On the morning of January 26, a rare note directly from Lee Jae-yong, the billionaire head of Samsung who had been jailed for bribery a week earlier, popped up on the internal online message board at its Seoul headquarters.
“I am deeply sorry,” Lee wrote in formal Korean. “Samsung should move forward regardless of my situation . . . We need to keep our promises made to the people.”
Longtime employees were hit with a sense of déjà vu. After the message leaked, the South Korean public had the same sensation.
In April 2008, Lee’s father, the late chairman Lee Kun-hee, publicly resigned under a cloud of financial crimes including tax evasion and breach of trust. In a ceremonious televised address which gripped the nation, the country’s richest man vowed that he was “leaving with all the faults of the past”.
The echoes from 13 years ago did not stop with the message from prison.
The charges — and later convictions — against father and son stem from allegations of complex and shady financial dealings in order to hand control of the Samsung empire from one generation of the founding family to the next. At a time when Samsung faces stiff competition and weakened political support, the political risks of another generational handover have increased. It has become more likely that it will be the first major Korean conglomerate without a family owner at the helm.
Both cases drew polarised public responses. Younger observers and progressives bemoaned the cronyism long associated with the chaebol which dominate the economy. However, older Koreans and businesspeople, who have not forgotten the poverty and desolation in the decades following the devastating civil war, believe South Korea’s biggest company is simply too important to fail.
The market reaction last month also mirrored 2008: Samsung’s share price has barely moved. Banks and investors are far more concerned with demand cycles and pricing of computer chips, smartphones and electronic displays — Samsung is the world’s biggest producer of each.
“Lee’s incarceration makes no difference for investors,” says an analyst with one of Seoul’s biggest brokerages, who asked not to be named.
Ever since Lee’s grandfather, Lee Byung-chul, started selling vegetables and dried fish in 1938, Samsung has played a unique role in Korean business and society. His father continued the journey, transforming the family businesses into one of the world’s biggest producers of consumer electronics and high-tech components.
It is unlikely that political pressure will lead to the dethroning of Lee, the 52-year-old Harvard-educated billionaire who is also known as JY or Jay. The realpolitik of Korean business dictates that chaebol leaders rarely cede power and continue to lead their empires, even behind bars. There are, however, unanswered questions for the company, investors and the South Korean people.
Will the Lee family and its inner circle of loyal, highly paid officials ever again attempt another generational handover? Or has the South Korean government led by President Moon Jae-in, finally forced it to change its attitude to management. This would mark progress after decades of efforts by leftwing political forces, and failed attempts by activist investors, aimed at diminishing Samsung’s political influence and web of cross-shareholdings and making its governance less opaque.
Perhaps even more pressing: has the decades-long game of palace intrigue, legal wrangling and political manoeuvring inflicted lasting damage on Samsung’s ability to compete globally? The key markets in which Samsung competes each contain an existential challenge from an overseas rival with deep pockets. Just how Lee now responds will dictate whether there is even a Samsung left for a fourth generation to one day take over.
“Samsung is at a critical juncture,” says Park Ju-geun, head of corporate research firm CEO Score. “Challenges are mounting internally and externally . . . the Lee family has to reform.”
Lee is serving his time at the Seoul Detention Center in a remote hilly corner on the southern outskirts of the Korean capital. His fellow inmates include Park Geun-hye, the former president who Lee was found guilty of bribing — via the gift of horses to the equestrienne daughter of Park’s closest aide, cult leader and “shaman adviser” Choi Soon-sil.
Lee — originally convicted in 2017 but freed a year later on appeal — is serving a further 18 months behind bars after the case was retried. According to corrections officials at the justice ministry, he has undergone an initial coronavirus quarantine and is now in a small room with a TV, a table, a toilet in the corner behind a partition, a washstand and a mattress on the floor. Three meals worth about Won1,400 ($1.25) are provided daily and no outside food is allowed.
Samsung declined to be interviewed for this story. But if history is any guide, Lee’s crew of lawyers will be busy taking out short-term leases on apartments in nearby suburbs, ready to form a long queue of visitors to the prison.
