Chaebol: the culture of Samsung and the Note 7's double recall (timeline)


Recently, activist hedge fund Elliott Management, which owns a small stake in Samsung, asked that the crown jewel electronics division of the company be spun off and listed on the NASDAQ, joining the pantheon of tech giants there like Apple, Microsoft, or Google's parent company, Alphabet. This would make Samsung Electronics more transparent and easier to control for shareholders, and would ensure management changes of the type that might have avoided the double Note 7 recall. It also has no chance of happening.

Samsung is run like a typical "chaebol" structure out of South Korea. "Chae" means wealth, and "bol" is a clan, and that's all you need to know about how companies like Samsung, LG, Hyundai and others are often run - as loosely knit family business conglomerates. The family owns stakes in each of the tens of holding companies, which in turn have ownership in the other firms in the network. This prevents outside investors breaking up the conglomerate, but also enshrines performance opacity, as well as rigid "no questions asked" top-down management policy.

Samsung  reported about $7 billion profit in Q2 2016, just a billion less than Apple, and was expected to report a similar amount for this one. The profit will now have to be slashed with up to $5 billion going forward to Q1 2017, and that's not even counting the intangible costs such as the brand damage. For us to understand how Samsung got here, and how this aggressive pursuit of market share, overly rapid innovation adoption, and vertical integration that culminated in the Note 7 fiasco, things need to be laid out in historical perspective.


Samsung origins

As we mentioned, Samsung is still pretty much a "chaebol" - a family-run conglomerate, notorious for its privacy and all-encompassing societal reach. Chaebols like Samsung, LG or Hyundai permeate South Korea, its business culture, and its everyday life with so much influence, that they have become a hot potato issue in many local elections.  

So how do you evolve from selling noodles and dried seafood in 1938, when Lee Byung-hul started Samsung, into a company battling a Silicon Valley juggernaut like Apple for world dominance in the most coveted subset of the consumer electronics market? 

The answer is again "chaebol" - Lee the founder branched out into many areas such as insurance, construction, shipbuilding and yes, electronics, whereas Lee the son, who was pinpointed as the business heir in 1987, built on the founder's success by nurturing and encouraging innovation and independent thinking. He was mentoring his kids to take over before he was hospitalized in 2014, leaving the company adrift, as nobody from the family could have taken the initiative until he was recovering. Again, family things. 

Amidst the Note 7 recall drama, however, the circumstances forced the board to install his son, Jay Y. Lee, who has been groomed as the heir apparent, as a member that will grant him influence over much more strategic decisions that his vice chairman position before.


Lee Kun-hee

Lee Kun-hee carried his father's push that Samsung must be the leader, or one of the best in every new field it enters, and this particularly paid off in the smartphone business, which has contributed significantly to Lee Kun-hee's $9 billion, or his son's $6 billion personal wealth in the last few years. It's not all puppies and flowers in the family, of course - Lee Kun-hee's older brother and sister sued him for shares in Samsung valued at a combined $850 million. His lawyers, on the other hand, say the father was clear who had to run the business, and the issue should have been raised 25 years ago when he took the helm, not now when Samsung is raking in record profits. 

The share transfers could have weakened the chaebol system, or the network of connected holdings that Lee Kun-hee used to maintain outsized control of Samsung Electronics and about 60 other companies in the group, even though he owns only a small amount in each of the various companies in the conglomerate. The court sided with Lee Kun-hee. 

In the early 90s, the current Chairman Lee Kun-hee realized that the company, as huge as it was, risked becoming a low-cost volume peddler, and said the famous quote: "Change everything but your wife and kids!" The slideshow below that has a timeline of Samsung's milestones, illustrates well the culture of innovation that was happening even before that battle cry.

Lee Kun-hee has a few other quotes, which establish him as a visionary leader, who is not overly concerned with the quarterly profits, but rather with building the right culture to secure strategic advantages for Samsung going forward:

  • "One genius can feed millions of others. For the upcoming era where creativity will be the most important driver of business success, we need to hire the best. The economic value of one genius is more than $1 billion."

  • "The business world has changed significantly. It is becoming increasingly difficult to foresee what sectors will prosper or opportunities will arise in the future. But if you hire the best and brightest, you will solve whatever issues arise in the future.

  • "It is difficult to understand the true dimensions of a problem or a situation when so many things seem to be happening on the surface. This is why I urge my employees to analyze a given situation from various perspectives. This way of thinking allows one to see the true aspects of a situation, which, in turn, allows one to respond wisely.

