Monday 22 October 2018

Emperor-style leadership at Samsung is a challenge

Click here to view full-size graphic
Click here to view full-size graphic

John Lynch

The company under our slide-rule today is able to boast a market capitalisation with the same value as the combined gross national product of 37 sovereign nations in Africa, albeit the less prosperous ones. It is probably safe to say it also has more clout than many of the richer countries on that continent. The multinational operation in question is the South Korean conglomerate Samsung, which is a market leader in so many fields that the mind boggles.

It is not just a world leader in mobile technology, but is also one of the great global shipbuilders, a major presence in construction, a big player in the life assurance game and among the top 20 advertising companies in the world. It also accounts for as much as 18pc of the South Korean GNP and employs 500,000 people in its 170 subsidiaries around the world.

Samsung has had lots of help on its way to fame and fortune. Favoured as part of a special industrial policy in the 1950s, it was one of several 'chaebols' which were given special status, including protection from import competition and guaranteed low-interest loans from an actively supportive banking system. Even today the five largest chaebols still account for half the value of South Korea's stock exchange.

The international rise of Samsung started in the 1990s and it rapidly became a global leader in its specialty areas. Its most interesting facet is the listed business, Samsung Electronics Company (SEC) - one the most profitable technology companies on the planet today.

SEC operates four divisions - consumer electronics, information technology, device solutions, and Harman International. Consumer electronics accounts for 24pc of the group's turnover, with products like TVs, refrigerators, air conditioners, medical devices and many household products. The information technology division includes its Galaxy range of smart phones, computers, and network equipment, and the division accounts for almost half of the group's revenue. Device solutions make and sell semiconductors and display panels used for TVs, monitors, and mobile phones (including Apple iPhones).

However, size and dominance can pose their own problems. The group's vice-chairman Lee Jae-yong, grandson of the Samsung founder, was jailed as part of a corruption scandal which included the bribing of now-disgraced former president of South Korea Park Geun-hye.

The jailing at least helped answer the question often asked: is the Samsung chairman more powerful than the country's president and above the law?

New President Moon Jae-in has pledged to "reform the chaebols" and tasked the authorities to rein in their unchecked power.

SEC's main profitability comes from its semi-conductor business and it recently ended Intel's 25 years of global dominance. The 'chip' business accounts for two-thirds of operating profits. Revenues last year were $174bn (€146bn), up slightly on the previous year, and half-year results show a further 10pc increase. Profits were up 20pc to $19.6bn (€16.4bn) last year, driven by semi-conductors. The group has a huge market value of $350bn (€294bn), a p/e multiple of 16, but negligible dividends. Investing in Samsung is not easy or cheap at $2,542 (€2,066) per share (yearly low $1,550) and using a technology ETF might be the best way.

Samsung today is in a good space with soaring demand for more powerful mobile and internet devices. It is also positioning itself for the technologies of the future which include driverless vehicles, internet of things, and artificial intelligence. Though it does not intend making driverless cars, it plans developing the software required. Some analysts have concern as to its ability in entering the 'new' technologies, citing lack of competitive software.

This could be solved by acquisitions, but Lee's conviction could hinder decision-making, given the 'Emperor' style of management. An added problem is China's plan to be a global leader in artificial intelligence by 2030, which has spooked everyone else in the business.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

Business Newsletter

Read the leading stories from the world of Business.

Also in Business