Seoul Machine

Cell phones. Memory chips. Plasma TVs. How Samsung made Korea a consumer electronics superpower.

May 13, 2005

Seoul at night, with products by Samsung

EVEN TODAY, PEOPLE TALK about the “vol­un­tary incineration” at Gumi. A drab fac­tory town in south-central Korea, Gumi is home to one of Sam­sung’s biggest plants. A decade ago, the com­pany was best known for budget air conditioners and low-end TVs. Its leader, Kun-hee Lee, had grander ambitions, but when he sent out Sam­sung’s new wireless phones as his 1995 New Year’s gift, word came back that they didn’t work. So that March he paid a visit to Gumi.
At Lee’s command, the factory’s 2,000 em­ployees donned headbands labeled “Qual­ity First” and assembled in a court­yard. There they found their entire in­ventory piled in a heap—cell phones, fax ma­chines, nearly $50 million worth of equip­ment. A banner before them read “Quality Is My Pride.” Be­neath it sat Lee and his board of directors. Ten workers took the products one by one, smashed them with hammers, and threw them into a bon­fire. Before it was over, em­ployees were weep­ing.
Ritual purification at the command of an he­­roic leader is an ancient and powerful tra­dition in this part of the world. With a few superficial changes, this whole scene could have played in a Zhang Yimou cos­tume epic. Certainly it had the desired effect: After Lee’s visit to Gumi, shoddiness was not an option. Ki-tae Lee, then the Gumi factory manager and now head of Samsung’s mobile telecom division, personally tests new models by hurling them against a wall or dropping them from a second-story window. Once he even ran over a handset with his car. It still worked.
Kun‑hee Lee’s ambition was straight­forward: He wanted to trans­form his company into the world’s top consumer elec­tronics brand—the place that makes the coolest stuff. A decade later, he’s just about done it. Samsung is ranked number 21 among the world’s top brands by the con­sulting outfit Interbrand, just one notch below Sony. In sales, Samsung has shot to number three behind Matsushita and So­ny in consumer elec­tronics and is fighting Motorola for the number two spot behind Nokia in cell phones. Samsung is also the world’s leading manu­facturer of flash memory and flat-panel screens, two of the core technologies of the digital era. And it’s the most profitable tech enterprise on the planet, with a cool $10 billion in earnings last year—more even than Microsoft.
The bonfire at Gumi was typical of Lee’s style, which is as gutsy as it is dramatic. In the late ’90s, when Korean labor became too ex­pensive, he cut thousands of jobs and built factories in cheaper parts of the world. Ignoring business pundits who argued that consumer electronics companies should outsource their components and go into more profitable businesses like content, he poured billions into plants where Samsung would make its own memory chips and LCD screens. Now his gamble is paying off as those technologies fuel a new generation of digital cell phones, video cameras, still cameras, music players, computer monitors, high-definition TVs. As a vertically in­tegrated, globally networked manufacturer, Samsung can produce all these gadgets at low cost and blistering speed. At the same time, it makes money selling com­ponents to its competitors. Either way, Samsung wins.
Sony, with its marquee brand and proud his­tory of inno­vation, has al­ways been the com­pany to beat. But the billions Sony poured into the music indus­try and the movie busi­ness left it hobbled, its tech­nological prowess dulled by media execs too fearful of piracy to endorse cutting-edge products. Mean­while, Sam­sung moved ahead. The result is in the num­bers: Sam­sung is valued by investors at $75 billion, while Sony’s mar­ket cap is roughly half that. As the world moves toward a play­ground of end­lessly replic­able slice-and-dice digital media, Sam­sung, a former also-ran from a small half-nation wedged uncomfort­ably be­tween China and Japan, is the company best posi­tioned to get us there.
SEOUL IS A GRITTY, WORKADAY CITY folded into a rugged moun­tain range at the butt end of Manchuria. Though home to more than 10 million people, it feels remote. Government economic policies have made South Korea the most connected country on the planet, but just over the horizon is North Korea, where the bomb exists and the Internet doesn’t. Everywhere you look in Seoul are neon crosses and Jesus Saves signs, testament to the success of Christian missionaries. Almost as ubiquitous is Samsung—not just Samsung Electronics but Samsung Securities, Life Insurance, Petrochem­icals, Heavy Industries, Engin­eering, even a Sam­sung Everland theme park. Together they make up South Korea’s leading conglomerate, or chaebol.
Samsung Electronics sits next to Samsung Life in a steel-and-glass high-rise on a broad boulevard near Namdaemun, the Great South Gate, a 14th-century portal inside an enormous traffic circle. But the company’s really run from a mansion several miles away, half-hidden among the wooded slopes of Namsan Mountain. There, near the spectacular new art museum that bears his name, lives Kun-hee Lee.
Lee rarely shows up at headquarters; he doesn’t have to. At 63, with an estimated net worth of $4.3 billion, he is the richest and arguably the most powerful man in South Korea. His authority is felt in inverse proportion to his presence. While Confucianism, with its deep respect for order and hierarchy, is prevalent across China and Japan, its most extreme form is found in Korea—and few things are more Confucian than the leader who’s so removed as to seem godlike. “He’s the in­visible chairman behind the scenes, having absolute power and con­trol,” an insider says. After the near-disastrous economic meltdown that hit South Korea in 1997, other chaebol became more open, like Western corporations. “But Samsung has been able to rebuild itself without jettisoning the old ways. It’s a global mega-corporation that’s run as a very old, Korean-style company.”
Samsung—the name means “three stars” in Korean, three being a lucky number—was founded by Lee’s father in the late 1930s as a small ex­porter of fruit and dried fish. In the ’60s and ’70s it became a key partner in the government’s industrial development drive, ven­turing not just into elec­tronics but shipbuilding, petro­chemicals, heavy machinery, and construc­tion. The junior Lee was considered an ir­responsible playboy when he took over after his father’s death in 1987. Instead, armed with a Japanese economics degree and an MBA from the US, he set out to make Samsung a premium brand—one that, like Sony, would not have to compete on price.
Clearly, that meant Samsung would have to do better than the cheesy-looking Econo model TV sets it was exporting to countries like Panama. Quality was key, but so too was design. Consumers, Lee realized, must be courted. The obvious place to look for inspiration was Japan, with its rising auto manufacturers and consumer electronics brands—Sony in particular. Lee wanted a “design philosophy” to give his products a common identity, so he hired a Japanese consultant who told him that Samsung’s products should be infused with Korean values. But what did that mean? Korea had been systematically purged of its identity during a brutal Japanese occupation that lasted from 1905 to 1945—its language suppressed, its palaces destroyed, its citizens forced to assume Japanese names. Reclaiming a Korean identity would not be easy, even if a Japanese designer said it was the key to Samsung’s future.

