How Samsung Got Big

The cellphones were stacked up high in the Gumi factory yard and more were coming out every minute. Phones, TVs, fax machines, and other gear shattered as it hit the concrete and Samsung CEO Kun-hee Lee and his board cracked the screens and cases with heavy hammers. Then they lit a bonfire and threw everything in.

The 2,000 workers began to cry. And still the hardware kept coming. The CEO was disgusted by the low quality product coming out of his factories in the early 1990s and, in a blaze of anger, ordered it all destroyed.

In all, something like $50 million worth of hardware burned on one day in 1995 when Samsung hoisted its “Quality First” banner and began its slow march towards world domination in earnest. Samsung Electronics emerged from those ashes a very different company, but the road leading to that cleansing fire was a long one.

To most of the western world the name “Samsung” is inextricably linked with smartphones and televisions and refrigerators and microwaves — with the consumer electronics that have turned Samsung into a global force. Go back far enough though and it becomes very clear that Samsung Electronics was only ever part of the equation. A massively successful part, yes, but still just a part.

Before Samsung Electronics there was merely Samsung Sanghoe: a small trading company founded by Lee Byung-Chull in 1938 that dealt mostly in dried seafood, produce, and its own noodles. Its bread and butter, so to speak, was shipping those comestibles all around the region. Business was good, and Lee went on to open Samsung Mulsan (now known as Samsung Corporation) in 1948, but that prosperity was ultimately short-lived. After diligently growing Samsung Mulsan, Lee was forced to abandon his holdings in Seoul when the city was invaded and occupied by the republic’s communist neighbors to the north.

He nearly lost everything.

Samsung’s story almost ended there, but Lee made his way south to Pusan to recoup from his losses and bring Samsung Mulsan back from the brink of death. The war economy treated the fledgling trading corporation well, and within a few years Lee was able to parlay the proceeds into a handful of prominent subsidiaries.

And thus, Samsung’s chaebol era began. Korea’s chaebols are curious things — they’re very large, very diverse commercial conglomerates, not entirely unlike a GE or a Dupont, save for one little difference. Rather than divvying up the leadership of the chaebol’s subsidiaries and interests among a slew of external candidates, all that power is saved and meted out to members of the family. If you think of them as Asian analogues to family-driven empires like the Rockefellers you wouldn’t be completely off-base, but even that would be underestimating the amazing amount of political clout and influence these corporate bodies exhibit. In later years, the sort of influence chaebols had on national matters was even a little scary.

Lee Byung-Chull sat in the throne, and over the years to come, most of his six daughters and four sons would occupy positions of great power with the carefully-cultivated chaebol. But none would be as prominent as Lee’s youngest son Kun-hee, who officially joined the chaebol in 1968 after studying economics at Japan’s prestigious Waseda University and getting his MBA from George Washington University.

1969 saw the founding of Samsung Electronics, the subsidiary that would ultimately go on to become perhaps the world’s most powerful electronics brand. But that’s a long way off — its first products were mostly modest home appliances. Samsung’s inaugural black-and-white television set rolled off assembly lines in 1969 by way of a joint venture with Sanyo since the Korean subsidiary had no experience putting TVs together, and refrigerators, air conditioners, and electric fans soon followed.

It didn’t take long for Lee to figure out that the growing demand for consumer electronics of all stripes could mean very big things for Samsung down the road, but there was a problem — many of the components that went into Samsung’s products came from overseas, and Japan in particular. Considering that Japanese companies like Sony had been churning out well-received gizmos for years at that point, nascent Korean electronics companies had grown dependent on imports of foreign components and technological know-how.

Samsung decided to do something about that. In 1974 it nabbed a majority stake in Korea Semiconductor in a bid to help wean itself off of foreign tech. Not everyone within Samsung’s brass agreed with the decision — granted, going from piecing together consumer electronics to building components seems slightly backwards — so Byung-Chull decided to settle matters with his own checkbook with some prodding from his son Kun-hee. Korea Semiconductor was renamed Samsung Semiconductor in 1978 and Samsung would soon begin to sling its own silicon, a move that would pay off handsomely in the decades to come.