  • "Firing a CEO because his financial performance was poor is simply a bad decision. I've encountered several situations where a CEO once performed poorly in one sector then went on to perform much better elsewhere. This is one of the reasons Japanese corporations were able to compete successfully against US corporations."


Company culture controversies

Do those remind you of a certain company that says money doesn't matter, but rather the right products? In any case, as with every powerful figure, the Lee Kun-hee's reign is not without controversies, and we don't mean just the family feud for inheritance. In 2008 his house and offices were raided by the police, starting an investigation whether Samsung is maintaining a slush fund that compensates court officials and politicians for favors. 

Moreover, Samsung was using every trick in the book to resist unionization of its workers, and there were even suicide cases among them, allegedly due to overwork and tight deadlines. A leaked power point presentation made to Samsung executives back in 2012, presented different ways that the company could prevent labor unions from representing employees at Samsung. The slides were discovered by the International Trade Union Confederation, and the ITUC says that there is a direct relationship between the "inhumane" treatment of employees by Samsung and the explosions that forced two recalls of the Samsung Galaxy Note 7. Chaebols are often depicted in the media and movies in Korea as almost mafia-type organizations, and such allegations don't help to dissuade the notion.

After being found guilty in things like financial wrongdoing and tax evasion, Samsung's boss was fined $109 million, and issued a three-year suspended jail sentence. "We, including myself, have caused troubles to the nation with the special probe; I deeply apologize for that, and I'll take full responsibility for everything, both legally and morally", Lee Kun-hee commented after the verdict. Pardoned by the government in 2009 in order to help Korea's bid for the Winter Olympics, he returned as Samsung's Chairman in March 2010, then the first Galaxy S was outed in June, and we all know what happened up to the Galaxy Note 7 recall point. Here is a brief primer on that saga in the form of a handy timeline infographic:


It's Samsung's relentless push for vertical integration and strict deadlines to save on costs, the top-down management policies, as well as insistence on tight family control that are behind a lot of the reasons for the Note 7 drama. Jay Y. Lee, the son, is on his last steps before being nominated as a CEO, so we aren't holding our breath for the chaebol management structure to change significantly in the near future, yet we can't wait for Samsung to clarify how it intends to move forward, and not only with the Note line. 

Back in the 90s, annoyed that Samsung phones he gave as New Year's gifts were failing, Chairman Lee collected thousands of them in a field near the Gumi factory, then lit them up, bulldozed the remains, and told everyone to start over. Will Lee the son have the wherewithal to do something similar now that Samsung is a global household brand? He just might have to.

source: Samsung, Mobilkoepen.net (infographic) & FT

Related phones

Galaxy Note 7
  • Display 5.7" 1440 x 2560 pixels
  • Camera 12 MP / 5 MP front
  • Processor Qualcomm Snapdragon 820, Quad-core, 2150 MHz
  • Storage 64 GB + microSDXC
  • Battery 3500 mAh

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18 Comments

1. AllFanboysMatter

Posts: 206; Member since: Feb 14, 2016

Samsung may be the worst company in existence right now. They make phones that do nothing but explode. How as a manufacturer can you ever allow a bunch of mini grenades outside of your shop? I mean it's insane to me that this was ever able to happen? How the hell could you possibly allow this to happen as a billion dollar company? This happens due to the foundation and values the company was created on. When these values are also compromised due to the sake of profits and trying to beat out the competition, guess what? That makes you a loser of a company. Hopefully they will turn into a non-criminal company someday, but it's a fact right now that they are in decline due to a stupid decision to push out some silly note product that wasn't nearly ready for primetime. As time goes on, we will be able to see the true winner. The comany that combines all the right qualities in efforts to being most successful. That means making profits, making customers happy, making your employees happy, and supporting goodwill causes day in and day out. But no, Samsung and Apple are just sitting on their butts making poor decisions on a daily basis. When will people listen to me? They need to understand these companies are just no longer the same anymore. All they do is care about themseleve.s

3. QWIKSTRIKE

Posts: 1461; Member since: Mar 09, 2010

I can't believe you make rant about how bad Samsung is because they had unforseen technical difficulties with the Note 7. Lay off the hater aid dry your tears, and go cry in a corner "with less bwoy". I am in love with the note 7 inspite of the issues, and software and software suite. That investor wants a spin off merely because as a major share holder his shares will become rich from such a happening. He pretends to be looking after other people's interest

5. bolosantosi

Posts: 103; Member since: Sep 20, 2016

If this is what you would say about Samsung, I wonder what your would say about Apple and their tactics.....

