Samsung Moves Upmarket

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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.