than 5 per cent, compared with 35 per cent for Nokia and 17 per cent for Apple.
Analysts said the answer lay in developing software. “Samsung is unlikely to drive smartphone growth through acquisitions, as it already has a product line-up,” said Choe Sung-jae, analyst at KTB securities.
“Instead it will try to increase its share of the market by launching more Android-based smartphones and pushing its own operating system, Bada.”