Samsung heir apparent Lee Jae-yong faces tough investor test

September 30, 2013 12:16 pm

Samsung heir apparent Lee Jae-yong faces tough investor test

By Simon Mundy in Hong Kong


Lee Jae-yong, probable heir apparent of Samsung Electronics

South Koreans sometimes remark that Samsung’s founding clan is the closest thing they have to a royal family. So when the patriarch Lee Kun-hee last year promoted his only son to the vice-chairmanship of Samsung Electronics, it heightened anticipation of a forthcoming dynastic succession. In the nearly 26 years since Mr Lee succeeded his own father as chairman of Samsung, the steely, private billionaire has overseen the group’s rise to become one of the world’s most powerful conglomerates, with interests ranging from construction to life assurance.But the clear jewel in the crown is the electronics company, now the world’s top technology group by sales. While other parts of the Samsung empire are expected to be passed down to Mr Lee’s two daughters, most analysts presume that Samsung Electronics will be led by his son, Jae-yong, who has spent most of his adult life rising through its ranks.

Yet a share price fall of 11 per cent since the start of June, driven by concerns about smartphone margins, shows that investors are already wondering whetherSamsung can maintain its meteoric growth – and these questions are bound to grow louder approaching the eventual succession.

Few of Samsung’s 246,000 employees have ever seen the 71-year-old Lee Kun-hee in person, but many of them are intimately familiar with his personal legend. Company lore celebrates the giant bonfire built on Mr Lee’s instructions during Samsung’s early forays into mobile phones, with thousands of substandard handsets consigned to the flames as a graphic warning to their developers.

Most revered is the “Frankfurt Declaration” he made in 1993 at that city’s Kempinski Hotel, where he told assembled executives to “change everything but your wife and children” as he outlined an approach to management commonly described as “perpetual crisis”.

This ruthless style has been vindicated by results. Lee Byung-chul, who founded Samsung as a small rural trading concern in 1938, had already built it into one of South Korea’s biggest conglomerates. But it was under the second chairman that Samsung became a leader in some of the biggest global electronics markets: first in memory chips, later in televisions, and most recently in mobile phones.

Despite his iconic standing within the company, Mr Lee has kept his distance from its day-to-day operations. Although business people in Seoul mutter darkly about his apparently ailing health, one person close to the company says that in recent months he has started regularly working at the Seoul headquarters, beginning at 6am. But for most of his time as chairman, he has worked from a private office next to his home, with executives visiting for regular consultations.

Company operations continued as normal after the chairman resigned from the company amid a corruption scandal in 2008; he returned nearly two years later after his conviction for tax evasion was overturned by the South Korean president.

“The nature of the chairman’s role is that it’s very, very much in the background,” says Mark Newman, an analyst at Sanford C Bernstein who previously worked in Samsung’s strategy department.

This has made it difficult for investors to be certain of how far Mr Lee should be given personal credit for the company’s recent success, and how far it is the doing of an executive team composed of some of South Korea’s most brilliant and ambitious managers.

“Over the past 20 years they have built a platform in which professionals make decisions in a very systematic manner – it’s unlike Apple in that respect,” says Marcello Ahn, a fund manager at Quad Investment Management in Seoul. “That’s the reason why I’m not that much concerned about [the leadership succession].”

But any indication that a handover is imminent is bound to focus market scrutiny on the credentials of an incoming chairman who has been groomed for the role since childhood. Aged 45, Lee Jae-yong is more outgoing than his father, and fluent in English and Japanese after studying business at Keio University and Harvard Business School.

His first prominent position within the company came with his appointment in 2007 as chief customer officer, an unusual title that drew sneers from critics who assumed it would be a sinecure. But it meant that he found himself acting as a regular point of contact with Apple founder Steve Jobs.

Despite a bitter court battle over disputed smartphone patents, Apple remains a huge customer for Samsung’s component business, and the younger Mr Lee was the only Asian executive invited to Jobs’s memorial service in 2011.

Over the past 20 years they have built a platform in which professionals make decisions in a very systematic manner – it’s unlike Apple in that respect. That’s the reason why I’m not that much concerned about [the leadership succession]

– Marcello Ahn, a fund manager at Quad Investment Management

Investors in Samsung will hope that this reflects an aptitude for managing relationships with foreign businesses – a vital attribute now that Samsung has moved from simply exporting electronics at low prices to managing a complex international web of customers, suppliers and partners.

Samsung’s move into Smart TV, for example, means that its television business now relies not only on producing hardware, but also on nurturing partnerships with content providers. Lee Jae-yong’s links in the US, where he mixes regularly with the political and business elite, helped him win support from companies including AmazonNetflixand Verizon for Samsung’s Smart TV business, according to one person close to the company.

At home, however, some criticise the presumption that the chairmanship will be passed down within a family that owns less than 5 per cent of Samsung Electronics’ stock, maintaining control instead through a web of cross-shareholdings between subsidiaries. Lee Kun-hee’s efforts to ensure a smooth succession led to his conviction, in 2009, of complicity in the illegal sale to his son of bonds of another Samsung subsidiary.

Moreover, some investors argue that the younger Mr Lee is unproven in management. Despite rumours several years ago that he was set to take charge of Samsung’s logic chip business, his only experience in running a division came at the helm of a shortlived e-commerce business more than a decade ago.

“Personally, I don’t think JY has ever proven himself,” says one former senior investor. “Everything was given to him. There is lots of scepticism around.”

Some people who know the younger Mr Lee say such criticism is unfair, and that he has been heavily involved in recent successes including the Galaxy smartphone range. One former Samsung executive says Lee Jae-yong has already effectively assumed the duties of a chief executive without the title, while his father takes a non-executive supervisory role.

In any case, Mr Lee will face a stern test when he eventually takes charge. The recent share price decline reflects investor nervousness about Samsung’s reliance on the maturing smartphone market. While the company has identified a cluster of new growth areas ranging from biotechnology to solar energy, company insiders admit these are years away from making significant contributions to the bottom line.

“It’s difficult to criticise the way Samsung has conducted itself because it’s been so successful,” says Jonathan Pines, who manages an emerging Asia portfolio for Hermes Fund Managers. “But like in a game of chess, everyone is looking at the next move.”


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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