The eighth-century Buddha in the mountain grotto at Seokguram.

So the company began a search for places and objects that embody the Korean spirit. Lee himself is said to have identified the key cultural touchstone: Seokguram, a remote mountain grotto that houses an exquisite eighth-century Buddha. He also issued the slogan “Balance of Reason and Feeling” to express Samsung’s design philosophy. “It’s very Oriental—not black and white, but a balance of things,” explains Hyun-joo Song, the executive in charge of design identity. “It states that we will meet the emotional needs of our customers with the technological solutions we have.”
In his 1996 New Year’s address, Lee proclaimed the Year of Design Revolution. He was referring to design in the broadest sense—not just styling but consumer research and marketing as well. Engineers had once defined new products and decided what features to give them; now specialists in everything from industrial design to cognitive science would take that role. When Lee issued his decree, “most of us didn’t understand what he was talking about,” says Kook-hyun Chung, the senior vice president who heads the Corporate Design Center in Seoul. “Now we understand that we have a new, bigger, broader responsibility.”
Just as Lee’s design revolu­tion was getting under way, however, disas­ter struck. First the market for memory chips—Samsung’s one stand­out success at the time—went into a nose­dive, taking the com­pany’s profits with it. Then, in October 1997, speculators began a run on the Korean won, which like other East Asian currencies had been weak­ened by reck­less corporate borrow­ing. With­in months, the value of the won plum­meted by half, interest rates shot sky-high, new loans became im­possible to secure, and Sam­sung, deep in debt, faced bank­ruptcy.
Before the crisis ended less than a year and a half later, Samsung Electronics would shed 30 percent of its employees—some 24,000 peo­ple, most of them factory workers—and eliminate dozens of businesses. The chaebol were expected to keep their employees for life—a tradeoff for government financing and other favors—but Samsung could no longer afford to now that Korean wages had ceased being competitive. “We moved a lot of manufacturing to other areas—China, Malaysia, Mexico, Brazil, Hungary, Slovakia,” recalls digital media president Gee-sung Choi at his satellite office in the port city of Suwon, where old factory buildings are giving way to high-rise R&D centers. “And we created a lot of jobs for software and design engineers. In some way, we have the financial crisis to thank for that.”

