Success and Failure - Samsung and other Korean Companies

The Question being raised of All Korean Companies are not successful, Why is Samsung Successful brings into picture an interesting contradiction in terms of the differing fortunes of large Korean companies that have belonged to the same ecosystem that has been created in the corporate sector of Korea. It also brings out the inconsistency in image; the image of Korea, an Asian tiger, and that of the economic failings in how this progress has been achieved and encouraged. Before we delve into specific companies and their fates, it is of paramount importance to take a look at the corporate ecosystem and its societal connections. The term Chaebol meaning wealth of a clan is one that cannot escape being mentioned whilst talking of Korean businesses. Comparable to the Japanese Zaibatsus these companies as the meaning behind the name suggests are large companies run by powerful families that have inherited them through generations. This section on the self-imposed constraints and limitations of the Chaebol system will endeavor to answer questions on why some large Korean companies ended up in a bad shape. We will move from the general picture to specific examples of Korean companies that were been put on life support systems in keeping with the cord that binds Korean Government and Society to these large companies. From the talk of all the faults of the Korean business, we shall move to Samsung and try to understand through the Samsung case what they did right in order to achieve the success they have today. One might ask that these sorts of companies are part of the ecosystem in almost all parts of the world, why then do they require special mention? It is needed because of the almost singular obsession it enjoys or at least enjoyed till the last decade when talking of the government and Korean society. These companies that span their businesses across a multitude of domains have traditionally been seen as intrinsic to the Korean way of business. The Chaebol which consisted of companies like Hyundai, LG, Daewoo and Samsung accounted for nearly 30% of the Korean Economy in 1945-1960[1]. They were often seen as a political product and this brought along with it support in form of favorable financial, trade, industrial and labor policies. This meant that they had access to bank credits, tax breaks, export subsidies, and industrial guidance on labor of governance [2]. The Chaebols support from its political influencers meant that it had grown on a massive scale in terms of the number of people it employed. When the Asian Crisis of 1997 hit the country the external trigger laid bare the internal mis-functioning. In 1999 it was found that out of the 11 of the 15 Chaebol had an interest coverage ratio below one, which meant that there earnings couldnt cover the interest payments. It is interesting to note that the Moody International rating that indicates financial strength rated the South Korean Banking system an abysmal D- on a scale between A and E [2]. This failed South Korean banking system kept the Chaebol companies alive through imminent collapse. Even after the crisis of 1997 when the government controlled about three-fourths of the banking system, troubled companies received financial support both from state and non-state institutions. The government apart from taking steps to wrest control of the situation continued to tinker around the

Chaebols in a bid to revive them. There prodding led to Hyundai taking over LGs semiconductor business [3]. These forms of pseudo-active participation by the government is what had led to the situation in the first place and when Hyundais unit was it trouble it exposed itself to the consequences of its actions in form of moral responsibilities which would lead to further feeding of failing companies. As mentioned above large parts of the society was employed by these companies and due to the poor labor policies of the government, the unions wielded significant power. They failed to accept lower wages and compromise, in normal situations this would lead to the company becoming defunct but their predicament was unnaturally prolonged due to the bad debts being given by the banks. Through this attempt to understand the corporate ecosystem of South Korea, we have identified issues of weak financial institutions, governmental nepotism, transparency and labor policy issues as the undoing of many South Korean giants. Now let us take specific examples in form of Daewoo and Hyundai. Daewoo, traditionally one the most reliable of the Chaebols began facing its troubles from the late 70s when governmental policy and emphasis on shipbuilding meant it was forced to get into the shipbuilding business. It was asked to take over the Worlds largest dockyard at Okpo in 1980. By the end of the decade in 1989 its shipbuilding business accounted for large loans. The government granted a seven year moratorium. In 1996 the inner workings were exposed as eight executives including Daewoos founder and chairman was convicted of Bribery [4]. This was immediately appealed. Even after what seemed an exposure of a collapsing company, the banks continued to lend. This was accountable in no small part to the governmental pressure on banks and the fact that Daewoo and associated companies employed 2.5 million people in Korea alone [5]. By the time Daewoos business was spawned off it had become the largest corporate bankruptcy with accumulated $50 billion debt. Lets consider another example of Hyundai. We have read earlier how Hyundai was asked to takeover LGs semiconductor business. This in turn led to a situation where the government had to bailout Hynix (Hyundais semiconductor business). The governments obsession with big crashed in Hyundai too as in 1999 it was divided off into five smaller business units. The banks could again not avoid facing the eventuality of the truth that unprofitable units of the organization could not artificially be nursed at the government or unions behest. Samsung We move to the case of Samsung. Samsungs is a curious case of being diverse and having a presence across different fields acting as one of the key success factors. South Korea has always been at the forefront of the drift in technological changes. Samsung presence in different fields from Television, Microwave Owens, Mobile Technology and Memory Devices meant it found itself it a unique position of being able to leverage on multiple core competencies that combined to allow it manufacture technologically advanced products across fields.

