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Samsung -- a costly rush to market

Company's folding phone fiasco has lessons for South Korea

Samsung unveiled a product that literally broke in the reviewers' hands.   © AP

Perhaps no concept sums up South Korea's postwar success better than "balle balle," or "quick, quick!" The nation's ability to rise from adversity and get the job done at bewildering speed is a national hallmark.

It can also be a great liability. Just ask executives at Samsung Electronics.

Last week's splashy Galaxy Fold debut provoked a response a world away from the expectations of Korea's biggest company. The $2,000 device that unfolds from a smartphone into a tablet was meant to cement Samsung's transition from clever copycat to innovative first-mover. It did not go well.

In its haste to best Apple and Chinese upstarts Huawei and Xiaomi, Samsung unveiled a product that literally broke in the reviewers' hands. That flipped the storyline. The issue is no longer Samsung building a game-changing gadget. It is how could Korea's proudest name let the Galaxy Fold debacle happen a little more than two years after its exploding phone disaster?

In 2016, Samsung launched the Galaxy Note 7, a high-end 5.7-inch, stylus-toting rebuttal to critics who had labeled Samsung a copycat cribbing from arch-rival Apple.

The trouble began as defective batteries in the Note 7 earned it a truly dubious honor: fire hazard. Airlines and hotels scrambled to ban the device. It did not help when some replacements also melted down. Samsung recalled the entire line, and consumers largely forgave the brand after the dust settled.

Defective batteries in the Note 7 earned it a dubious honor: fire hazard.    © AP

Will they be as forgiving again? Only time will tell. It is clear, though, that Samsung failed to internalize the lessons from 2016. The obvious one is not to serve up new technologies before their time. Solid execution of a reliable product trumps attempting to be novel with untested gadgets.

Another: forgetting Samsung's real strengths. The company's financials show why investors looked past 2016's missteps. Smartphone revenues last year were exceeded by the conglomerate's chip business. The former provided less than 18% of operating profit on 36% of sales, the latter 76% on just 32% of revenues.

Samsung also is filling its coffers with growing sales of electronic components, including displays. Cyclical businesses, of course, but reliable money earners, especially when taken together.

The Galaxy Fold stumble, in other words, was not worth the reputational risk. That goes, too, for the entire foldable phone market. Executives at Huawei should brace for a knock-on effect on their own $2,600 Mate X handset.

Granted, Samsung appears to be handling the new debacle better. In 2016, moves to recall the Note 7 were slow and tentative at first. Back then, at least 10 governments, including the U.S., suspended Note 7 use before Samsung.

This time, Samsung gets higher grades for corporate crisis management. Clearly, it learned from experience. As one analyst told the Nikkei Asian Review, Samsung's quick move to delay the Galaxy Fold's launch may limit "the impact on earnings." The sales target for 2019 was 1 million units, equivalent to 2% of Samsung's information technology and mobile revenue.

The reputation hit may be another story. The irony, of course, is that Samsung scrambled to market ahead of Chinese rivals to show the tech world what it can do. It ended up proving that making a reliable foldable handset is something it cannot. At least not yet.

It is understandable that Samsung seeks a big win. Operating profit for the IT and mobile segment fell about 30% year-on-year for three consecutive quarters through the October-December period. There is a top-down view at Samsung, Apple, Huawei and elsewhere that smartphones and tablets remain pivotal in the era of fifth-generation wireless networks. Data collection opportunities abound. Hence the need to get the hardware right.

As is often the case, though, challenges facing Samsung are often a microcosm of those facing the broader economy. It is by far the biggest and most influential of the family-owned conglomerates, or chaebol, that tower over the economy. Their influence, and political ties, can thwart reforms and skew incentives in Asia's fourth-biggest economic power.

Here, too, what is true for Samsung is true for Korea. Many of the questions clouding the country's future reflect the death of Korea's high-volume, cheaply-priced export model.

First came China, then Indonesia, the Philippines and Vietnam. The only way for Korea to maintain its relatively high standard of living -- and Samsung's market share -- is to put the quality of growth over quantity.

Korea is "sandwiched" uncomfortably between high-tech developed economies like Japan and the U.S. and upstarts like China, as Samsung Chairman Lee Kun-hee said back in 2007. He has since been sidelined by a 2014 heart attack, and lies out of sight in a Seoul hospital. Since then, Lee's son, Lee Jae-yong, has served as Samsung's de facto leader.

Korean leaders know this well, but talking reform is easier than doing. Since taking office in May 2017, President Moon Jae-in has articulated grand plans for structural upgrades. Yet he, like predecessor Park Geun-hye, enacted few reforms to up competitiveness or boost innovation.

Any such endeavor means reining in the country's over-powerful, family-run chaebol conglomerates. Their monopolistic ways, and political ties, thwart reforms, skew incentives and starve Korea of a vibrant startup scene.

Yet even a giant corruption scandal involving the younger Lee and a former president was not shock enough to prompt Moon to break up the chaebol. That 2017 controversy put Lee Jae-yong in jail for a year on bribery charges. His sentence was suspended in February 2018, and Lee was freed. But former President Park remains in prison, serving a 25-year term on corruption charges.

As the largest chaebol and Korea's best-known global brand, Samsung has a chance to break the mold. Not by rushing to market with untested products that China can match in short order, but by moving upmarket.

In recent years, the younger Lee talked a good game of bold shifts into artificial intelligence, autonomous driving technology, biopharmaceuticals, robotics, the internet of things and other game-changing industries. It is time to execute on those plans and arm Samsung with a pipeline rich with disruptive new offerings.

That would help Samsung transcend the economic system from whence it came -- and offer the rest of Korea Inc. an example of how to reinvent itself. Get it right at Samsung and whole country could learn.

William Pesek is an award-winning Tokyo-based journalist and author of "Japanization: What the World Can Learn from Japan's Lost Decades." He was given the 2018 prize for excellence in opinion writing by the Society of Publishers in Asia for his Nikkei Asian Review work.

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