Samsung reported about $6 billion profit in the last quarter. To put it in perspective, this was just a third shy of Apple's profits, near to what Microsoft made, save for the one-time aQuantive charge, and roughly twice Google's take. It is also about a third less than oil giant Exxon Mobil’s profit without the one-time income charges.
The bottomline is that Samsung became one of the most profitable companies in the world in the span of two years, riding the smartphone wave (no, not that Wave). Apple argues it's because Samsung followed the footsteps it has been trailblazing since 2007 with the first iPhone, and is now asking for $2.5 billion of patent infringement compensation in the tech trial of the century that started July 30.
For us to understand how Samsung got here, and where does this aggressive pursuit of innovation and market share we are observing now stem from, things need to be laid out in historical perspective. Thankfully, court filings that keep on leaking from the Apple-Samsung trial, are adding the last pieces to the Samsung puzzle.
Lee Kun-hee
We say thankfully, since Samsung is 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 the upcoming 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? The answer is 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, and is now mentoring his kids to take over. He carried his father's push that Samsung must be the leader or one of the best in every new field it enters, and this is particularly paying off with the smartphone business now, which is well on the way to increase Lee Kun-hee's $8 billion personal wealth significantly.
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It's not all puppies and flowers in the family, of course - the older brother and sister are suing Lee Kun-hee 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. As you see, Apple's lawsuit is not the only legal trouble on the Samsung Electronics Chair's radar.
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."
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. Chaebols are often depicted in the media and movies in Korea as almost mafia-type organizations, and those allegations didn't help to dissuade the notion.
Korean chaebol movies often depict them as mafia-type organizations
He stepped down as chairman and, 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 apologise 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 since then.
It is precisely the line of phones and tablets starting with the first Galaxy S in 2010, which attracted Apple's attention to its largest components supplier. In Cupertino's point of view, Samsung has been mimicking the moves that made Apple the largest market cap in the world, with the only added value its manufacturing prowess, obtained through the years of making flash memory, processors and displays, rather than creativity.
Samsung, on the other hand, argues that it is different enough, as it has been having similar designs before the iPhone was introduced, not to mention it is using a third party mobile OS for its most successful products, over the features and appearance of which it has limited influence. Some argue that Samsung is just a collateral damage in the fight against Google's Android, whose introduction had Steve Jobs fuming and threatening with "thermonuclear" response, a part of which is the current patent litigation mess in the mobile tech world.
Below are a few examples of internal conversations Apple claims illustrate that Samsung has been influenced by the iPhone or iPad to arrive at the final retail versions. Long reads, but totally worth it. This one is from 2008:
Your efforts are much appreciated.
The CEO’s words to the Head of the Office of Development and to the Product Planning Team Leader, during a business trip to America, are re-summarized as follows. Please note that the CEO’s words below were relayed by the Head of the Office of Development.
'I am getting the sense that the Apple i-phone’s Touch Method (C Type) is becoming the De facto Standard in the market. I think that we should probably fully apply the C method as well. Isn’t that the demand of the carriers and the market? Excluding China, or the cases where there is no choice but to use the R method, let us think seriously about applying the C method. To apply the C method, the Icons would have to be large, and when viewing a screen with small letters, there would have to be a Zooming function, and……. I would like the executives in related areas to gather and have a discussion on this topic.'
Here we are talking tablets:
Hello Principal Shin,
At today’s meeting to review the UX team’s P1’s usability and effect related analysis, we were requested to implementadditional effects for browser related portions that are inadequate in comparison to the iPad.The requested effect items are as below:
1. Multi window screen transition is not emotive because the screen shrinks without Tension effect.(iPad) During multi window screen transition, an effect is provided in which the screen shrinks down slightly smaller thanthumbnail size then plumps up to thumbnail size.
(refer to attached 33.wmv)
2. The animation effect for multiwindow deletion is plain in comparison to the iPad.(iPad) A genie effect is provided in which the image almost seems to be folded.(refer to attached 34.wmv)
3. Non-emotive because Bounce effect not provided in Browser screen.(iPad) Bounce effect provided(refer to attached 35.wmv).
And a very philosophical one, sent to the interface design team in February 2010, on the runup to the first Samsung Galaxy S:
I have confidence in our products’ H/W, in their exterior design, and in their quality. But when it comes to the ease of use of our UX, I lack such confidence. Influential figures outside the company come across the iPhone, and they point out that 'Samsung is dozing off.'
All this time we've been paying all our attention to Nokia, and concentrated our efforts on things like Folder, Bar, Slide, yet when our UX is compared to the unexpected competitor Apple’s iPhone, the difference is truly that of Heaven and Earth. It’s a crisis of design. The world is changing, and the flow of change isn’t something that you can have come back again by going against the flow.
Metamorphosis requires energy; we have ample assets in the form of our people, so as long as we are equipped with capability, the world’s change will function for us as an advantageous opportunity. All the executives and employees in the Mobile Communications Division are diligent and exemplary that all this time, when Operators made comments about the designs we put before them, we modified and modified again, without missing a single comment. That style of business has worked until now, but the iPhone’s emergence means the time we have to change our methods has arrived.
In regards to exteriors, do your best not to create a plastic feeling and instead create a Metallic feel. As for UX, see to it that it is a UX that is easy to use regardless of age, occupation, and level of education, that it’s a UX that’s not like a UX, that, just like the flow of water, its alarm rings when you wake in the morning then out comes the news while you’re getting ready to leave for work, see to it that you’re able to come up with that kind of UX.
Our biggest asset is our Screen. It is very important that we make Screen Size bigger, and in the future mobile phones will absorb even the Function of e-books. The concern about being too far ahead is that it can also mean failure; so our designers need to think at least six months ahead; they need enough prior preparation to resolve whatever sales or product planning says about their designs.
From now on I’ll come to Seocho more often and agonize together with you. If you have something to report, don’t come to Suwon bearing a bag of mockups, just call me anytime. A judge speaks through judgments, an engineer speaks through products, and a designer should not need to speak.
That is all.
What's at stake? Well, it's not just the $2.5 billion of damages Apple is asking from Samsung. The Koreans make the components in-house, but sell their flagship phones at prices close to Apple's iPhone. And Samsung announced record $42 billion of investments for this year in areas like processor manufacturing in its Austin, Texas facility, and OLED displays, so it is certainly determined to maintain its edge.
Making your own components means that even with Apple's state-of-the-art supply chain that Tim Cook built, the margins on Samsung's high-end products are likely very close to the stratospheric 50-60% gross that Cupertino commands, positioning the chaebol for not only market share gains, but stellar financial success as well. In fact, according to Apple's own graph on the right, Samsung's market share shot up exponentially, and keeps climbing, with the introduction of the Galaxy Android line, but a part of that success Cupertino claims can be credited to Apple's ideas with the iPhone and the iPad.
We'll follow how the trial progresses, and one thing is for sure - we will know much more about the behind the scenes interaction that leads to a smartphone or a tablet in these secretive companies after the final verdict.
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