[JY Era 100 Days] AI Technology Super-Gap, Investment, Innovation ... Lee Jae-yong's Challenge

①Must Shed the 'Fast Follower' Label
Great Companies That Created, Like IBM in PC and Apple in iPhone
Samsung, Urgent Need for Technology and Investment Innovation

[Asia Economy Reporter Moon Chaeseok]

Editor's Note Lee Jae-yong, Chairman of Samsung Electronics, took the helm of Samsung in place of the late former chairman Lee Kun-hee, who collapsed in 2014. In other words, this year marks his 10th year as the head of Samsung. Additionally, Chairman Lee will celebrate 100 days since his inauguration next month on the 3rd. Ahead of his 10 years as the head and 100 days as chairman, we have summarized his management performance, future challenges, and recent status.

From 2015, when Chairman Lee truly began managing the company as the head, through 2022, Samsung Electronics’ total operating profit amounted to 326.98 trillion KRW over eight years. Since its founding in 1969 until 2014, Samsung Electronics’ cumulative operating profit was 230.492 trillion KRW. In just eight years, Chairman Lee earned more than his grandfather and father did over 46 years. The problem is that despite these brilliant results, Samsung Electronics is not respected by people. When Lee Jae-yong assumed the chairman position on October 27 last year, he said, "I will make a company that is trusted and loved more by the people."

Samsung Electronics Chairman Lee Jae-yong inspecting the smartphone manufacturing plant during his visit to Samsung Electronics Vietnam (SEV) near Hanoi, Vietnam, on December 22 last year. [Image source=Yonhap News]

There are still companies that are recognized by people, even though their influence has weakened to the point where comparison with Samsung Electronics is difficult. Representative examples are IBM and Sony. IBM is preceded by the phrase "the first to make a PC." The word that follows Sony is Walkman. Both companies created products that did not exist before. These products created new industry categories: personal computers and portable audio devices. Because of these achievements, both companies have established themselves as "great companies" in people's minds, regardless of their current status or performance.

Apple, currently one of the world's top companies, is the same. Apple is known as "the company that made the iPhone." The iPhone is not just a product. Through its App Store, it created an entire industry category or ecosystem that changed people's lives. Companies that create something new that changes humanity’s life are regarded as "great companies."

On the other hand, the phrase that precedes Samsung Electronics, which competes with Apple, is not "the company that made something." In people's minds, Samsung Electronics is a company that "makes products well" or "makes money well." Lee Kun-hee said, "The essence of business is manufacturing." Samsung is the best in the world in manufacturing. Based on manufacturing technology, it has reached the top globally in various fields such as TVs, memory semiconductors, and mobile phones. However, until now, Samsung has been a so-called 'fast follower' that makes products that already exist better than others.

In December 2020, Lee Jae-yong expressed his ambition called 'Seung-eo-bu (勝於父),' meaning to surpass his late father Lee Kun-hee. To achieve Seung-eo-bu, the essence of business must shift from manufacturing to creation. Lee Jae-yong’s New Samsung is making various attempts to pioneer the path of a leading company rather than a follower.

◆The Direction: Semiconductors, Bio, and Communications

Lee Jae-yong has set semiconductors, bio, and next-generation communications (6G) as the paths for New Samsung. All aim to be number one in the world, but each is a challenging task.

In semiconductors, Samsung must catch up with Taiwan’s TSMC, which has four times the market share in the foundry (contract manufacturing) sector. As of the third quarter of last year, Samsung’s market share was 15.5%, about a quarter of TSMC’s 56.1%. In the ultra-fine process, Samsung was caught up by TSMC in the leading-edge 3-nanometer (nm, one billionth of a meter) technology within six months. Samsung uses a "shell-first" strategy, building factories first and then attracting customers. The problem is that major customers like Apple have been lost to TSMC. Samsung also needs to improve yield (the ratio of good products among finished products). It must not repeat the failure it experienced in the 5-nanometer competition against TSMC.

Samsung Electronics Chairman Lee Jae-yong visiting the Samsung Biologics Songdo Campus in Yeonsu-gu, Incheon, on October 11 last year to inspect the production facilities of Samsung Biologics Plant 4. [Image source=Yonhap News]

Bio innovation is even more difficult. While Samsung is doing well in contract manufacturing (CMO), it is struggling with truly innovative results such as new drugs. Samsung Biologics is expected to have the world's largest production capacity 12 years after its establishment. However, regarding new drugs, it is reported that Samsung has only created a fund of about 100 billion KRW to invest in overseas companies. There is still a long way to go to develop new drugs that cure humanity’s worst incurable diseases like cancer and heart disease.

In communications, Lee Jae-yong has personally achieved success in securing 5G equipment orders, but the Galaxy S series and others are considered to be losing to Apple’s iPhone. According to a recent report by Taiwanese market research firm TrendForce, Samsung Electronics’ estimated market share in the global smartphone market in the fourth quarter of last year was 20% based on shipments. It lost the number one spot to Apple (25%).

◆Must Achieve AI-Centered Technological Superiority and Unimaginable Investment

The consensus in the business community is that if it is difficult to compete through creation, Samsung must bet its life on technology and investment. It must achieve disruptive innovation in technology and investment that other companies cannot even imitate.

Investment has been stagnant for several years. The acquisition and merger (M&A) of British fabless (design company) ARM has lost momentum. Recently, the world is paying attention to rumors that major deals such as acquiring automotive semiconductor companies NXP and Infineon will soon be completed. In facility investment, the Texas plant in Taylor, USA, where $17 billion (about 21 trillion KRW) was invested, must be operational next year as planned.

Samsung Electronics Chairman Lee Jae-yong (center) is taking a commemorative photo with Peter Wennink, ASML CEO (left), and Martin van den Brink, ASML CTO, at ASML headquarters in Eindhoven, Netherlands, on June 14 last year (local time).
[Image source=Yonhap News]

The technological blueprint is clearer than investment but its feasibility is uncertain. Samsung has publicly declared a scenario to mass-produce 2-nanometer chips by 2025 and 1.4-nanometer chips by 2027. In the 2030s, it must also win the ultimate technology war involving virtual concepts like angstroms (one ten-billionth of a meter, one-tenth of a nanometer) developed by Intel.

Expanding the view beyond the semiconductor (DS) division to the entire company, the challenge is to accelerate the development of future technologies such as AI algorithms, nanoelectronics, battery materials, and quantum technology centered on AI. It must mobilize the full organizational capabilities of the group’s top R&D institutions, including the Samsung Advanced Institute of Technology (SAIT), the Semiconductor Research Institute, and Samsung Research.