The rest of the 1970s would see Samsung Electronics making strides abroad with its inexpensive wares. One of its earliest international hits was a cheap color television — it first made a splash in Panama of all places before making its debut in the United States. It was a slow start, but a start all the same. Black and white sets hadn’t gone completely out of style yet though, and Samsung Electronics had manufactured almost 10 million of its cost-conscious sets by the end of the decade.**

By the time 1980 rolled around, the Samsung Group had grown to become one of the most prominent chaebols in South Korea, with a construction company, a petrochemicals division, and a ship-building arm supplementing the conglomerate’s sugar, paper, and newspaper businesses.

While the Samsung Group broadened its scope and grew into an economic powerhouse, Samsung Electronics slowly became more proficient at churning out consumer gadgetry. Even so, pure production power just wasn’t enough — even though Samsung had become a notable electronics exporter, foreign customers still passed over their products because of poor marketing and positioning. Who would buy a off-brand Samsung television when a proven Sony set sat right next to it on store shelves? Even worse, foreign and domestic consumers who did take a chance on Samsung products often found that they just didn’t work the way they were supposed to. The quality just wasn’t always there.

Somewhere along the line balls were being dropped, but the senior Lee didn’t have enough time to address the matter.

The skies over Seoul were peppered with clouds when Lee Byung-Chull died of lung cancer on November 20, 1987. Just two weeks later, Byung Chull’s youngest son, Kun-hee, took his place on the family throne to become the Samsung Group’s second chairman.

Kun-hee’s installment as chairman was agreed upon by Byung-Chull’s survivors and Samsung Group’s board, but it seemed like a peculiar move to some who peered in from the outside. The late Lee was no fool though, and didn’t suffer them lightly either. When his two elder sons proved ill-suited for duty he dismissed them outright. “They were unfit for executive positions,” Lee remarked to Time Magazine in 1976. “The life of a man is short, but that of a corporation must never be.”

The Confucian patriarchy that was a hallmark of the chaebol power structure meant that Kun-hee Lee would be the one to ultimately succeed Byung-Chull, though the patriarch may have wished otherwise. He was very fond of his eldest daughter Lee In-hee, and reportedly mentioned to his confidants that she would be a shoe-in as his successor if only she was male.

Kun-hee’s first few years as chairman were marked by relative prosperity for the Samsung Group, and Samsung Electronics in particular. Samsung Semiconductors, the purchase which you’ll recall both senior and junior Lees coordinated, had already begun to pay off thanks to the popularity of its DRAM memory chips and became the market leader in 1992, and Samsung Electronics had begun to focus more on research and development in addition to production prowess. That said, there were some problems.

To say that Kun-hee Lee is a character is putting it awfully mildly — his tenure as chairman of the Samsung Group was peppered with overzealous but defining moments that changed the course of the chaebol’s growth. The first took place in 1993, when Lee the junior found himself facing an electronics division that simply wasn’t doing its best work. Lee’s vision was of a Samsung that sat on top of the world’s industries, a vision that didn’t jibe with the slipshod products and careless practices that he saw day in and day out. So what did he do?

He talked, and talked, and talked.

It was a lengthy, impassioned demand for change. His initial, hour-long phone outburst took place on a flight to Frankfurt, and he had his rant recorded so others who weren’t present would be able to heed his words. Upon his arrival in Germany, Lee gathered up some 200 Samsung executives in a hotel and laid out his vision over the course of three days.

“Change everything but your wife and kids,” Lee famously proclaimed. Lee would later prove to be full of such soundbites, but the message was clear — Samsung Electronics was in trouble and the people in that room needed to fix things fast.

His message may have seemed like a powerful one, and some execs surely took it to heart, but it didn’t seem to stick for very long. As the story goes, Lee sent out some of Samsung’s newest mobile phones as New Year’s gifts in 1995 only to be embarrassed when he was informed that they didn’t work the way they were supposed to. Quality had began to slip once more, and Lee was intent on making his earlier edict crystal clear.