South Korean tycoons imprisoned for white-collar crimes are infamous for managing their kingdoms from behind bars. Meetings with external people are technically restricted to a 10-minute meeting once a week, but they can meet their lawyers anytime during weekdays with few restrictions.
According to Chae Yi-bai, a former lawmaker, data he received from the justice ministry shows Lee met with lawyers 439 times during the 353 days he last spent in jail. Similar statistics apply to the stints behind bars of other chaebol leaders, including Chey Tae-won, the head of South Korea’s third-biggest company, SK Group.
“The tycoons spend most of their days at a meeting room of the prison, which virtually becomes their office,” says Park Sang-in, an economics professor at Seoul National University. “Day-to-day operations are managed by professional managers anyway . . . Of course, it will be more inconvenient, but being in jail won’t make a big difference.”
For Moon, who won the presidency in 2017 in the wake of Park’s downfall, Lee’s imprisonment validates promises of chaebol reform and ending corruption. While South Korea’s courts are independent, others believed the sentence was light, highlighting an inherent restraint on the government and the judiciary when locking horns with the company that contributes about 15 per cent of the country’s total corporate tax revenue.
One lawyer familiar with Samsung describes Seoul as “a little bit schizophrenic” when it comes to dealing with the chaebol.
Suh Ki-ho, a former judge and progressive politician, says the light sentence handed to Lee showed “tycoons are still above the law”, while the Korea Enterprises Federation says business was “gravely concerned” over the impact on Samsung’s ability to help steer the economy through coronavirus. Opposition conservative politicians called for a presidential pardon.
Hong Young-pyo, a ruling party lawmaker, argues that Lee’s sentencing reflects broad social criticism against the opaque governance, unfair business practices and economic dominance of the chaebol.
“That kind of ruling would be unimaginable were it not for a democratic government,” he says. “The Moon administration has tried hard to make our economic system fairer and more transparent and I think we have seen substantial progress . . . Samsung will slowly change.”
According to Sea-jin Chang, an expert on Asian corporate history at the National University of Singapore, Lee has made changes, devolving towards a more western-style of corporate leadership with greater dependence on professional managers. This is no small adjustment from Lee Kun-hee, whose command went unchallenged for decades. He died last year.
“It is very difficult to break away from his father’s regime. He was the emperor, and everybody listened to his orders and marched in the same direction . . . It is not an overnight change, it is a slow evolutionary process,” says Chang.
Lee has already vowed not to hand over management of the group to his children. And Geoffrey Cain, author of Samsung Rising, believes that after his time behind bars, he will have little appetite for any moves that risk putting his children through the same ordeal.
“If he does try to pass Samsung cross-shareholdings to his kids, there’s a good chance they will end up in prison or under investigation,” Cain says. “No sane parent wants for his kids what Jay has gone through.”
In addition, many of the legal loopholes that allowed the succession from Lee Kun-hee to Lee Jae-yong have already been closed. “The mechanisms that Samsung used to pass shares to Jay Lee in the 1990s and 2000s would be very difficult in Korea today,” he says.
Hong, the lawmaker, agrees that there is now much closer scrutiny of the ties between big business and politics. “The Moon government is not asking for any sort of bribery or favours from chaebol like in the past — this, in itself, is big progress.”
Last month, Apple and Samsung reported fourth-quarter results. Apple posted revenues of $111.4bn and Samsung Electronics $55bn, both buoyed by solid tech demand during the pandemic.
But buried in the profit and loss tables was another number keeping executives in Seoul up at night: the Cupertino, California-based group now generates about $50bn each year from customers paying for services such as music and video streaming and gaming subscriptions, all linked to its in-house software. Samsung’s revenues from similar services are too small to report.
$30bn Possible value of Taiwan Semiconductor Manufacturing Co’s capex this year. Samsung announced a 10-year, $116bn investment in processor chips in 2019
Samsung, in response, points to its deepening partnerships with Microsoft and Google, boosting synergies between the US groups’ operating systems such as Windows and Android and increasing the attractiveness of Samsung’s devices.