Kun-hee Lee

At first, Lee had to slash capital spending to help pay down debt. Even so, Samsung didn’t stop pushing forward: It managed to pioneer the development of SDRAMs, superfast memory chips used in personal computers, and to deliver the specialized memory chip that goes into Sony’s PlayStation 2. “Memory is a capital-intensive business that requires continuous investments,” says Samsung Electronics’ CEO and day-to-day decision-maker, Jong-yong Yun. “The key is in attaining high profit margins through the release of innovative products while maintaining the lowest cost structure.” At the end of 1998, the company started spending again. From that point on, Lee bet big on new technology, spending billions on state-of-the-art facilities to build more custom memory chips, flash memory devices, and liquid crystal displays.
Lee made some bad bets during this period as well—most spectacularly, his decision to venture into the automobile business. In 2000, several years and more than $3 billion later, he unloaded 80 percent of the operation on Renault. By this time, the Korean economy had recovered and the tech bust had hit the rest of the world, which meant that Samsung Electronics was charging ahead while its competitors were cutting back. The timing could not have been better, since this positioned Samsung to lead the transition in consumer electronics from analog—dominated by Sony and other Japanese companies—to digital.
“In 1997, memory was a commodity business and Samsung was a follower in consumer electronics with a few percent market share,” says David Steel, the company’s marketing chief for digital media, which encompasses everything from PCs to TVs. “The economic crisis forced us to focus on areas where we could lead. If things continue in a linear way, it’s hard to catch up. Along comes this disruption—digital technology, flat-panel screens—and it makes a new playing field.”
Once the crisis had passed, Jong-yong Yun nimbly executed Samsung’s transition from engineering-driven to market-driven. This has meant a heavy reliance on marketing and con­sumer research, from focus groups to “shadow tracking” of target users over a two-day period. (How do they use the product? How do they manip­ulate it? What does their facial expression say?) Because Western-style marketing was almost unheard-of when he took over, Yun had to butt heads to make it happen. But Koreans are rarely afraid to mix it up—this is a country where Buddhist monks have been known to attack rival cliques with baseball bats—and Yun’s no exception. When Eric Kim, the Korean-American marketing whiz he brought in to make Samsung a top brand, was greeted with ill-disguised hostility by senior executives, Yun announced that anyone who got in Kim’s way was dead.
As for Lee, his vindication came at a Tokyo news conference in October 2003. With demand for flat-panel LCDs skyrocketing and Samsung the undisputed king, Nobuyuki Idei, then CEO of Sony, declared he would join with Samsung to produce the most-advanced LCDs ever at a new factory in South Korea. He also announced that Sony, its revenue and profits sliding downward, would finally attempt the cost-cutting moves Samsung had made years before, eliminating jobs, shuttering plants, and shifting much of its manufacturing to China. He also promised to put more focus on semi­conductors, mimicking yet another Samsung strategy. Finally it was Korea’s turn to teach.