With the help of a few of his generals, Kun-hee Lee took it upon himself to play the perfectionist pyrophile. Invoking the flaws that paved the way for the bonfire likening product defects to “cancer,” a grim but fitting metaphor for a subsidiary whose fate could be sealed if its employees and brass didn’t enact some dramatic changes.

After the flames were put out and the debris cleared, Samsung Electronics redoubled its investments in research and development. The installation of a new Electronics CEO, Yun Jong-Yong in December 1996 was meant to put the errant subsidiary on a more ambitious, profitable path.

The shrewd Mr. Yun, a graduate of Seoul National University who also studied at MIT’s Sloan School of Business, also helped navigate Samsung Electronics through one of its most desperate periods. 1997 saw South Korea’s massive chaebols take considerable losses thanks to the Asian financial crisis. In retrospect Samsung weathered the storm better than most despite carrying loads of debt, but Yun was faced with a hell of a task — and was forced to streamline the subsidiary’s operations by selling off nearly $2 billion in corporate assets and temporarily shutting down factories to help Samsung Electronics move through its inventory.

To many of its employees, working for Samsung is a mark of pride. In an effort to further trim costs, Yun laid off 24,000 of them.

It was a trying time for Samsung Electronics. Yun’s efforts helped to solidify the subsidiary’s transition from being a producer of cheap, me-too products to a herald of the bleeding edge. One of the keys, according to Yun, was sheer speed. Without it Samsung Electronics could fall prey to any number of major rivals set on out-innovating and out-producing them. Between that focus on aggressive turn-around times and the thoughtful reinvestment of fund in products and divisions that were seen as potential long-term winners, Samsung Electronics had set the stage for the next decade.

Samsung’s early interest in the nascent semiconductor business allowed it compete in ways that other consumer electronics firms — like Sony — weren’t prepared to. The subsidiary didn’t focus just on finished products, it concerned itself with the electronic building blocks that went into them.

That M.O. speaks to another trait of Samsung Electronics: it doesn’t do much pioneering in unproven spaces. Rather, it picks out markets that have clear traction and try to consistently outperform the players that are already there. Consider the humble TFT-LCD display. Samsung Electronics’ first was produced in the mid-90s, and in the years to come the subsidiary would dump considerable amounts of money into improving production quality, clarity, size, as demand for flat-screen displays grew from the late 90s onward.

And of course, mobile was another one of the those big opportunities. If a strategy based on weighty investments and rapid development helped Samsung stay ahead of its Japanese display rivals, then it helped Samsung take on the world with its mobile devices.

The approach would best be described as “scattershot.” Be they feature phones or Android smartphones, Samsung Electronics has always seen to fit to churn them out at an astonishing rate to see what clicks with consumers. That’s led to a considerable number of one-off devices meant to stand on their own and then disappear after mere months on the market, but hits are inevitable and so are their sequels.

Consider the company’s flagship Galaxy S series, for instance. First introduced in 2010, the Galaxy S was one of the first Android devices to become a runaway success, despite companies like HTC and Motorola having a considerable head start. From there, the typical Samsung drive to iterate kicked in and now, after less than three years, Samsung is already preparing to push its Galaxy S4 out the door and into the world marketplace. One could argue (and some already have) that Samsung’s Galaxy S4 is little more than a software-centric rehash of the model that preceded it, but that’s not really the point.

It’s better than the model that came before it, and it’s being released less than a year since the Galaxy S III came out. Samsung is fighting to maintain its position at the head of the curve through production and development speed — don’t expect that to change any time soon.

The story of Samsung’s humble birth, growth, and dominance of multiple industries reads something like a creation myth, a rags-to-riches story for the ages. Samsung Electronics in particular hit its stride in the years that followed that famous fire, but there’s one more factor that helped propel the subsidiary into the stratosphere and keep it there: the Samsung chaebol’s tremendous stature.

