Chaebol: the story of Samsung and why Apple is after it

Chaebol: the story of Samsung
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.

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.

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.

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