Also, as the case mentions Samsung considered manufacturing to be a core competency in itself, in the face of a polar opposite direction taken by its competitors of an outsourcing solution. Samsung developed its manufacturing capabilities deriving multiple benefits such as greater flexibility, better R&D opportunities through synergies and even becoming a supplier to its competitors in subcomponents due to its reliable image. This came with investment from Samsung where they used geographical strengths such as manufacturing strength of China and human capital in India. The fortunate position that Samsung found it itself in was converted into realized potential through their vision. The fact that the chairman of the company, Lee, stressed on the move towards Digital technology and Samsungs potential was key to them exploiting their potential. Investment in form of $2.45 Billion and hiring of top scientific talent paid dividends in form a constant flow of new digital products. The digital convergence cemented the strength of their vision as their different capabilities came together to create even more powerful and innovative products. The leadership of Samsung also played a key role in creation of the brand image. The traditional apathy to importance of brand at Samsung was replaced with a marketing infrastructure created to strategize its efforts in marketing its product capabilities and create a powerful global brand. Like the R&D program a significant sum of $1 Billion was invested that made its marketing efforts more systematic and identified areas of improvement in terms of utilization of resources. This shift towards a global attitude was accompanied with incentivizing of managers to focus on global performance. M-Net programme and the Market Driven Change (MDC) initiative were two such programs adopted by Samsung in its transformation. This also gave birth to the DigitalAll campaign that made its brand presence felt worldwide. South Korea provided the perfect opportunity for Samsung to test its products in a demanding environment and high technology usage society. With garnering of more than 50% share in its product categories it consciously focused on various markets worldwide to be ready for the opportunities presented. Now trying to connect Samsung to the earlier section on Korean corporate culture we see that Samsung is not impervious to some of the problems faced by other Chaebol. The president of Samsung was found guilty of Tax evasion and breach of trust. But what differentiates some of the major failures of the other giants is the vision and leadership shown by the board of Samsung in gearing its vision to match the future technology world and being able to leverage its strengths to achieve this vision. This again recertifies the discussion in class on how countries do not fail, but companies do. Today Samsung has become the largest manufacturer of Cell phones and continues to expand. This I believe is and will be the largest factor to its success as it doesnt expose itself to frailties of the South Korean system and uses an international scale to measure its performance and expectations.

References [1] Zaibatsu formed a relationship with the Government -http://www.stockmarkettoday.cc/zaibatsuformed-a-relationship-with-the-government.html. [2] Economic Reform in South Korea: An Unfinished Legacy by Marcus Noland, Peterson Institute for Intnl Economics http://www.iie.com/publications/papers/print.cfm?researchid=458&doc=pub. [3] Manyin, Mark and Stephen Cooney. 2002. "The Semiconductor Industry and South Korea's Hynix Corporation," CRS Report for Congress, 10 January. [4] Daewoo History - http://www.fundinguniverse.com/company-histories/daewoo-group-history/ [5] The death of Daewoo, Aug 1999 - http://www.economist.com/node/233562 [6] "Samsung overtakes Nokia in mobile phone shipments". BBC News. 27 April 2012.