February 16, 2017 12:00 pm JST

Rocky road ahead for the group's third No. 1

Will Lee Jae-yong prove a worthy inheritor of South Korea's top conglomerate?

SHIMAO OJIMA, Nikkei deputy editor

Lee Jae-yong, left, and his father, Lee Kun-hee, pay their respects to late South Korean President Kim Dae-jung in 2009. The elder Lee has been hospitalized since suffering a heart attack in 2014. © Reuters

TOKYO Any business operating on a system of hereditary control leaves itself open to criticism. No matter how talented a new leader may be, there will always be whispers that he or she was chosen on the basis of blood rather than merit.

Lee Jae-yong has likely heard such whispers all his life.

The vice chairman of Samsung Electronics, Lee is the only son and the eldest of four children of Lee Kun-hee, who inherited control of the Samsung group from his own father. As a child, the younger Lee received the best education available. He went on to study East Asian history at Seoul National University and later took postgraduate courses in business administration at Keio University in Japan and Harvard University.

Tall and affable, Lee enjoys a very good reputation among Samsung's Japanese suppliers and customers. He is also widely known for being well-mannered. When he was once asked by a journalist what he aspired to in his work, he answered, "I wish to be humbler and wiser."

In every respect, he appears to be the impeccable heir of a powerful family, a man worthy to inherit South Korea's biggest conglomerate.

Lee seems keen to live up to that image, even under the most trying circumstances. Early on the morning of Jan. 18, he received word that a South Korean court had rejected prosecutors' request for his arrest warrant on suspicion of bribery. After hearing the good news, Lee walked quickly out of the detention center where he had been held since the previous night and got into a company car. He wore a faint smile, most likely to avoid looking too grim in front of media cameras.

But is he cut out to take over Samsung? To answer that question, one should look at his company's recent performance. In 2016, Samsung Electronics' consolidated operating profit rose 10% on the year to 29.2 trillion won ($25.3 billion). With an operating profit margin of 14.5%, the company showed steady profitability despite massive costs related to a recall of its flagship Galaxy Note 7 smartphones.

Samsung has been cautious about capital spending in recent years, but that did not stop Lee Jae-yong from investing in two product areas, including display panels, that entail large amounts of spending. For now, soaring prices of flash-memory devices and shortages of smartphone panels are supporting Samsung's earnings.

Lee recently negotiated a contract to supply organic electroluminescence panels for a new iPhone model to be released this autumn. Although Apple purchases from multiple manufacturers in principle, Lee persuaded the company to buy his panels by emphasizing Samsung's market dominance -- the South Korean company accounts for 90% of the global market for small and midsize OLED panels. Meanwhile, Samsung has sold off its 3% stake in Sharp, apparently losing interest in the Japanese company after Taiwan's Hon Hai Precision Industry, also known as Foxconn, acquired it. Samsung had wanted Sharp's multifunction printer business but likely thought it unwise to be seen as seeking a "takeover" in Japan, where it does much business.

Samsung's two approaches -- forceful with Apple, considerate toward Japan -- reflect Lee's strategy of combining hard and soft policies. So far, that strategy has proved effective, but a presidential election is looming in South Korea, and public sentiment is turning against the country's powerful conglomerates. Moon Jae-in, the likely candidate for the opposition camp, has promised to curtail the privileges and power of groups like Samsung.

Lee has a good track record as a businessman. This year, we will see how he handles facing a hostile government and an angry public.

Nikkei deputy editor Shimao Ojima is a former Nikkei Seoul Bureau correspondent who mainly covered business news.

Asia300

Samsung Electronics Co., Ltd.

South Korea

Market(Ticker): KRX(005930)
Sector:
Industry:
Electronic Technology
Telecommunications Equipment
Market cap(USD): 281,429M
Shares: 161.19M
Asia300

Hon Hai Precision Industry Co., Ltd.

Taiwan

Market(Ticker): TAI(2317)
Sector:
Industry:
Electronic Technology
Computer Peripherals
Market cap(USD): 55,098.9M
Shares: 17,328.7M
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