If defects are “a cancer” just as Lee famously proclaimed, then what about the flagrant, repeated violations of the law that seem to punctuate Samsung Electronics’ history? Product defects are one thing, but what of defects of character and ethics? After all, Samsung has flouted its share of Korean and international regulations over the years, often with the help of some prominent chaebol buddies.

Consider this small selection of legal imbroglios that Samsung has been engaged in over the years:

• In October 2005, Samsung Electronics plead guilty to charges of taking part in a conspiracy to illicitly manipulate the prices of its DRAM memory chips. It was stuck with a $300 million fine for its role in the scheme.
• In March 2012, Samsung Electronics was fined 14.2 billion won for engaging in a mobile price-fixing scheme (along with LG, Pantech, and others) that saw manufacturers inflating phone prices, and was later fined another 400 million won for obstructing Korea’s Fair Trade Commission investigation of the matter one week later.
• In August 2012, a California jury found Samsung Electronics guilty of infringing six of Apple’s patents with a variety of mobile devices. Despite vigorous appeals from both sides (Samsung wanted to have the case reconsidered, Apple wanted more money), Judge Lucy Koh upheld the original $1.05 billion fine.
• In February 2013, Samsung Electronics was found to have delayed reporting a hydrofluoric gas leak at a chip plant in Hwaseong until after one employee had already died. The fine? A scant 1 million won ($923).

And those are just the some of the cases that directly involve Samsung Electronics — the other subsidiaries and the Samsung Group as a whole was responsible for much more. It’s easy enough to ascribe some of these incidents as the work of unscrupulous loners, and that may be the case at least some of the time, but Lee Kun-hee was no paragon of virtue himself. The world would soon discover that the revered chairman had pinned his name to a hefty list of transgressions while helping Samsung become one of the world’s most prolific conglomerates.

Kim Yong Chul, who served as Samsung in-house counsel before leaving the company to write a tell-all tale of corruption, leveled some of the weightiest accusations at his former employer. In late 2007, he participated in televised press conference in which he claimed that Samsung and Chairman Lee had secretly cultivated a 200 billion won slush fund meant primarily to bribe government officials.

An investigation ensued and while the bribery claim didn’t stick, in 2008 Lee stepped down from his inherited post as chairman after being indicted for dodging roughly $120 million in tax payments. At the time he was required to pay a small (for him) fine of $100 million, and was sentenced to three years in prison, a punishment that was quickly suspended. He was ultimately pardoned by President Lee Myung-bak in 2009 so that the Samsung Group chairman could remain a part of International Olympic Committee, and Kun-hee eventually reclaimed his place atop the chaebol in 2010.

The kicker? That’s the second time Lee Kun-hee has received a presidential pardon. The first was back in 1997 for yet another slush fund scandal, this time involving plans to pay off presidential hopefuls.

Despite all that, Kun-hee Lee, Samsung Electronics, and the whole of the Samsung Group walked away with minimal (if any) lasting damage. Its size now is one of Samsung’s greatest assets — it employs hundreds of thousands around the world, and the sheer amount of money it brings in (the Samsung Group accounts for around one-fifth of South Korea’s GDP) it has more than enough financial and political resources to handily deal with whatever comes its way.

In spite of all that Samsung Electronics (and by proxy, the Samsung Group) has grown to truly massive proportions.

Though it needed some swift kicks in the proverbial pants along the way, Samsung Electronics’ rise to the top of the consumer electronics industry is one based on nearly as many questionable practices as good ones. Tremendous production power, a devotion to speed and efficiency, a modicum of measured craziness in its leaders, and the willingness to throw around its amazing weight have all contributed to Samsung’s domination of nearly every industry it’s involved with.

For Samsung, it’s all about thoughtfully applying its brawn, which becomes all the more important when you reach the heights Samsung has. Once you reach the top, you become a target.

There’s a very fine line between being ruthless and being effective, and Samsung seems to have mastered its balancing act.