- 2018-10-18
Samsung is in a power vacuum
Lee Jae-yong is the only son of Samsung Electronics Chairman Lee Kin-hee. After his father suffered a heart attack in 2014, he became the actual head of Samsung. He joined the Samsung Electronics Board of Directors in October 2016.
On the "Forbes" magazine rankings, Li Jianxi is the highest net worth individual in South Korea, with assets of 14.8 billion U.S. dollars, and Lee Jae-yong's personal assets also have 5.8 billion U.S. dollars. After the Korean court approved the arrest of Lee Jae-yong, public opinion generally believed that Samsung has fallen into a power vacuum and will suspend "big moves" related to restructuring, mergers and acquisitions and investments.
Endangering South Korea's economy
A professor at a South Korean university said that Samsung’s leadership will face unprecedented difficulties after Lee Jae-yong’s arrest. "Without the ‘captain’, can Samsung’s ‘this big ship’ go in the right direction? The arrest of Lee Jae-yong is bad news for Samsung and other big groups, as well as the entire Korean economy.”
A person in charge of the Korea General Managers Association said that Samsung Electronics accounted for 11.7% of the total sales of South Korea’s manufacturing industry and accounted for as much as 30% of the total operating profit. It can be said to be a leading company on behalf of South Korea. After Lee Jae-yong was arrested, Samsung’s operations will inevitably be hindered, and international trust will also plummet, which will make South Korea’s economic recovery even more difficult.
The director of the Korea Trade Association believes that the current export situation in South Korea is severe, trade protectionism in various countries is rising, and the economic situation in South Korea is not optimistic. Under this background, people in the industry hope that the chaos will end as soon as possible, so that companies can get back on track and focus on increasing exports and restoring the economy.
Zheng Changyuan, a senior analyst at Nomura Holdings, holds the same view, “Samsung will encounter difficulties when facing major decisions such as restructuring and mergers and acquisitions, and its brand image will also be damaged.” Some employees within Samsung also admitted that after the arrest of Li Jayong, the group Will be restricted in some ways. An employee revealed: "The chief executive officer hired with money has limited powers, especially in major investments. Such plans usually require the president himself to decide."
Samsung's plan to strengthen the control of the Lee Group
Samsung Electronics has already made adjustments to better protect the interests of shareholders. In response to criticism that the nine directors of this company are all Koreans, Samsung Electronics announced in November last year that it would add at least one independent director with experience in multinational companies. In addition, the company is still weighing the pros and cons of the holding company structure, which may take about six months.
Despite the smartphone recall scandal, Samsung Electronics’ performance has not been affected by the semiconductor business. In the fourth quarter of 2016, Samsung Electronics' operating profit increased by 50.2% year-on-year to 9.22 trillion won. This means that the company has got rid of the shadow of recalling Note 7 in October last year. However, revenue in the fourth quarter was 53.3 trillion won, basically the same as the same period last year. Throughout 2016, Samsung Electronics’ revenue reached 201.9 trillion won, an increase of 1% over the previous year: net profit increased by 19.9% to 22.4 trillion won. Samsung Electronics distributed 27,500 won per share in 2016, bringing the total dividend to 3.85 trillion won, an increase of 24.2% over the previous year.
Market analysts said that, driven by the market’s strong demand for memory chips, Samsung Electronics’ performance this year is still expected to grow substantially. However, since its share price reached a record 2 million won on January 26, Samsung Electronics’ stock price has lost its growth momentum. Since then, the company’s share price has fallen more than 5% and closed at 1.893 million won last Friday.
Another challenge facing Samsung Electronics is the smartphone market. Statistics from market research firm IDC show that Apple surpassed Samsung Electronics in the fourth quarter of last year, with shipments reaching a record 78.3 million units, making it the world's largest smartphone manufacturer. Samsung Electronics’ smartphone shipments fell 5.2% to 77.5 million units.
Market analysts believe that the arrest of Lee Jae-yong means that Samsung Group has entered a critical period. "The arrest of Lee Jae-yong will not immediately affect Samsung Electronics' credit rating," said Shelley Jang, director of Fitch Asia Pacific. She pointed out that Samsung Electronics has solid fundamentals and business strength, as well as "market dominance and technological leadership." However, he believes that the arrest of Li Zairong will have a negative impact on investor sentiment in the short term. "Even if a team of professional managers can manage the company's daily operations, long-term strategic investment decisions such as large-scale mergers and acquisitions may be delayed."
As shown by deals like the acquisition of Harman International, Samsung Electronics is eager to obtain a new growth engine. In addition to smart cars, the company also seeks to develop in the fields of artificial intelligence technology and biopharmaceuticals. Such a strategy requires strong leadership and bold decision-making. The arrest of Lee Jae-yong will undoubtedly hinder the development of Samsung Electronics.
Sister takes over?
After the South Korean court approved the arrest of Li Zayong on February 17, many foreign media speculated that his sister Li Fuzhen might take advantage of the situation and enter the leadership of Samsung Group.
Lee Boo-jin is currently the President of The Shilla Hotel. As the eldest daughter of South Korea's richest man Li Jianxi, Li Fu is really the richest woman in South Korea. According to the US "Forbes" magazine, he is estimated to be worth 1.72 billion U.S. dollars (about 11.8 billion yuan).
Li Fuzhen has officially operated the Shilla Hotel since 2001, increasing sales from 430.4 billion won (2.57 billion yuan) at the time to 3.25 trillion won (19.4 billion yuan) in 2015, an increase of more than 650%. In the list of "Top 50 Powerful Women in Asian Business" released by Forbes in April last year, Li Fuzhen was on the list. The magazine commented that "President Lee, who leads the Shilla Hotel, plays a central role in the Samsung Group."
According to Yonhap News Agency, in the Korean business community, Li Fuzhen is considered to be most similar to his father Li Jianxi in his own character and management style. After the news that she would "take over" Samsung, the Shilla Hotel's stock price began to rise.
However, in the view of some Samsung executives, these speculations are completely stories fabricated by "outsiders" who do not understand Samsung's internal operations, and are not at all believed.
"The arrest of Lee Jae-yong does not mean that Samsung's basic leadership will change," said an unnamed executive. "We will do our best to prove his innocence in court."
A securities analyst in South Korea also believes that after the unfounded rumors came out, the Shilla Hotel's share price rose for a while, but this was only a short-lived and difficult to last.