Samsung’s leadership tested as its technology dominance withers

Sunday marked two years since Samsung Electronics Executive Chairman Lee Jae-yong ascended to the company's top post in 2022. The company's path has been rocky over that time period with supply chain disruptions due

Samsung Electronics' Seocho office in southern Seoul [YONHAP]

[NEWS ANALYSIS]

Sunday marked two years since Samsung Electronics Executive Chairman Lee Jae-yong ascended to the company's top post in 2022.

The company's path has been rocky over that time period with supply chain disruptions due to geopolitical tensions and one of the worst cyclical downturns in the chip segment's history.

In the midst of all that, Chinese players caught up fast, and companies that trailed Samsung Electronics were suddenly running far ahead in the cutthroat race of AI.

Lee emphasized "bold and challenging" moves in a message commemorating the death of his father, the late chairman Lee Kun-hee, sent to employees in 2022.

"Talent that can change the world" and "technology that did not exist before" were the most important values that Samsung Electronics should invest in, the message said.

Two years later, however, those values are scarce at the electronics giant.

Its chip business head, Jun Young-hyun, issued an unprecedented apology early in October over disappointing third-quarter earnings, and its mobile division hurriedly released a slim version of its foldable smartphone only three months after the original version launched in an apparent response to fast-chasing Chinese rivals.

Its shares hit 55,900 won ($40.24), a 52-week low, during trading on Friday, with foreign investors shedding a net of 4.2 trillion won in October alone.

A massive leadership shake-up is anticipated at Samsung Electronics as early as mid-November, earlier than its usual annual December reshuffle, indicating the urgency of the matter. Experts also say the company must re-establish a command center that oversees and coordinates business decisions across its multiple divisions.

"This year's leadership shake-up, which is expected to be on a large scale, could be considered the last chance for Lee Jae-yong to prove his leadership," says Hwang Yong-sik, a business administration professor at Sejong University.

"Lee's management has focused on giving more leeway to professional managers to take care of business while he focuses on external relations, but that has given birth to a strange hybrid type of management style that doesn't fit with Korea's unique chaebol-led business environment."

This is also owed to Lee's involvement in more than one legal case in the past decade, hindering him from assuming full-fledged leadership. He was jailed two times — in 2017 and 2021 — for bribery before being released on parole. To this day, he still attends trials over an appeal by the prosecution related to alleged stock manipulation and accounting fraud in the controversial 2015 merger of two Samsung affiliates.

Lee is scheduled to attend the third hearing of the trial on Monday, according to the company.

Samsung Electronics Executive Chairman Lee Jae-yong attends second hearing of his appeal trial at Seoul High Court in Seocho District in southern Seoul on Oct. 14. [NEWS1]

Lee's leadership prowess questioned The 56-year-old Lee has been the de facto leader of Samsung Electronics since late chairman Lee Kun-hee became bedridden in 2014. In 2019, when the chip industry was in a super cyclical upturn, Lee declared his "New Samsung Vision," pledging to become the world's No. 1 in "system semiconductors," including logic processor design and contract manufacturing by 2030, and promised to pour 133 trillion won into the sector.

Five years remain until the target year, but the gap with leaders in the sector has only widened.

Samsung Electronics' share in contract manufacturing dropped to 11.3 percent last year from 15.8 percent in 2022, according to TrendForce data. TSMC now takes up more than 60 percent of the global market.

Its chip design business, which is in the hands of Samsung's LSI division, has yet to secure major clients, except for Samsung's own Galaxy smartphone series, to which it supplies its Exynos mobile AP chipset.

The memory chip business, which used to be the most reliable and profitable segment within Samsung Electronics, is also at stake. It admittedly failed to take leadership in premium AI memory chips, represented by high bandwidth memory (HBM), while being chased by Chinese players in legacy chips, or less advanced memory chips.

There has been no significant commitment in new business that could act as new growth driver for the struggling company.

Since acquiring Harman in 2016 at 9.4 trillion won, no major merger and acquisition deals have been concluded. Smaller deals have happened, such as purchasing stakes in Korean robotics company Rainbow Robotics at 59 billion won and acquiring AI-related startups, but that hasn't been enough to meet market expectations.

It is not like Samsung Electronics is running on a tight budget. According to its half-year report for 2024, the company sits on 100.8 trillion won in cash and cashable assets.

"The absence of big deals could mean that Samsung Electronics currently doesn't have a clear vision or direction of where it is headed," Professor Hwang said.

Lee Jae-yong who then served as Samsung Electronics' vice chairman declares new vision for its system chip business at its Hwaseong Campus in Gyeonggi in 2019. [YONHAP]

Leadership reshuffle Vice Chairman Chung Hyun-ho, who is considered second-in-command after Lee, helms Samsung Electronics as head of the Business Support Task Force. This role involves making strategic plans coordinating departments' activities, which is crucial in its chip division.

Industry insiders say that under Chung, who has roots in business management instead of engineering, Samsung Electronics has invested less in high-risk and high-return technologies while focusing more on safer, profitable projects.

Samsung Electronics Vice Chairman Chung Hyun-ho is seen at Seoul Gimpo Business Aviation Center on Oct. 11 where he returned from business trip with executive chairman Lee Jae-yong. [YONHAP]

"That approach is a downer for engineers because a breakthrough technology needs hefty investment in the long term," said Lee Jong-hwan, a system semiconductor engineering professor at Sangmyung University and a former chip engineer at Samsung Electronics.

"Research in new technology, new materials and new processes needs to be done even if it doesn't promise you a certain return, but Samsung Electronics seems to have focused only on what they already do well, which is memory chips. And that business philosophy is causing the company to lose its 'super gap' competitive edge in the industry."

Establishing a new command center equivalent to the now-dissolved Future Strategy Office may be an option to re-align business strategies that are scattered across the company's divisions, experts say.

"To concentrate on selected business decisions, the re-establishment of a command center appears necessary," Lee Chan-hee, chairman of Samsung's compliance committee, said in a recent report.

The Future Strategy Office was dismantled in 2017 due to the office's deep engagement in corruption, such as bribery.

"For a gigantic corporation like Samsung, a division like the Future Strategy Office is crucial, only it failed to serve its original purpose in 2017," said Professor Hwang.

"If it could serve the original purpose of coordinating business decisions and directing scattered affiliates into one direction, it could help salvage Samsung Electronics' current situation, which is equivalent to being in a state of war."

BY JIN EUN-SOO [jin.eunsoo@joongang.co.kr]