4. Macready

Posts: 1830; Member since: Dec 08, 2014

"It's Samsung's relentless push for vertical integration and strict deadlines to save on costs, the top-down management policies, as well as insistence on tight family control that are behind a lot of the reasons for the Note 7 drama." This is still chock full of assumptions. It's still nothing more than assumption or rumor that the deadline is reason for the fault found in the Note 4. Because it can simply also be that very odd chance of bad luck, not detecting a very rare defect, as also witnessed by the fact that it took/takes so long to find the main cause or even being able to replicate it in controlled environments. Not just by Samsung laboratories, but also independent research centers in both the US and South Korea. To put the assumption/rumor into a better perspective, the Note 7 doesn't pack any new inventions or unique parts for that matter. The SoC, storage, screen technology, battery technology, all seen before in a model sold in much larger quantities for months (the S7 Edge). Even the Iris scanner was already used in a tablet released months ago. With all that in mind and their experience with previous deadlines around the same time, or those in early spring for the more important seller, I fail to see how this suggested pressure was such a driver behind this particular failing. Especially realizing that those billions (literally) of phones sold before didn't fail in this particular area. To me it just seems like a very unfortunate combination of factors/bad luck that came together, all at the same time.

6. trojan_horse

Posts: 5868; Member since: May 06, 2016

^^ I second that. Heck, such assumption from this writer, implying that Samsung's "chaebol" structure and push for tight family control being behind the Note7's issues is completely unecessary in an article like this - journalism which is supposed to be objective, and not influenced by personnal opinion, which in this case, is utterly irrelevant. I mean, how is Samsung's "chaebol" culture and family issues relevant to the Note7's double recall? It's not like this "chaebol" culture debuted just in 2016, for such assumption of it being somehow the cause of the Note7 disaster, to make any sense. Samsung's flagships like the Galaxy S7/S7 edge have had success, amid this chaebol family issue in Samsung. So, why all of a sudden, this chaebol family issue is being regarded as the cause of the Note7's failure? Was this chaebol family issue regarded by PA (Daniel P) as the reason of the S7/S7 edge success? NO! Then why is it now regarded as the cause of the Note7's failure? That's nit-picky journalism.

13. PrYmCHGOan

Posts: 335; Member since: Sep 28, 2016

Exactly. This can happen to any phone. They can't find the issue. It's called an accident. Even if their is a faulty part, it doesn't mean it was intentional. SAMSUNG makes tons of phones. You all make it sound like the Nktebis the end of the world for Samsung. If this was Apple, where 70% of their income comes from the iPhone, then that would be different. Samsung sells 300M phones. More them half of those sales come from Galaxy branded devices. The Note s the 2nd largest Galaxy as far as sales, but they are only a 3rs of the S salea. Every one is hanging on the Nitenissue, likes it's a suitcase full of money. Samsung makes lots of products that have had issues. Sure manybmay stop buying, but others will simply replace them, because Samsung makes some of the best products. Having great products ,will never mean tbeybwont have problems. You all.are riding this Note is so hard, because you have nothing else to keep your attention. If the iPhone was so good, you wouldn't need tonlay attention to s lesser devuce. The Note 7 was flawless, from day one until this happened. Yet the iPhone 7 has been flawed with 7 serious issues, and they have also caught fire. But you don't hear about that. Let's this happen to Apple, and Apple could lose for more.moneybthat whatvSamsung is going to lose. It sucks it happened. The Nite has been a beast and if Samsung drops the Nite without replacing it, they could lose at least 10M customers, assuming hardcore Note users, may not want a Galaxy S. I still have mine. I am. It gonna give it up. I don't travel by pu loc transportation at all. So I could care less about the bans for me, but understand but not ruins it for others. Money and reputation will take some hit, but when you make 100s of products, you will manage.

16. jeroome86

Posts: 2314; Member since: Apr 12, 2012

Stop promoting people to keeps these devices. Turn yours in already. Good grief.