IN A SMALL CONFERENCE ROOM JUST OUTSIDE the locked doors of the Corporate Design Center in Seoul, Yunje Kang is explaining how Samsung came up with one of its hottest products to date: the HL-P5685W, a 56-inch high-definition DLP television with a $4,200 price tag. Europeans tend to regard humongous TV sets with distaste, and few Asian households have room for one. But in the US, they’re just the thing to impress the neighbors at Super Bowl blowouts—and Samsung has become the number one maker of high-end digital light processing TVs, the sharpest, brightest big-screen option out there. This beauty helps explain why. What’s cool about it, apart from the fact that it’s nearly 5 feet wide, is that instead of having a horizontal processing engine that simply takes up room beneath the screen, its engine stands upright and serves as a pedestal base. On sale for less than a year, the HL-P5685 and its slightly smaller sister command a $700 premium over other models and already account for 15 percent of Samsung’s DLP sales in the US—far more than anticipated, the company maintains. Coming this summer: a $5,000 progressive-scan version, the world’s most high-def DLP TV yet.
“When other players were neglecting DLP, we got a foothold,” says Kang, the model’s chief designer, a diffident-seeming man with a trim goatee and a bemused smile. “But then our competitors started catching up, so we had to have something original.” To make sure they’d have a DVD player and a home-theater system to match the new TV’s sleek lines, Kang’s team put their heads together with people from the audio/video division who also work in the Corporate Design Center. No balkanization here: With all consumer electronics and computer products reporting to digital media chief Gee-sung Choi, and his designers working side-by-side with appliance and mobile handset designers on four open floors in a building a short walk from headquarters, the walls between business units are literally nonexistent.
This would be remarkable at any company, but it stands in particular contrast to Sony, where Japanese-style consensus management has led to near-paralysis. The difference is instructive, for even though much about Samsung—indeed much about South Korea—is modeled on Japan, it doesn’t work like a Japanese company at all.

As the design revolution got under way, disaster struck.

In fact, much of Samsung’s triumph can be traced to its symbiotic relationship with the country it sprang from—starting with South Korea’s emergence as an early adopter nation. Korea’s government has long used eco­nomic policy to encourage development, and its people have responded wholeheartedly. In the ’60s, when their country rivaled Ghana on the poverty scale, they eagerly embraced the government’s “new village” movement, singing anthems and slinging concrete to build a brighter tomorrow; during the ’90s financial crisis, they got equally juiced on its new “knowledge superpower” initiative. Preferential government loans encouraged telecom companies to wire urban areas with Internet connections averaging 20 megabits per second—10 times the speed of broadband in the US.
Today, three-quarters of South Korea’s households boast a high-speed Internet connection. All this bandwidth has yielded not just PC baangs—computer parlors where young people gather to play online games—but services like SK Telecom’s Cyworld, whose 6 million users create avatars known as “mini-me’s” and spend real money buying them everything from virtual sports cars to plastic surgery. There’s an equally hot mobile market, with intense competition among carriers and handset suppliers alike. “The government has screwed up on a lot of things,” says Gilbert Kim, who heads the Korean office of the mobile gaming company Mforma, “but they’ve done a great job on tech­nology.” The result has been an unrelenting consumer demand that puts Samsung under constant pressure to outdo itself.
To keep up, Samsung put together an elite CNB Group (short for creating new businesses) to explore long-term social and technological trends that could spark new product lines. CNB is one of Samsung’s secret weapons: a team of designers from different business units who look into the future. Ki-seol Koo, the vice president who heads the organization, was a TV designer who found his new assignment bewildering at first. “There was no agenda,” he recalls. “We were just told to come up with something. Normally you have a road map to follow—you know what’s going to happen months from now. But this was blank.” Now the unit’s 30-odd members develop animated what-if films and 3-D mockups to show top executives how products might be used in some future world. “It’s not about what’s happening now,” Koo says. “It’s about imagining what our living environment will be like five or ten years down the road.”
But Samsung’s most powerful weapon may be Koreans themselves—people like Chi-young Ahn, who leads a team from the mobile telecom division in the Cor­porate Design Center. A slender thir­ty­some­thing wearing charcoal-gray pants and black shirt, his heart-shaped face framed by spiky salt-and-pepper hair, Ahn matches the im­age Samsung likes to pro­ject: sleek, edgy, cool. But with Sam­sung releasing a new cell phone model every couple of weeks, he doesn’t have time to play the hipster. Last fall, his team put together a fashion handset for a Ko­rean carrier that wanted it within weeks, not the usual three or four months. Before that, they created the supersleek 3G vide­ophone that hit the streets of Seoul months before Verizon Wireless intro­duced it in the US as the A890.
Almost within Ahn’s lifetime, South Korea has risen from dire poverty to become one of the world’s most gadget-happy nations, and his job is to keep up. “Techies get rid of their old phones every six months, fashionistas every year and a half,” he explains. “The life cycle of our products is so short that we have to move fast. But we don’t think about the extra hours.” Then again, neither does anyone in Silicon Valley; the difference is that in Korea, it’s not about the stock options. “Cell phones are a cash cow of the Korean economy,” Ahn says. “I want to contribute to my country — that’s why I do them. My team members feel the same way.”
This sentiment is not unusual. The late ’90s financial crisis was widely viewed as a Western assault on Korean industry, and during its worst moments, Koreans rallied in reply to a call from Kun-hee Lee and Woo-choong Kim, head of the wildly over-indebted and now-defunct Daewoo Group, to support the won by exchanging their gold for the country’s increasingly worthless currency. Some 40,000 Koreans turned in athletic medals, family heirlooms, even wedding rings. The response was so overwhelming that in two days the price of gold fell to its lowest point in more than a decade.
How to explain such behavior? “Koreans are very emotional, even in business,” observes Joonmo Kwon, CEO of the mobile gaming company Entelligent and a psychologist by training. “It’s totally opposite from Japan. But that’s why Koreans are so motivated. ‘We are one!’ ‘We’re gonna be number one in the world!’ Americans think, Are you crazy or something? But moti­vation is a key factor at Samsung—you go to work at 7 am and you leave at 10 pm. People are proud to work there, because it’s the elite company. I’m proud. When I was living in the US, if you went to a cheap motel it had a Samsung TV. Now, Samsung means quality.”


