[Insight & Opinion] The Samsung Electronics Crisis Theory: Responsibility Lies Nowhere Else

The Consequences of Halting HBM Development in 2019
Responsibility Lies with Top Management to Drive Innovation
Chairman Lee Jae-yong Must Demonstrate His Capability and Performance After 10 Years

The crisis theory surrounding Samsung Electronics is gaining momentum. Discussions about diagnosing the crisis and prescribing solutions for Samsung Electronics are pouring in. The entrepreneurial spirit, often said to have disappeared within a rigid and bureaucratic organizational culture, is being criticized. Decision-making is slow, and under a short-term performance-driven conservatism, projects with questionable outcomes are postponed or not pursued at all. There are many calls for restoring competitiveness through personnel reform and innovation.

However, let’s rewind time a bit. Up to July this year, securities firms raised Samsung Electronics’ target stock price by 17%. Some even released reports titled "The Return of the King." Despite Samsung Electronics’ stock price falling to the 70,000 KRW range, securities firms maintained a target price in the 110,000 KRW range. Many analyses suggested this was only a temporary phenomenon due to concerns over a U.S. economic recession.

But naturally, the internal problems of Samsung, which are now being criticized as urgently needing reform, did not suddenly arise recently. Samsung’s management style, which prioritizes profitability and emphasizes a financial perspective, has been longstanding. Criticisms of so-called "big conglomerate disease" or governance issues?characterized by communication breakdowns between organizations, risk aversion, reliance on precedents, and insensitivity to external environmental changes?are similar. If Samsung’s governance problems and big conglomerate disease are severe, does that mean other companies in South Korea, excluding Samsung, have no governance issues or are unaffected by big conglomerate disease?

To simply summarize the difficulties Samsung Electronics is currently facing: it is the result of Samsung Electronics’ management temporarily halting HBM development in 2019. In the last quarter, Samsung Electronics’ memory division recorded an operating profit of 3.8 trillion KRW. Meanwhile, SK Hynix posted an operating profit of 7 trillion KRW, surpassing Samsung Electronics’ semiconductor division. But does this mean SK Hynix did not suffer from big conglomerate disease, had a more challenging corporate culture, or resolved governance issues?

Samsung Electronics recorded sales of 79 trillion KRW and an operating profit of 9.2 trillion KRW in the last quarter. The annual operating profit for this year is expected to be between 39 trillion and 40 trillion KRW. Compared to 53 trillion KRW in 2017 and 59 trillion KRW in 2018, which are considered semiconductor boom years, it is naturally disappointing but not to a level that warrants major despair. Evaluating the current market situation, the crisis theory about Samsung Electronics is exaggerated.

Of course, the super-gap has disappeared, competition is fierce, and Samsung Electronics missed opportunities to lead the market. The situation is difficult and the future uncertain, but it is not to the extent that expectations should be abandoned. The technical issues, such as Samsung falling behind in HBM technology and low production yields of cutting-edge system semiconductors, are in fact phenomena that have appeared externally.

Samsung’s problem is not complicated. Ultimately, it is the responsibility of the management. If the problem is a corporate culture that avoids risk, the top management should have changed that culture, simplified the decision-making system, and led innovation. The core issue is the capability of the top management. Although not officially a registered executive, Samsung Electronics Chairman Lee Jae-yong has effectively served as the de facto head since the previous chairman collapsed in 2014. Ten years have passed, and now is the time for an objective evaluation of his ability and performance.

Over the past ten years, Samsung Electronics’ sales growth rate has been only 1% annually in dollar terms. In the previous 15 years, it exceeded 17% annually. When Chairman Lee Kun-hee declared the New Management initiative, telling everyone except his wife and children to change, he was 51 years old. In 1995, when he burned 150,000 mobile phones in front of employees, he was 53. Chairman Lee Jae-yong is 56 this year.

Kim Sang-chul, Economic Commentator