17. coldspring22

Posts: 349; Member since: Feb 28, 2015

There are more than one million Note 7 still in use out there. But since Samsung's announcement abandoning production and sale of Note 7, all reports of any further explosions have stopped! That's really interesting. Risk wise, using Note 7 is hugely hyped, as though it's a hand grenade, but fact is only 100 devices had thermal event out of 2.5 million produced. Using Note 7 is heck of lot safer than even going out for a drive in your car! So that's pretty low odds of anything going wrong, and it's even much less risk when you consider that mot of the vulnerable Note devices probably have failed early. So expect exponential decay in Note 7 devices failing, even if all one million+ Note 7 users keep using their devices. In any case, as many users persist in keeping and using their devices, let see if there really is/was any tremendous danger in using Note 7 that's being promulgated by all media and government agency! Results will be clear soon!

7. redmd

Posts: 1948; Member since: Oct 26, 2011

Bad read PA. This is a pointless article, it's just a click bait. The Note7 fiasco is over. Find another article to write.

8. p51d007

Posts: 705; Member since: Nov 24, 2013

Samsung, tried to "one up" Apple, THIS time, it backfired BADLY. The past few release cycles, they've pushed out devices, just ahead of Apple, then use quirky commercials to poke fun at Apple. THIS time, they got caught...BIG time.

9. jhonqseven

Posts: 9; Member since: Oct 05, 2016

No se como llamar a los redactores de iphonarena, o debo llamarla trasharena? De verdad leen SUS Propios articulos? Se nota una kilometros de distancia que estan obsesionados con Samsung. Creia que tenian mas creatividad, pero ultimamente solo les da para atacar, desprestigiar y denunciaar a samsung. Los consideraba mucho mas inteligentes como para seguir culpando a una empresa por mas que un producto que salio mal. Todas las compañias de comercio, de ropa, de electronica, todas explotan a los trabajadores, les pagan una miseria. Si realmente estuvieran preocupados por este tipo de practicas deberian dejar de alabar y escribir tambien articulos contra apple y sus practicas en faxxcon y sus empleados. Por favor IPHONEARENA deja de lado tu doble moral, y por favor trabajen, usen su imaginacion y dejen de lado algo que el mundo ya supero y ustedes siguen obsesionados con el tema. me pregunto cuando creceran y seran unos editores responsables y sin apasionamiento que puedan escribir sobre una marca, sin favoritismos? Por favor crezcan editores Not as a call iphonarena editors, or should I call trasharena? Really read your own articles? one kilometer away who are obsessed with Samsung shows. Believed to have more creativity, but lately only gives them to attack, discredit and denunciaar to Samsung. He considered much more intelligent to continue to blame a company for more than a product that went wrong. All trade companies, clothing, electronics, all exploit workers, pay them a pittance. If they were really concerned about such practices should stop praising and also write articles against apple and practices in faxxcon and its employees. Please IPHONEARENA put aside your double standards, and please work, use your imagination and put aside something the world has already passed and you still obsessed with the subject. I wonder when they grow and be a responsible and dispassionately publishers who can write about a brand, without favoritism? Please grow editors

11. XperiaG

Posts: 178; Member since: Jun 06, 2016

Google translator?? hahaha the english part has lots of grammar mistakes but you are right...

10. niteiknight

Posts: 77; Member since: Aug 02, 2012

Are people on here seriously defending corporate cultures like this? Poor journalism or not, you can't sit there and tell me chaebols like Samsung's didn't influence the poor decisions that led to a disaster like the Note 7. No, they are not alone, and corporations need to be held accountable for their poor decisions. This includes not just Samsung or even Korean corporations, but all companies worldwide. If that means criticizing corporate cultures then by all means do so. I mean really. Letting one family have so much power as to affect thousands of lives? I wonder why that sounds so familiar...

12. ph00ny

Posts: 2069; Member since: May 26, 2011

Wait companies pushing to achieve a goal is a "corporate" culture? Shiiii I guess all businesses should shutdown Also all the Gates', Zuckerbergs hold too much power to affect thousands of lives...

18. coldspring22

Posts: 349; Member since: Feb 28, 2015

Add Tim Cook to the list. He's holding onto dear hope and dreams of millions of ifanboys out there!

14. kevin91202

Posts: 642; Member since: Jun 08, 2014

I'm waiting for the anti-Apple article where a PA writer discusses how Steve Jobs violated federal employment law by conspiring with other Silicon Valley executives to hold down wages and prevent fair competition among its employees; stole trade secrets; stole trademarks such as iPad and iPhone; supported child and slave labor; and evaded income tax. Let us know if PA can grow a pair to write such a critique.

15. kevin91202

Posts: 642; Member since: Jun 08, 2014

As a single article.

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