Services are just one problem area. In the lucrative but cut-throat market for producing processor chips for other companies, Samsung is racing to keep up with the advances of Taiwan Semiconductor Manufacturing Company. Samsung in 2019 touted an $116bn investment spread over 10 years as the cornerstone of its bid to chase down TSMC, which last month announced capital expenditure for 2021 alone might reach $30bn.
A fledgling telecoms unit building 5G networks holds promise, especially given the US squeeze on the international expansion of Chinese telecoms company Huawei.
In memory chips and electronics displays, Samsung’s position is much stronger. But these technologies are less complicated for newcomers, and a clutch of Chinese groups, including Yangtze Memory Technologies and BOE Technology, are quickly making ground.
Dan Wang, a Shanghai-based tech analyst at Gavekal Dragonomics, says US pressure under the Trump administration has driven Beijing to an inflection point, aligning the interests of Chinese tech companies with Beijing’s designs of “self-sufficiency and technological greatness”.
“Huawei, the greatest victim of US actions, is now in the position of Nasa in the 1960s when it comes to chips: a cash-rich entity willing to purchase on the basis of performance, not cost,” he says.
In other areas of future growth, such as the transition to autonomous driving, Samsung has only a small toehold — thanks to its $8bn takeover of US auto tech group Harman in 2016, the last time Lee pulled the trigger on a large M&A decision. But the auto sector is becoming overrun with tech groups including Google, Amazon and Baidu. Even Apple is in early talks over a potential tie-up with Korean carmaker Hyundai.
Many analysts currently have a “buy” rating on Samsung Electronics, indicating expectations for near-term share price improvement and a myopic focus on quarterly earnings and dividend expectations. But others watching Samsung are waking up to the fact that it has now been 16 quarters since the company made a chunky acquisition despite a period of sweeping technological change. Global semiconductor M&A activity alone has topped $250bn in the past four years, hitting a record high of $118bn in 2020.
Under the chaebol model, the final decision on group strategy and significant new investments always rest with the man at the top. For Samsung, since Lee Kun-hee suffered a heart attack in 2014, that man has been his son.
But Lee’s legal troubles have taken up too much “time and energy”, says Sanjeev Rana, a Seoul-based tech analyst at CLSA. That has hindered the company’s ability to take advantage of emerging opportunities. “Samsung has been a notable absence from major deals that are transforming the global tech landscape.”
National Liberation Day of Korea is celebrated in both North and South Korea on August 15, marking an end to Imperial Japan’s 35-year rule over the peninsula. In Seoul, the day is also synonymous with presidential pardons, clemency that often extends to jailed politicians and tycoons.
Among those pardoned in earlier Augusts by former president Park were SK’s Chey, in 2015, and Lee Jay-hyun, Lee Jae-yong’s cousin and head of retailer CJ group, in 2016.
Today, with his two immediate predecessors behind bars and the country’s most important businessman, pressure is mounting on Moon to follow tradition. A recent poll showed that almost half of South Koreans believed Lee’s imprisonment “excessive”.
Given Moon’s earlier promises to end presidential pardons for chaebol leaders, legal experts speculate that Lee Jae-yong is likely to instead be released on parole around the same time.
For Lee, freedom from his cell does not equate to an end to all legal problems. He, along with a group of top lieutenants, is still being investigated over an alleged $3.9bn accounting fraud, linked to his succession. Samsung denies wrongdoing.
A $10bn inheritance tax, owed by Lee and his two sisters after their father’s death in October, complicates the outlook. Cash from dividends will probably not suffice, opening the door to sales of non-core units which have cross shareholdings in Samsung Electronics, as well as less valuable holdings in property and other assets.
The process may well end a chapter in Samsung’s history, but Lee’s control over the crown jewel, Samsung Electronics, is unthreatened. “If they give up the idea of ‘one Samsung’, Lee Jae-yong can run the group’s technology units and give the rest of the group including financial units to his sisters,” says Park, the economics professor.
Once released, however, immediate focus is expected to shift back to Samsung, and what kind of legacy Lee will pursue.
“Jay’s under incredible pressure to lead his company and country, from a public that both admires him and hates him,” says Cain, the author. “I think Jay wants to be known for doing something great at Samsung.”
Credit: Financial Times