Samsung Moves Upmarket

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Only a few years ago, cell phones were built just for talking. Then along came a company called Samsung Electronics, little known to most Americans, selling us phones that are voice activated, that surf the Internet, that play MP3 tunes. Last year Samsung rolled out stylish models that keep our calendars in color and can pinpoint our exact location. Now the South Korean company is introducing phones with always-on text messaging and wireless video that lets us play games and watch movie clips.

Like a lot of Samsung's new devices, these combine cutting-edge technology with award-winning design--at premium prices. That's something new for a company that only a few years ago was known as a mass marketer of cheap TVs and VCRs--the kind you bought off a shipping pallet at Costco if you couldn't afford a Sony or Mitsubishi. Since 1997, however, Samsung has begun rubbing shoulders with the market leaders in high-end cell phones, DVD players, elegant flat plasma TVs and a wide range of other consumer products. These gadgets are sometimes less expensive than those of Japanese or Finnish competitors--but by no means inferior. Which is pretty clear if you've tried to order an I300, the Palm-powered PDA that's really a phone (sorry, sold out), or if you feel embarrassed to answer your Motorola StarTAC in public because it's so...yesteryear.

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All this attention has prompted Eric Kim, 47, Samsung's savvy Korean-American marketing chief, to boldly suggest that he hopes to surpass Sony in brand recognition by 2005. Don't laugh; Sony CEO Nobuyuki Idei certainly isn't laughing. Samsung has the second most recognizable consumer-electronics brand in the world, according to Interbrand, the New York City-based consultancy. Idei has said privately that Samsung is on the verge of overtaking Sony in the consumer-products race. Graeme Bateman, head of research in Seoul for Japanese investment bank Nomura Securities, says Samsung is "no longer making poor equivalents of Sony products. It is making things people want."

What's more, at a time when most of the world's tech companies are still shuttering plants and trimming R. and D. to weather the global economic slump, Samsung is extending its reach. Bolstered by the resurgent Korean economy--which is expected to grow 3% to 6% this year after nearly collapsing during the 1997 Asian financial crisis--Samsung Electronics' worldwide revenue reached $25 billion last year.

That's not even half the revenue stream of giant Sony, but Samsung Electronics is growing fast. It is the best performer in the family-controlled conglomerate that spawned it, the Samsung Group. Some analysts complain that the family of founder Lee Byung Chull, who died in 1987, still treats Samsung Electronics as a personal fief and that murky financial reporting makes it hard to discern the company's true profits. But neither worry has stopped investors from pouring money into the stock, which is up 65% over the past 12 months. Korea's consumers are spending more than ever, and they just happen to be among the most wired people on the planet, with easy access to broadband connections and new wireless local-area networks. So Samsung has an unparalleled testing platform for new gadgets right in its backyard.

Since the early 1990s, Samsung has led the global market in dram semiconductors, the memory chips that are vital to almost every digital product we use. During the current slump, as competitors like Hitachi and NEC have been backing away from the chip business, Samsung has been diving in, introducing two new lines. The company has leveraged its digital know-how to dominate the manufacturing of computer monitors and state-of-the-art flat-panel displays. This summer Samsung, in conjunction with Texas Instruments, will introduce the world's first 50-in. TV with digital light-processing technology, now used mostly in movie theaters. Analysts who have seen the picture say it is sharper than anything on the market. And Samsung revolutionized the world of microwave ovens with a technology that senses when your food is properly cooked.

Consider that Samsung got into the U.S. phone business only in 1997, through a $600 million deal with Sprint. Samsung Telecommunications America, established that year in Dallas, pledged that it would become a Top 5 phonemaker within five years. It made it in two, with the clamshell-shaped 3500, which became America's top-selling cell phone in 2000. Last year, among a rush of other introductions, Samsung started selling the I300, a Palm-based PDA with a built-in wireless phone. Although there are plenty of combo PDA phones on the market, none have sold as well or enjoyed as much acclaim. "People pull these out at meetings to show off, which makes them a walking brand advertisement," says Peter Skarzynski, an STA vice president. "That's what Sony's Walkman did for them." And that's what Samsung's products and a big advertising investment are doing for it. Last year its global brand recognition grew a stunning 22%.