LAST FALL, SAMSUNG DEMONSTRATED ITS PROWESS in the heart of another country that has long overshadowed its own: China. Shanghai looks entirely computer-generated—sheer glass towers with rocketship crowns, a gleaming skyscraper unfurling at the top like a giant lotus blos­som, a glass wing spiraling up from a stone plaza. Zoom in on the spiral, officially known as the Shanghai Science and Technology Museum, on a sunny day in October and you’d have seen some 7,000 people celebrating Samsung’s success.

A 3G phone with satellite TV! A credit card-sized camcorder!

A pep rally for dealers and distributors from every time zone, Samsung’s Global Roadshow was part sales ex­trav­aganza, part intraplanetary mind meld for world peace through technolust: no Iraq, no North Korea, just bound­less faith in the digital future. Scores of hostesses wearing red silk gowns stood in formation as guests glided up the escalators. Onstage, an eager young American with his shirt untucked in­troduced gadget after gadget. The world’s first 5-megapixel camera phone! A camcorder the size of a credit card! A 3G phone that gets satellite TV! The world’s smallest multifunction printer! The world’s biggest plasma TV! Dazzling technology from South Korea, English as the common lan­guage, China as the emerging world super-market—the very definition of now.
The enthusiasm in the crowd was palpable. “What Samsung has done in the past five years is noth­ing short of amazing,” declared Jim Warren of CarToys, a Seattle-based retail chain, between pres­entations. “They’ve elevated themselves to one of the top brands in the world in consumer elec­tronics, and they’re the number one call brand in wireless—particularly with youth. Poor Nokia.”
“Japan used to be the benchmark,” said D. J. Babani, a Dubai-based distributor who handles Sam­sung in the Persian Gulf. “Now Samsung has the upper hand, in terms of both technology and design.”
“I used to represent Sony, but I switched about four years back,” said Farooq Naseem, Samsung’s wholesaler in Pakistan. “Frankly, I did not see the value addition anymore. Samsung is defining the future.”
Koreans have always struck their neighbors as country bumpkins, and some of the Samsung execs, for all their state-of-the-art gadgets, looked a little out of place amid the lingering colonial decadence and burgeoning capitalist glitter of Shanghai. But this time, they were the stars. Cell phones, home-theater systems, flat-panel TV sets and computer screens, memory chips, North America, South America, Europe, Asia—everywhere you looked, Samsung was winning. The afternoon press conference was full of Chinese reporters eagerly asking CEO Yun how he’d done it. Yun, of course, gave nothing away. The Chinese would have done better to stay for the evening banquet, which was periodically interrupted by entire tables of Samsung execs leaping to their feet as one, slinging back shots of wicked soju (roughly translated as “white lightning”), and shouting “Wee ha yo!” “To us! To us!” It was a sound as defiant and primal as a Rebel Yell—and equally evocative of deter­mination against all odds. ◆

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