The climb to prominence hasn't been easy. Just a few decades ago, Samsung Group founder Lee made the annual December pilgrimage to Japan for how-to books and advice from economists and business leaders, some of whom were his classmates in the 1930s at Tokyo's prestigious Waseda University. As recently as the late 1970s, Samsung engineers were huddled over Japanese TV sets, trying to reverse-engineer their components and produce them for less. As late as 1993, Samsung Electronics remained a little-known company within one of Korea's sprawling industrial conglomerates, or chaebols. The firm was just beginning to focus hard on quality when the 1997 financial crisis swept through Asia, forcing Korea to seek an International Monetary Fund bailout. Samsung Electronics paid heavily for its parent's misguided investments, which included a $3 billion foray into carmaking.

Under the leadership of Yun Jong Yong, an avid disciple of American management gurus like Jack Welch, the electronics company laid off a third of its work force, or about 30,000 people, slashed costs and dropped sideline businesses like pagers and electric coffeepots. Yun recruited top managers and engineers from the U.S. Back in Seoul, recruits were put through a four-week boot camp in which they were awakened before 6 a.m. every day to martial anthems extolling the virtues of being a Samsung man. Marathon mountain hikes were part of the drill.

Throughout the current global slump, Yun has continued to invest in new processes and research. The company refined its semiconductor and liquid-crystal-display operations so effectively that traditional competition from Tokyo was upended. "Samsung is more cost effective, and its manufacturing technology is better than at companies like Sharp and Hitachi," says Shiro Mikoshiba, a Nomura Securities analyst in Tokyo. "The Japanese stopped competing two years ago."

The next stop in Samsung's digital march is the living room. To that end, the company has worked with Microsoft to develop Home Media Center, designed to control everything from your DVD player to the PC. Last June, Texas Instruments and Samsung signed an agreement to develop ultrathin, large-screen televisions based on TI's digital light-processing technology. In 1999 TI turned down a Samsung partnership offer, thinking it would be better to work with "established" brands. By last year it was clear that TI's initial partners were moving too slowly to get anything to market in good time. With Samsung, it took only a matter of months. The new 50-in. television made its debut in January at the Consumer Electronics Show in Las Vegas, and videophiles like Evan Powell of ProjectorCentral declared it an instant hit.

For all its technical prowess, Samsung faces big-league competition in its quest to dominate the digital home. Microsoft, AOL Time Warner, Apple and Sony are among the heavy hitters that are also betting that someday everything from our alarm clocks to our refrigerators will be linked to a constant stream of information and entertainment from the Internet. (AOL Time Warner has formed partnerships to develop digital hardware with both Samsung and Sony.) Samsung is gambling that it can move faster than its bigger rivals.

Key to Samsung Electronics' future is a listing on a U.S. stock exchange, but first the company will have to convince the sec that its accounting is up to American standards. For the most part, analysts view the firm as a world-class business. Among foreign investors--who own more than 50% of Samsung Electronics' shares--there is some concern that management is still subject to the whims of the Samsung Group's Lee family. Chairman Lee Kun Hee, the founder's son, wields outsize personal influence throughout the Samsung empire. One fear is that Samsung Electronics' profits could be siphoned off to bolster the fortunes of, say, Samsung Life Insurance, one of 24 other companies under the Samsung umbrella. That might not be illegal, but it certainly would not please investors in the electronics unit. "In terms of business, this is a top-notch company," says Jang Ha Sung, Korea's leading advocate for transparency. "But in terms of corporate governance, it is still in the 19th century."

CEO Yun and his top managers have demonstrated a century's worth of catch-up in a very short time. Now the question is whether they can fulfill the new expectations for Samsung's future.